10-K405

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-K

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2001

Commission File No. 1-9767

International Remote Imaging Systems, Inc.

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)

Telephone Number: (818) 709-1244

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

Common Stock (American Stock Exchange)

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

None

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

      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.     þ

      On March 12, 2002, the aggregate market value of the shares of Common Stock held by non-affiliates of the Registrant was approximately $18.3 million based upon the closing price of $2.30 per share of Common Stock as reported on the American Stock Exchange. Solely for the purpose of determining “non-affiliates” in this context, shares of Common Stock held by each officer and director and by each person who owns 5% or more of the outstanding Common Stock have been excluded. This determination of affiliate status is not necessarily a determination for other purposes.

      The Registrant had 10,374,359 shares of Common Stock outstanding on March 12, 2002.

      Part III incorporates information by reference from the Proxy Statement for the Registrant’s 2002 Annual Meeting of Stockholders.

INTERNATIONAL REMOTE IMAGING SYSTEMS, INC.

FORM 10-K ANNUAL REPORT

Fiscal Year Ended December 31, 2001

PART I
Item 1.	Business	1
Item 2.	Properties	8
Item 3.	Legal Proceedings	9
Item 4.	Submission of Matters to a Vote of Security Holders	9
PART II
Item 5.	Market for the Registrant’s Common Stock and Related Stockholder Matters	9
Item 6.	Selected Financial Data	10
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	10
Item 7A.	Quantitative and Qualitative Disclosures About Market Risk	17
Item 8.	Financial Statements and Supplementary Data	17
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	17
PART III
Item 10.	Directors and Executive Officers of the Registrant	17
Item 11.	Executive Compensation	17
Item 12.	Security Ownership of Certain Beneficial Owners and Management	17
Item 13.	Certain Relationships and Related Transactions	17
PART IV
Item 14.	Exhibits, Financial Statements Schedules, and Reports on Form 8-K	18

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PART I

Item 1.     Business

Overview

      We design, develop, manufacture, and market in vitro diagnostic, or IVD, imaging systems for urinalysis testing based on patented and proprietary automated intelligent microscopy, or AIM, technology for automating microscopic procedures performed in clinical laboratories, as well as special purpose centrifuges and other small instruments. Our microscopy technology combines our capabilities in automated specimen presentation, including our patented slide-less microscope, and proprietary high-speed digital processing hardware and software to classify and present images of microscopic particles in easy-to-view displays. Our systems provide customers better and more rapid results and labor cost-savings over manual methods of performing microscopy. We sell our products directly and through distributors to hospital and reference clinical laboratories, as well as to veterinary, physician office and research laboratories. We incorporated in California in 1979 and reincorporated in 1987 in Delaware.

      We pioneered our first urinalysis system in 1983 with the introduction of The Yellow IRIS family of workstations and we introduced a high volume, fully-automated urine pathology system, the Model 939UDx, in 2000. We believe our Iris Diagnostics division is the only supplier of laboratory systems that fully automate a complete urinalysis. We also provide ongoing sales of supplies and service for our urinalysis workstations. Most supplies are purchased under standing orders and, following an initial one year warranty period, the majority of customers purchase annual service contracts. During 2001, we also became the exclusive U.S. distributor for the ARKRAY Model AX-4280 Automated Urine Strip Analyzer. We recently received 510(k) clearance from the Food and Drug Administration to market this product in the United States and expect to begin offering it for sale in the second quarter of this year.

      Through our StatSpin subsidiary, we manufacture and market a variety of benchtop centrifuges, small instruments and supplies for the laboratory market. These products are used primarily for manual specimen preparation and dedicated applications in cytology, hematology and urinalysis. The urinalysis products appeal to laboratories and physician offices performing too few tests to justify the cost of an automated IVD imaging system.

      Our research and development subsidiary, Advanced Digital Imaging Research, LLC, assists in the advancement of proprietary imaging technology while conducting government-sponsored research and development in medical imaging and software, as well as contract research for corporate clients.

The Industry

      The healthcare industry has undergone profound changes in the last decade, and healthcare providers are continually focusing on the most efficient use of their resources. This goal drives them to reduce costs while simultaneously improving the outcome potential of patient care. Toward that end, they must reduce the cost and improve the accuracy of medical tests for diagnosing and monitoring diseases and improve the reporting of test results.

      Medical tests are performed either on the patient or on a specimen removed from the patient. In vitro diagnostic, or IVD, testing is conducted outside of the body in a laboratory apparatus using a specimen obtained from the patient (blood, urine, tissue, etc.) to identify or monitor a disease. The specimen is examined from the patient, usually in the clinical laboratory. Many IVD tests rely on chemical or simple physical measures of specific characteristics of the specimen. Over the last five decades, the chemical and particle-counting aspects of these tests have been largely converted from manual methods to automated instruments, such as clinical chemistry analyzers and blood cell counters. However, many other IVD tests still require a manual microscopy — the visual examination of the specimen through a microscope. Manual microscopy requires numerous steps, from specimen preparation to visual examination, making the method labor-intensive, cumbersome, potentially biohazardous, inefficient and imprecise. More time is spent in performing manual microscopy than in any other IVD testing procedure in the clinical laboratory. Even so, the vast majority of microscopic procedures are still performed manually.

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

The Company’s Strategy

      Our current objectives are to enhance our core business in urinalysis, continue market penetration of our existing products, expand the geographic markets for existing products and increase sales of related supplies and service. We are pursuing these objectives through the following strategies:

•  Enhancement of Existing Product and Continued Market Penetration. Our business plan emphasizes the development of new product enhancements that will lead to our next generation urinalysis workstation. Our goal is to provide a higher performance, lower-cost platform for our urinalysis workstations that will enable us to maintain a competitive advantage and penetrate the market for those laboratories and hospitals who are in need of cost-effective urinalysis technology.

•  Expanding into New Geographic Markets. We traditionally focused on domestic sales for our urinalysis workstations and in 1999 began to selectively market our product internationally. With international markets consolidating and focusing on increased productivity, we are continuing to introduce our urinalysis workstations in selected overseas markets where consolidation has already occurred and are developing relationships with local distributors.

•  Increasing Sales of Supplies and Service. Once our urinalysis workstation is installed, we generate significant recurring revenue from sales of supplies and service for its operation. We are expanding these revenues by installing more systems and increasing our product offering of supplies for our workstations.

AIM Technology

      An effective system for most automated microscopy applications requires technology for fast, consistent and easily discernible presentation of the specimen to the microscope (“front end processing”) and for rapidly capturing, analyzing, classifying, enhancing, arranging and displaying images of the specimen (“back end imaging”). Over the past twenty years, we have created and developed our patented and proprietary Automated Intelligent Microscopy, or AIM, technology to address both of these requirements. AIM technology involves the synthesis of visual microscopy, digital image processing and automated image interpretation/pattern recognition to analyze microscopic specimens.

      Traditional urine sediment analysis requires manual preparation of a slide from the specimen requiring several steps, including centrifugation followed by carefully positioning, staining and coverslipping a sample extracted from the specimen. The slide is then placed under the microscope and manually manipulated and scanned by a technologist. This procedure is time-consuming, imprecise, and potentially hazardous. In contrast, our patented slide-less microscope automates the front end processing and allows microscopic examination of a moving specimen precisely positioned in a stream of fluid. This eliminates the need for manual slide preparation, manipulation and scanning. The slide-less microscope positions the specimen to within microns as it flows past the microscope at high-speed ensheathed in a larger stream of fluid. This method of alignment, particle orientation, focus and measurement is called “imaging flow cytometry.” We hold a patent on this method, and we are unaware of any other company that has developed similar technology.

      Once the specimen is located and presented to the microscope, AIM’s back end processing automatically captures, digitizes, classifies, organizes and presents the microscopic images displayed on a video monitor for

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review by the medical specialist. These digital images of the specimen can then be stored on magnetic or optical media for later retrieval, even years later.

Products

Urinalysis Systems

      Our principal product is our family of urinalysis workstations. These systems require customers to make substantial capital investments and are designed for sale to hospitals and clinical laboratories performing a large number of IVD tests. Our urinalysis workstations are used nationwide, including hospitals affiliated with more than 80% of all U.S. medical schools. Diagnostic automated systems are designed for workloads ranging from the largest hospitals to smaller laboratories and process anywhere from a few specimens to hundreds per day.

      We have two basic models: The Model 500 Urine/ Fluids Workstation which can also perform IVD imaging tests on a number of body fluids other than urine, including cerebrospinal, peritoneal, pleural, pericardial, synovial and seminal fluids as well as peritoneal dialyzates and lavages. The Model 939UDx, is a fully-automated, walk away system designed for laboratories testing medium to high numbers of urine specimens. The Model 939UDx can transmit final test results directly to the laboratory computer without operator intervention. The key advantage of the 939UDx models over the Model 500 is that they are fully automated and walk away. Our urinalysis workstations currently have prices ranging from $100,000 to $195,000.

      We also are the exclusive U.S. distributor of the ARKRAY Aution Max^TM AX-4280 Automated Urine Strip Analyzer. The AX-4280 is the world’s smallest, fully walk away urine chemistry strip reader designed around a universal sample transfer rack system that provides automatic, unattended batch processing. The AX-4280 is manufactured by ARKRAY, Inc., of Kyoto, Japan.

      We ceased distribution of the IRIS/Sysmex UF-100 urine cell analyzer in 2001 following a dispute with Sysmex regarding our exclusive distribution rights. We were unable to resolve our differences with Sysmex through negotiations and decided not to pursue legal action. We based this decision on our assessment that the product’s market potential was insufficient to justify the legal expense of enforcing our contractual rights to the product. This product did not account for any sales in either 2001 or 2000.

System Supplies and Service

      We realize significant recurring revenue from sales of supplies used in the operation of our urinalysis workstations and from their service and repair. These supplies include the sheath fluid used to position the particles and cleanse the system in slide-less microscopy and “controls” used in monitoring the performance quality of the systems. We also sell the CHEMSTRIP/IRIStrip for testing urine chemistry on some or our workstations. CHEMSTRIP/IRIStrips urine test strips are produced for us through a distribution agreement with Roche Diagnostics. Roche Diagnostics has exercised its right to terminate the distribution agreement effective in 2003. They will continue to supply CHEMSTRIP/IRIStrips for our installed base of workstations after termination until 2009. We plan to phase out their test strips. After termination, we will be permitted to modify our workstations to accommodate other test strip readers.

Small Instruments and Supplies

      We also manufacture and market a variety of small instruments and supplies for the clinical laboratory market through our StatSpin subsidiary. Some of these products complement our line of urinalysis systems because they appeal to smaller laboratories and physician offices that do not perform enough tests to justify the capital cost of a large automated system. StatSpin’s technologically advanced small benchtop centrifuges prepare certain biological specimens for instrumental or microscopic examination in a fraction of the time required by larger, common laboratory centrifuges. They have proven ideal for on-demand, point-of-use testing in hospitals, physicians’ offices and veterinary laboratories. The basic StatSpin centrifuge unit is adaptable to a variety of uses through application-specific rotors and consumables. Noted for their compact

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design and simple, quiet, and unobtrusive operation, they are well-suited to laboratories in which technicians are located close to the equipment. These products also serve integrated healthcare providers who want to purchase systems and supplies for a variety of clinical settings (both large and small) from one supplier. This category of products includes special-purpose centrifuges, digital refractometers for measuring the specific gravity of urine, the CenSlide System for manual microscopic examination of urine and other supplies intended primarily for specimen preparation.

Summary of Revenues by Product Line for Each Segment

      The following tables present a summary of revenues for each segment by product line for the three years ended December 31, 2001:

			Small
			Laboratory
For the Year Ended December 31, 2001	Urinalysis		Devices		Total
Sales of IVD systems	$	5,824,832	$	—	$	5,824,832
Sales of IVD system supplies and service		15,735,336		—		15,735,336
Sales of small instruments and supplies		—		6,694,145		6,694,145
Royalty and license revenues		393,356		—		393,356
Total	$	21,953,524	$	6,694,145	$	28,647,669

			Small
			Laboratory
For the Year Ended December 31, 2000	Urinalysis		Devices		Total
Sales of IVD systems	$	6,981,886	$	—	$	6,981,886
Sales of IVD system supplies and service		14,849,392		—		14,849,392
Sales of small instruments and supplies		—		6,209,967		6,209,967
Royalty and license revenues		601,511		—		601,511
Total	$	22,432,789	$	6,209,967	$	28,642,756

			Small
			Laboratory
For the Year Ended December 31, 1999	Urinalysis		Devices		Total
Sales of IVD systems	$	6,505,821	$	—	$	6,505,821
Sales of IVD system supplies and service		13,611,676		—		13,611,676
Sales of small instruments and supplies		—		5,297,385		5,297,385
Royalty and license revenues		310,587		—		310,587
Total	$	20,428,084	$	5,297,385	$	25,725,469

Backlog

      We did not have a material amount of backlog at December 31, 2001 or 2000. The Company believes that backlog is not necessarily indicative of sales for any succeeding period.

Research and Development

      We maintain an active research and development program to continually enhance our urinalysis systems and centrifuges. Our product technology investments (including amounts reimbursed by third parties under research and development contracts) totaled $6.0 million in 2001, $3.8 million in 2000 and $1.9 million in 1999.

      During 1999, we began a major project to completely redesign our family of urinalysis workstations and develop the next generation operating platform. We have devoted substantially all of our research and

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development efforts to this project over the past year, increasing our net research and development in 2001 by $1.4 million, to $3.9 million from the previous year. By incorporating more than 20 years of experience and the latest developments in computer technology, we expect to (1) significantly improve the speed and image quality of our workstations, (2) further reduce the time required to operate the system and (3) reduce our cost of goods and our historical dependence on single-source suppliers by incorporating more “off-the-shelf” components. Significant progress was made in 2001, and we plan to continue this development effort in the current year.

      We sold our genetic analysis business in July 2000, but we retained the Houston-based research group and changed the name to Advanced Digital Imaging Research, LLC (ADIR). ADIR is a research and development organization specializing in digital imaging software and algorithm development for IRIS and government entities. Under a typical government grant program, the government has the right to use any new technology royalty-free, but ADIR retains the right to commercially exploit the new technology. ADIR applies for government grants with potential application to the imaging part of our business. We believe ADIR’s existing government research grants are sufficient to fund all of its planned operations through at least 2002. ADIR also performs some of our internal research and development work as well as contract research for corporate clients.

      In 1992, we entered into a project with LDA Systems, Inc. for development of The White IRIS leukocyte differential analyzer and later acquired LDA for approximately 498,000 shares of our common stock. In 1999, we conducted a reassessment of our business and developed a new, near-term business plan. We elected not to include The White IRIS in our new plan, and, as a result, we wrote off all costs of development and inventory related to The White IRIS in the third quarter of 1999.

      In 1995, we entered into a project with Poly/ UA Systems, Inc. for development of several new products to enhance automated urinalysis. Subsequently, certain disputes arose with the Poly/ UA shareholders. In 1999, we acquired approximately 77% of the outstanding shares of Poly/ UA stock in a tender offer for a package of IRIS securities with an estimated value of up to $1.5 million. We subsequently acquired the remaining shares of Poly/ UA common stock in privately negotiated transactions. We now own 100% of the outstanding common stock of Poly/ UA Systems.

Marketing and Sales

      In the United States, we sell and service our products through our own sales and service forces. Sales activities consist of direct sales by field sales representatives, telemarketing to initiate and aid in pursuing sales opportunities, logistics support of the field sales representatives and after-sales support to customers in the operation of their systems. In addition to our sales activities, we promote our products through advertising in trade journals, attendance at trade shows, direct mail, and Company website. All sales of our workstations include installation, customer training and a one-year warranty. Our small instruments, targeted primarily at smaller customers, are sold through distributors.

      Internationally, we sell and service our products through distributors in selected markets around the world. The global economic downturn in 2001 directly impacted our distributors ability to purchase our high end capital equipment and sell these new systems into their respective country markets. By the end of 2001, in anticipation of a strengthening international market, we expanded our international team to include a Director of International Sales and Marketing and a Director of Global Business Development, with an aim of capitalizing on unfulfilled demand. Our StatSpin subsidiary, on the other hand, entered into a new distribution agreement with Science International Corp. of China covering our proprietary CenSlide Urinalysis System. We believe there is significant potential for long-term growth opportunities in China.

      We also maintain a rental program for our urinalysis workstations. Under the terms of the rental agreements, payments generally are based on the number of tests performed, with a guaranteed monthly minimum payment. We are responsible for supply and service of the systems. Alternatively, some customers lease our workstations from medical equipment leasing companies that, in turn, purchase the systems from us.

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      We market most of the supplies used in the operation of our urinalysis workstations and maintain these systems through our own national service organization domestically, and through our distributor network internationally. Service (after a one-year warranty period) is generally sold under an annual service contract or, less frequently, on a per-call basis.

Competition

      Our primary product is the IRIS urinalysis workstation. The principal competitive factors in the urinalysis market are cost-per-test, ease of use, and quality of result. We believe our workstation competes favorably with regard to these factors in its target markets.

      Bayer Diagnostics and Roche Diagnostics sell lines of urine test strips that are used in determining the concentration of various chemical substances found in urine. Despite the Company obtaining FDA clearance to claim improved performance of our urinalysis workstations over urine test strip measures in detecting microscopic abnormalities in urine, a substantial portion of the urinalysis market has subscribed to the theory that these test strips can be relied upon to reduce the number of microscopic examinations. We believe that this is largely due to laboratories’ reacting to cost-cutting pressures and has resulted in significantly slower growth in the demand for microscopic examinations at certain hospitals and reference laboratories. As urine chemistry test strips remain a large segment of the urinalysis market and a revenue source for the Company, the exclusive US distribution agreement with ARKRAY for the Aution Max AX-4280 Automated Urine Strip Analyzer offers a competitive alternative in the form of a compact, high-throughput analyzer with a complete test strip menu.

      Our urinalysis workstations currently support only automated test strip readers supplied by Roche Diagnostics, and some potential customers who have previously purchased automated test strip readers from Bayer Diagnostics (the dominant company in the urine test strip business) cannot connect those readers to our workstations. Our ability to modify our workstations to support a connection to test strip readers from Bayer Diagnostics and other suppliers is presently subject to significant restrictions under our existing agreements with Roche Diagnostics. Roche Diagnostics has exercised its right to terminate these agreements effective in 2003. After termination, we will be permitted to modify our workstations to accommodate other test strip readers.

      Sysmex Corporation markets its automated urine sediment analyzers globally, and remains the Company’s chief competitor in the urinalysis business segment. The Sysmex systems, although automated and easy to use, do have several limitations. The systems are not capable of direct integration of both the chemistry and sediment analysis of urine. Additionally, these systems are limited in terms of the number of automatically reported analytes and cannot perform body fluid analysis. When further examination is needed, Sysmex systems, which do not use image analysis, require the technologist to remove the sample, prepare a slide and conduct a manual microscopic analysis.

      We are also experiencing increased domestic competitive pressures in the urinalysis market due to the ongoing consolidation of both hospitals and medical device suppliers. Large hospital chains and groups of affiliated hospitals are negotiating comprehensive supply contracts with the larger medical device suppliers, who can offer one-stop shopping for laboratory instruments, supplies and service. In addition, they typically offer the hospitals annual rebates based on the total volume of business with the suppliers. These rebates create financial incentives against purchasing instruments or supplies from others and act as a barrier to the penetration of hospital laboratories covered by the contract.

Intellectual Property

      Our commercial success depends on our ability to protect and maintain our proprietary rights. We protect our proprietary technology by filing various patent applications. We have received numerous United States patents for our AIM technology and related applications, as well as a number of corresponding foreign patents. These patents also cover developments in image analysis and blood processing. A number of additional patent applications are pending in the United States and abroad. These patents also cover image analysis, urine and

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blood processing. Also, numerous patents relating to digital refractometers, centrifuges, automated slide handling and disposable urinalysis products were acquired in various acquisitions.

      We granted Sysmex a royalty-bearing license to use pre-1989 technology for urine sediment analyzers and non-medical industrial instruments. We also granted Dade International a royalty-bearing license to use certain centrifuge technology.

      We have trade secrets and unpatented technology and proprietary knowledge about the sale, promotion, operation, development and manufacturing of our products. We have confidentiality agreements with our employees and consultants to protect these rights.

      We claim copyright in our software and the ways in which it assembles and displays images, and have filed copyright registrations with the United States Copyright Office. We also own various federally registered trademarks, including “IRIS,” “The Yellow IRIS” and “StatSpin.” We own numerous other registered and unregistered trademarks, and have certain trademark rights in foreign jurisdictions. We intend to aggressively protect our copyrights and trademarks.

Government Regulations

      Most of our products are subject to stringent government regulation in the United States and other countries. These laws and regulations govern product testing, manufacture, labeling, storage, record keeping, distribution, sale, marketing, advertising, and promotion. The regulatory process can be lengthy, expensive and uncertain, and securing clearances or approvals often requires the submission of extensive testing of data and other supporting information. If we don’t comply with regulatory requirements, we may be subject to fines, recall or seizure of products, total or partial suspension of production, withdrawal of existing product approvals or clearances, refusal to approve or clear new applications or notices and criminal prosecution. Further, any change in existing federal, state or foreign laws or regulations, or in their interpretation or enforcement, or the enactment of any additional laws or regulations, could affect us both materially and adversely.

      In the United States, the FDA regulates medical devices under the Food, Drug, and Cosmetic Act (the “FDC Act”). Before a new medical device can be commercially introduced in the United States, the manufacturer usually must obtain FDA clearance by filing a pre-market notification under Section 510(k) of the FDC Act (a “510(k) Notification”) or obtain FDA approval by filing a pre-market approval application (a “PMA Application”). The PMA Application process is significantly more complex, expensive, time-consuming and uncertain than the 510(k) Notification process. To date, we have cleared all of our regulated products with the FDA through the 510(k) Notification process. We cannot guarantee that we will be able to use the 510(k) Notification process for future products. Furthermore, FDA clearance of a 510(k) Notification or approval of a PMA Application is subject to continual review, and the subsequent discovery of previously unknown facts may result in restrictions on a product’s marketing or withdrawal of the product from the market.

      We are also required to register as a medical device manufacturer with the FDA and comply with FDA regulations concerning good manufacturing practices for medical devices (“cGMP Standards”). In 1997, the FDA expanded the scope of the cGMP Standards with new regulations requiring medical device manufacturers to maintain control procedures for the design process, component purchases and instrument servicing. The FDA periodically inspects our manufacturing facilities for compliance with cGMP Standards. We believe that we are in substantial compliance with the expanded cGMP Standards.

      The FDA also regulates computer software of the type used in our urinalysis workstations and is currently reevaluating the regulation of such software. We can’t predict the extent to which the FDA will regulate such software in the future.

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

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      Many states have also enacted statutory provisions regulating medical devices. The State of California’s requirements in this area, in particular, are extensive, and require registration with the state and compliance with regulations similar to the cGMP Standards established by the FDA. While the impact of such laws and regulations has not been significant to date, it is possible that future developments in this area could affect us both materially and adversely.

      In addition to domestic regulation of medical devices, many of our products are subject to regulations in foreign jurisdictions. The requirements for the sale of medical devices in foreign markets vary widely from country to country, ranging from simple product registrations to detailed submissions similar to those required by the FDA. We have not yet applied for regulatory clearances or approvals to market our urinalysis workstation in most of these foreign countries. Our business strategy includes expanding the geographic distribution of these and other products, and we cannot guarantee that we will be able to secure the necessary clearances and approvals in the relevant foreign jurisdictions. Furthermore, the regulations in certain foreign jurisdictions continue to develop and we cannot be sure that new laws or regulations will not have a material adverse effect on our existing business or future plans. Among other things, CE Mark certification is, or may soon be, required for the sale of many products in certain international markets such as the European Community. We secured CE Mark certification for our urinalysis workstations in 2001.

      The Company is in the process of obtaining the ISO 9001 certification and expects to obtain this certification sometime in 2002.

      Our products are also subject to regulation by the United States Department of Commerce export controls, primarily as they relate to the associated computers and peripherals. We have not experienced any material difficulties in obtaining necessary export licenses to date.

Segment and Geographic Information

      See Note 16 to the Consolidated Financial Statements, “Segment and Geographic Information,” for financial information regarding our operating segments and geographic areas.

Employees

      We had 137 full-time employees at December 31, 2001 and 123 full-time employees at December 31, 2000. We also use outside consultants and part-time and temporary employees in production, administration, marketing and engineering. No employees are covered by collective bargaining agreements, and we believe that our employee relations are satisfactory.

Item 2.     Properties

      We lease all of our facilities. The leases expire at various times over the next five years. Our headquarters are located at 9172 Eton Avenue, Chatsworth, California 91311. The table below sets forth certain information regarding our leaseholds as of March 12, 2002:

	Approximate Floor		Monthly
Location	Space (Sq. Ft.)		Rent		Use
Chatsworth, CA		51,000	$	32,300	Sales and Marketing, Research and Development, Manufacturing and Corporate Administration
Norwood, MA		11,000	$	7,800	Sales and Marketing, Research and Development and Manufacturing
League City, TX		4,000	$	6,300	Research and Development

      We leased additional contiguous space at our Chatsworth facility in January 2002 and believe our facilities are now adequate to meet our current needs.

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Item 3.     Legal Proceedings

      We are not presently involved in any litigation.

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

      We did not submit any matters to vote of security holders during the quarter ended December 31, 2001.

PART II

Item 5.     Market for the Registrant’s Common Stock and Related Stockholder Matters

      IRIS Common Stock is traded on the American Stock Exchange under the symbol “IRI.” The closing price of the Common Stock on March 12, 2002 was $2.30 per share. The table below sets forth high and low closing prices reported by American Stock Exchange for the period January 1, 2000 through December 31, 2001:

		Price Per Share
		High		Low
Fiscal 2001
	First Quarter	$	2.20	$	1.31
	Second Quarter		2.25		1.50
	Third Quarter		3.11		2.15
	Fourth Quarter		3.00		2.20
Fiscal 2000
	First Quarter	$	3.69	$	.69
	Second Quarter		2.44		1.13
	Third Quarter		2.69		1.56
	Fourth Quarter		2.00		1.06

      In October 2001, we issued a five-year stock warrant to purchase 45,045 shares of common stock at $2.22 in connection with services provided by our investor relations firm. The warrant is part of their overall compensation package for one year of services. We believe the investor relations firm is an “accredited investor” under Regulation D and has acquired the warrant for its own account and not with a view to resale or distribution. We did not engage in general solicitation or advertising, and the securities issued in the transaction bear appropriate restrictive legends concerning the registration requirements of the Securities Act of 1933. We believe this transaction was exempt from the registration requirements of the Securities Act of 1033 based Section 4(2) of the Securities Act of 1933.

      As of March 12, 2002, we had approximately 3,900 holders of record of our common stock.

      We intend to use all available funds in business development and debt repayment. As a result, we do not expect to pay any cash dividends for the foreseeable future. Furthermore, we may not pay any cash dividends on the common stock, or repurchase any shares of the common stock, without the written consent of our lender, and the holders of a majority of the outstanding shares of Series B Preferred Stock.

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Item 6.     Selected Financial Data

      This information as of December 31, 2001 and 2000 and for the years ended December 31, 2001, 2000 and 1999, is derived in part from, and should be read in conjunction with, the our Financial Statements, including the Notes thereto, included elsewhere in this Annual Report.

	Year Ended December 31,
	2001			2000(1)			1999(1)			1998(1)			1997(1)
	(In thousands, except per share data)
Financial Statement Data
Net revenue	$	28,648		$	28,643		$	25,725		$	21,581		$	20,724
Operating income from continuing operations		3,306			5,152			390			2,202			1,007
Interest and other expense, net		(740	)		(763	)		(947	)		(1,115	)		(1,099	)
Income (loss) from continuing operations		1,539			2,794			(1,088	)		667			(58	)
Income (loss) from continuing operations per share — basic		.15			.29			(.15	)		.11			(.01	)
Income (loss) from continuing operations per share — diluted		.14			.27			(.15	)		.09			(.01	)
Working capital		8,636			8,472			5,092			3,570			1,650
Total assets		26,503			28,288			26,661			32,107			32,735
Long term debt, including current portion		5,249			7,500			8,700			10,442			10,942
Total liabilities		10,538			14,668			16,439			17,108			17,942
Shareholders’ equity		15,965			13,619			10,222			14,999			14,792
OTHER FINANCIAL DATA
Operating income from continuing operations as adjusted(2)		3,306			5,152			4,549			2,395			2,346

(1)

The year ended December 31, 1997 includes unusual charges totaling $1.3 million relating to expenses for litigation and assets related to the White IRIS leukocyte differential analyzer program, the write-down of deferred private offering costs and the write-off of goodwill no longer considered recoverable. The year ended December 31, 1998 includes unusual charges totaling $193,000 primarily for legal expenses associated with an arbitration matter. Unusual charges in the year ended December 31, 1999 totaled $4.2 million and primarily relate to a litigation settlement, write off of assets related to the White IRIS leukocyte differential analyzer program and a retirement agreement.

(2)

Operating income from continuing operations as adjusted represents operating income from continuing operations before unusual charges of $1.3 million, $193,000 and $4.2 million in the years ended December 31, 1997, 1998 and 1999, respectively.

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

Overview

      We generate revenues primarily from sales of our urinalysis workstation, an in vitro diagnostic, or IVD, imaging system based on our patented and proprietary AIM technology, and the related supplies and service required to operate this workstation. We also earn revenues from sales of ancillary lines of small laboratory instruments and supplies.

      We make significant investments in research and development for new products and enhancements to existing products. We fund our research and development programs primarily with internal funds, but we also

10

receive grants from the National Institutes of Health and to a lesser extent, contracts from third parties. The following table summarizes total product technology expenditures for the periods indicated:

		Year Ended December 31,
		2001		2000		1999
		(in thousands)
Research and development expense, net		$	3,861	$	2,526	$	1,124
Capitalized software development costs			867		279		248
Reimbursed costs for research and development grants and contracts			1,233		972		535
	Total product technology expenditures	$	5,961	$	3,777	$	1,907

Results of Operations

Comparison of Year Ended December 31, 2001 to Year Ended December 31, 2000.

      Net revenues for the year ended December 31, 2001 were virtually unchanged from the prior year. Sales of IVD imaging systems decreased to $5.8 million from $7.0 million, a decrease of $1.2 million, or 17% from the last year. The decrease is primarily due to decreased sales to international distributors. IVD imaging system sales consist of sales of our urinalysis workstations. Workstation sales have been relatively stable from quarter to quarter. However, we plan to introduce a significantly upgraded model later this year on a new operating platform pending clearance from the Food and Drug Administration. The failure to make a successful and timely transition to the upgraded model would have a material and adverse affect on IVD imaging system sales. This is an inherent risk in any major upgrade to products in our industry.

      Sales of IVD imaging system supplies and services increased to $15.7 million from $14.9 million, an increase of $886,000 or 6% over last year, primarily due to the larger installed base of urinalysis workstations. Royalties and licensing revenues decreased to $393,000 from $602,000 in the prior year. The prior year’s revenue was higher because it contained a $300,000 license fee related to expanded licensing of several existing patents.

      Revenues from the urinalysis segment totaled $22.0 million in the current period, down slightly from $22.4 million in the prior year. Revenues from the small lab devices and supplies segment increased to $6.7 million from $6.2 million, an increase of $484,000 or 8%. The increase is due to the launch of new products into the veterinary market and increased sales in the international markets.

      Cost of goods sold for IVD imaging systems as a percentage of sales of IVD imaging systems totaled 78% in the current period as compared to 62% last year. The increase is primarily attributable to increased manufacturing overhead associated with improved quality assurance and inventory control processes and the effect of the amortization of certain capitalized software, which began in June 2000. Cost of goods sold for IVD imaging system supplies and services as a percentage of sales of such products decreased to 34% for the current period as compared to 37% for the same period last year. This decrease is due primarily to efficiencies derived from higher volumes and improved manufacturing processes. Cost of goods sold for small instruments and supplies as a percentage of sales of this segment totaled 47% for the current year as compared to 52% in the prior year. This decrease is primarily due to manufacturing efficiencies from increased production volume as well as a change in product mix.

      Cost of goods sold as a percentage of revenues from the urinalysis segment totaled 46%, up slightly from 44% in the prior year. The aggregate gross margin totaled 54% for the year ended December 31, 2001, which is comparable with the prior year.

      Marketing and selling expenses totaled $3.8 million, compared to $3.6 million last year, an increase of $284,000 or 8%, due primarily to increased marketing efforts in the urinalysis segment as well as upgraded sales efforts in the small lab devices segment. Marketing and selling expenses as a percentage of net revenues were 13% in 2001, up slightly from 12% in 2000.

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      General and administrative expenses increased $189,000 to $4.4 million from $4.2 million in the prior year. This increase is primarily due to additional charges for legal fees and other professional services. General and administrative expenses represented 15% of net revenue, comparable to the prior year.

      Net research and development expenses increased to $3.9 million for the year ended December 31, 2001, as compared to $2.5 million in 2000, an increase of $1.4 million or 56%. Net research and development expenses as a percentage of revenues increased to 13% in 2001 from 9% in the prior year. Total product technology expenditures, including capitalized software development costs and reimbursed costs under research and development grants and contracts, increased to $6.0 million from $3.8 million, an increase of $2.2 million or 58% as compared to the prior year. The increase in total product technology expenditures is due primarily to increased spending under a major project begun in 1999 to improve our urinalysis workstation product line. We believe this project is important to maintaining our competitive position in the urinalysis market and that our failure to successfully complete this project on schedule could have a material and adverse effect on future system sales. We expect our net research and development expenses to remain approximately the same or decrease slightly in 2002.

      Amortization of intangible assets reflects the amortization of acquired intangible assets and patents and is essentially unchanged in 2001 from the prior year.

      Interest expenses decreased to $859,000 in 2001 from $979,000 in the prior year due to reduced indebtedness and lower interest rates corresponding to a drop in our lender’s prime rate.

      For the year ended December 31, 2001, urinalysis segment profits decreased to $3.7 million from $5.8 million in the prior year. The decrease is attributable to the higher operating expenses described above. Segment profits for the small lab devices segment totaled $1.9 million, as compared to $1.6 million in the prior year. Increased product sales, along with improved profit margins in the segment, contributed to this increase. Unallocated corporate expenses were up slightly in 2001 as compared to the prior year, primarily due to increased charges for legal fees and other professional services.

      The income tax provision for the year ended December 31, 2001, totaled $1.0 million, as compared to $1.6 million in 2000, due to the reduction in taxable income. This tax provision is a non-cash item, since the Company has significant deferred tax assets.

      Income from continuing operations decreased to $1.5 million, or $0.14 per diluted share, for the year ended December 31, 2001 as compared to income from continuing operations of $2.7 million, or $0.27 per diluted share, for the prior year.

Comparison of Year Ended December 31, 2000 to Year Ended December 31, 1999

      Net revenues for the year ended December 31, 2000 increased to $28.6 million from $25.7 million, an increase of $2.9 million, or 11% over the prior year. Sales of IVD imaging systems increased to $7.0 million from $6.5 million, an increase of $476,000, or 7% from the prior year. The increase was due primarily to higher sales to domestic hospitals, partially offset by decreased sales to international distributors. Sales of IVD imaging system supplies and services increased to $14.8 million from $13.6 million, an increase of $1.2 million or 9% over the prior year, primarily due to the larger installed base of urinalysis workstations. Sales of small instruments and supplies increased to $6.2 million from $5.3 million, an increase of $913,000, or 17%. The increase was due primarily to increased sales of small instruments. Royalties and licensing revenues increased to $602,000 from $311,000 in the prior year. The increase was due to a $300,000 license fee in connection with expanded licensing of several existing patents.

      Revenues from the urinalysis segment totaled $22.4 million in 2000 as compared to $20.4 million in the prior year, an increase of $2.0 million or 10%. This growth was due to increased sales of our urinalysis workstations and increased sales of related system supplies and services to the growing installed base. Revenues from the small laboratory devices segment increased to $6.2 million in 2000, as compared to $5.3 million in the prior year, an increase of $913,000. This growth was due primarily to increased sales of small instruments.

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      Cost of goods for IVD systems as a percentage of sales of IVD imaging systems totaled 62% in 2000 as compared to 66% in the prior year. The decrease was primarily attributable to a relatively lower proportion of low margin international sales in 2000. Cost of goods for IVD imaging system supplies and services as a percentage of sales of such products decreased to 37% for 2000, as compared to 44% for the same period in the prior year. This decrease was due primarily to efficiencies derived from higher volumes and improved manufacturing processes. Cost of goods for small instruments and supplies as a percentage of sales of small instruments and supplies totaled 52% for the current year and is comparable to last year. The aggregate gross margin totaled 54% for the year ended December 31, 2000 as compared to 49% in the prior year.

      Cost of goods sold as a percentage of revenues from the urinalysis segment totaled 44% in 2000, as compared to 50% in the prior year. This decrease was primarily due to improvements in the manufacturing process, as well as changes in the international/domestic sales mix and the impact on revenues of the license fee. Cost of goods for small laboratory devices as a percentage of revenues totaled 52% in 2000, which was comparable with the prior year.

      Marketing and selling expenses totaled $3.6 million, compared to $3.3 million in the prior year, an increase of $255,000, or 8%, due primarily to increased promotional activities associated with our urinalysis workstation. Marketing and selling expenses as a percentage of net revenues declined to 12% in 2000 as compared to 13% in 1999.

      General and administrative expenses increased to $4.2 million from $3.5 million, an increase of $764,000 or 22% from the prior year. This increase was primarily due to accrued management bonuses based on improved profitability. General and administrative expenses for the period, as a percentage of net revenue, was 15% as compared to 13% in the prior year.

      Net research and development expenses increased to $2.5 million for the year ended December 31, 2000, as compared to $1.1 million in 1999, an increase of $1.4 million or 125%. Net research and development expenses as a percentage of revenues increased to 9% in 2000 from 4% in the prior year. Total product technology expenditures, including capitalized software development costs and reimbursed costs under research and development grants and contracts, increased to $3.8 million from $1.9 million, an increase of $1.9 million or 100% as compared to the prior year. The increase in total product technology expenditures was due to increased spending under a major project begun in 1999 to improve our urinalysis workstation product line.

      Amortization of intangible assets reflects the amortization of acquired intangible assets and patents. Amortization of intangible assets for 2000 decreased to $143,000 from $231,000, a decrease of $88,000 or 38% from the prior year. The decline was the result of the write-off in the third quarter of 1999 of the White IRIS and deferred warrant costs.

      The results of operations for the year ended December 31, 2000 do not include any unusual expenses as compared to $4.2 million in the prior year. The prior year’s expenses related primarily to the settlement with Poly/UA ($1.7 million), legal expenses for an arbitration with the former owner of our genetic analysis business ($392,000), the write-off of the White IRIS ($797,000) and related deferred warrant costs ($807,000).

      Operating income for the year ended December 31, 2000 increased to $5.2 million as compared to an operating income of $390,000 in the prior year. Excluding unusual charges and write-offs, operating income totaled $5.2 million for 2000 as compared to $4.5 million in 1999.

      Interest expense increased to $979,000 in 2000 from $966,000 in the prior year due to increased interest rates on the credit facility, partially offset by reduced indebtedness.

      For the year ended December 31, 2000, urinalysis segment profits increased to $5.8 million from $3.7 million in the prior year. This increase was attributable to higher revenues and lower operating expenses described above, as well as the fact that the 1999 segment profit figure included the effect of $1.7 million of write-offs which did not recur in 2000. Segment profits for the small laboratory devices segment totaled $1.6 million, as compared to $1.4 million in the prior year. The increase results from increased product sales in

13

that segment. Unallocated corporate expenses totaled $3.0 million in the current period as compared to $5.6 million in the prior year. The decrease was due primarily to the fact that 1999’s figures included charges related to the arbitration with the former owner of our genetic analysis business, the settlement with Poly/UA and expenses associated with the Office of the Chief Executive and Board of Directors, which did not recur in 2000.

      The income tax provision for the year ended December 31, 2000 totaled $1.6 million, as compared to $531,000 in 1999. The increase reflects the increased taxable income experienced by the Company in 2000.

      Income from continuing operations increased to $2.8 million, or $0.27 per diluted share, for the year ended December 31, 2000 as compared to a loss from continuing operations of $1.1 million, or $0.15 per diluted share, for the prior year.

Liquidity and Capital Resources

      Cash and cash equivalents decreased to $2.3 million at December 31, 2001 from $3.7 million at December 31, 2000. Cash provided by operations for the year ended December 31, 2001 decreased to $2.7 million from $3.5 million in the prior year, primarily due to the drop in net income, as described above. Our primary source of liquidity is cash from operations which depends heavily on sales of our urinalysis workstations. Workstation sales have been relatively stable from quarter to quarter. However, we plan to introduce a significantly upgraded model on a new operating platform later this year pending 510(k) clearance from the Food and Drug Administration. The failure to make a successful and timely transition to the upgraded model would have a material and adverse affect on workstation sales and, consequently, our liquidity. This is an inherent risk in any major upgrade to products in our industry.

      Cash used in investing activities totaled $1.8 million in 2001, as compared to $938,000 in the prior year. The increase is primarily due to the increase in expenditures for property and equipment as part of our efforts to upgrade the facilities, as well as increased software development costs under the Company’s research and development program.

      Net cash used by financing activities totaled $2.2 million and consisted primarily of net principal payments under the credit facility and principal payments of our subordinated note payable, partially offset by funds received from the exercise of stock options and warrants.

      In February 2002, we refinanced our Foothill Capital Corporation credit facility and replaced it with a new $8.0 million credit facility with California Bank and Trust. The new facility consists of two term loans totaling $1.5 million and a $6.5 million revolving line of credit. The term loans mature in February 2007 while the line of credit is renegotiated in June 2004. Borrowings under the line of credit are limited to a percentage of eligible accounts receivable and inventory. The entire credit facility bears interest at the lender’s prime rate, or the LIBOR rate plus 2.0%. We believe the new credit facility is a significant improvement to the Company’s liquidity position, as it provides increased borrowing capacity at a much lower cost than the previous credit arrangement.

      We reduced our outstanding debt by $2.2 million in 2001 and, after considering the effect of the refinancing discussed above, we have scheduled principal payments totaling $1.4 million during the next twelve months. We believe that our current cash on hand, together with cash generated from operations and cash available under the credit facility, will be sufficient to fund normal operations and pay principal and interest on outstanding debt obligations for at least a year.

Discontinued Business Operations

      We sold Perceptive Scientific Instruments, our genetic analysis business, in July 2000. Its principal product was the PowerGene family of genetic analyzers — IVD imaging systems for karyotyping, DNA probe analysis and comparative genomic hybridization. We sold the assets of the U.S. operations to Applied Imaging Corporation (NASDAQ: AICX) for 385,371 shares of Applied Imaging common stock, the assumption of certain liabilities and contingent cash payments tied to the future performance of Applied Imaging’s business. We retained the Houston-based research group, including its federally funded research grants, and changed

14

the name of the group to Advanced Digital Imaging Research, LLC. We were unable to sell the international operations and placed Perceptive Scientific International Limited (a wholly-owned subsidiary of Perceptive Scientific Instruments) into a voluntary liquidation under United Kingdom law. We have classified Perceptive Scientific Instruments as a discontinued operation for accounting purposes and have removed it from most of the discussion and financial information in this Annual Report and our other reports filed with the Securities and Exchange Commission after July 2000.

New Accounting Pronouncements

      In September 2001, the Financial Accounting Standards Board finalized FASB Statements No. 141, Business Combinations (SFAS 141), and No. 142, Goodwill and Other Intangible Assets (SFAS 142). SFAS 141 requires the use of the purchase method of accounting and prohibits the use of the pooling-of-interests method of accounting for business combinations initiated after September 30, 2001. SFAS 141 also requires that the Company recognize acquired intangible assets apart from goodwill if the acquired intangible assets meet certain criteria. SFAS 141 applies to all business combinations initiated after September 30, 2001 and for purchase business combinations completed on or after July 1, 2001. It also requires, upon adoption of SFAS 142 that the Company reclassify the carrying amounts of intangible assets and goodwill based on the criteria in SFAS 141.

      SFAS 142 requires, among other things, that companies no longer amortize goodwill, but instead test goodwill for impairment at least annually. In addition, SFAS 142 requires that the Company identify reporting units for the purposes of assessing potential future impairments of goodwill, reassess the useful lives of other existing recognized intangible assets, and cease amortization of intangible assets with an indefinite useful life. An intangible asset with an indefinite useful life should be tested for impairment in accordance with the guidance in SFAS 142. SFAS 142 is required to be applied in fiscal years beginning after December 15, 2001 to all goodwill and other intangible assets recognized at that date, regardless of when those assets were initially recognized. SFAS 142 requires the Company to complete a transitional goodwill impairment test nine months from the date of adoption. The Company is also required to reassess the useful lives of other intangible assets within the first interim quarter after adoption of SFAS 142.

      The Company’s previous business combinations were accounted for using the purchase method. As of December 31, 2001, the net carrying amount of goodwill is $188,911. Amortization expense during the year ended December 31, 2001 was $34,692. Currently, the Company is assessing but has not yet determined how the adoption of SFAS 141 and SFAS 142 will impact its financial position and results of operations.

      In August 2001, the FASB issued SFAS No. 143, Accounting for Asset Retirement Obligations. SFAS No. 143 requires the fair value of a liability for an asset retirement obligation to be recognized in the period in which it is incurred if a reasonable estimate of fair value can be made. The associated asset retirement costs are capitalized as part of the carrying amount of the long-lived asset. SFAS No. 143 is effective for fiscal years beginning after June 15, 2002. The Company believes the adoption of this Statement will have no material impact on its financial statements.

      In October 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. SFASB 144 requires that those long-lived assets be measured at the lower of carrying amount or fair value less cost to sell, whether reported in continuing operations or in discontinued operations. Therefore, discontinued operations will no longer be measured at net realizable value or include amounts for operating losses that have not yet occurred. SFASB 144 is effective for financial statements issued for fiscal years beginning after December 15, 2001 and, generally, are to be applied prospectively. The Company believes the adoption of this Statement will have no material impact on its financial statements.

Shareholders’ Rights Plan

      We have a shareholders’ rights plan. The rights are not presently exercisable. They become exercisable only if a person or group acquires 20% or more of our common stock, or announces a tender offer for 20% or more of our common stock, without board approval. If the rights are triggered, all common stockholders (except the hostile party) will be entitled to purchase shares of common stock (or the economic equivalent in

15

preferred stock) at a price based on a substantial discount from the market price of the common stock. The Board of Directors may terminate the plan at any time or redeem the rights prior to their becoming exercisable. The rights expire on December 22, 2009.

Market Risk

      Our business is exposed to various market risks, including changes in interest rates and foreign currency exchange rates. Market risk is the potential loss arising from adverse changes in market rates and prices, such as interest rates and foreign currency exchange rates. We do not invest in derivatives or other financial instruments for trading or speculative purposes.

Interest Rates

      We rely significantly on long- and short-term fixed and variable rate debt in our capital structure. We do not use interest rate swaps to manage any of our floating-rate debt obligations. As of December 31, 2001, our debt obligations consisted of (1) $3.1 million subordinated loan outstanding at a variable rate of prime plus 2.0% and (2) $2.4 million term loan outstanding at a variable rate. The variable rate obligation is based upon the lender’s prime rate. See “— Liquidity and Capital Resources.” Assuming an increase of one-half of a percentage point in the lender’s prime rate on January 1, 2001 and no principal payments for the remainder of the year, our total interest expense would increase by less than $100,000 for 2001 as compared to 2000.

Foreign Currencies

      We are subject to some currency risk on a portion of our licensing revenues. This portion is calculated quarterly based on sales results in Japanese Yen and subsequently converted into United States dollars at the then current exchange rate.

Inflation

      We do not foresee any material impact on our operations from inflation.

Healthcare Reform Policies

      In recent years, an increasing number of legislative proposals have been introduced or proposed in Congress and in some state legislatures that would effect major changes in the healthcare system, nationally, at the state level or both. Future legislation, regulation or payment policies of Medicare, Medicaid, private health insurance plans, health maintenance organizations and other third-party payors could adversely affect the demand for our current or future products and our ability to sell our products on a profitable basis. Moreover, healthcare legislation is an area of extensive and dynamic change, and we cannot predict future legislative changes in the healthcare field or their impact on our business.

Forward-Looking Statements

      This Annual Report on Form 10-K contains forward-looking statements which reflect our current views about future events and financial results. We have made these statements in reliance on the safe harbor created by that Private Securities Litigation Reform Act of 1995. Forward-looking statements include our views on future financial results, financing sources, product development, capital requirements, market growth and the like, and are generally identified by phrases such as “anticipates,” “believes,” “estimates,” “expects,” “intends,” “plans” and similar words. Forward-looking statements are merely predictions and therefore inherently subject to uncertainties and other factors which could cause the actual results to differ materially from the forward-looking statement. These uncertainties and other factors include, among other things,

•  unexpected technical and marketing difficulties inherent in major product development efforts such as the new platform for our urinalysis workstation;

•  the potential need for changes in our long-term strategy in response to future developments;

16

•  future advances in diagnostic testing methods and procedures, as well as potential changes in government regulations and healthcare policies, both of which could adversely affect the economics of the diagnostic testing procedures automated by our products;

•  rapid technological change in the microelectronics and software industries; and

•  increasing competition from imaging and non-imaging based in vitro diagnostic products.

      We have attempted to identify additional significant uncertainties and other factors affecting forward-looking statements in Exhibit 99 to this Annual Report. Stockholders should understand that the uncertainties and other factors identified in this Annual Report and in Exhibit 99 are not a comprehensive list of all the uncertainties and other factors that may affect forward-looking statements. We do not undertake any obligation to update or revise any forward-looking statements or the list of uncertainties and other factors that could affect those statements.

Item 7A.     Quantitative and Qualitative Disclosures About Market Risk

      See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Market Risk.”

Item 8.     Financial Statements and Supplementary Data

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

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

      See the Company’s 8K filed on September 20, 2001.

PART III

Item 10.     Directors and Executive Officers of the Registrant

      Incorporated by reference from “Directors and Executive Officers” in the Proxy Statement to be filed with the Securities and Exchange Commission for the 2002 Annual Meeting of IRIS Stockholders.

Item 11.     Executive Compensation

      Incorporated by reference from “Executive Compensation” in the Proxy Statement to be filed with the Securities and Exchange Commission for the 2002 Annual Meeting of IRIS Stockholders.

Item 12.     Security Ownership of Certain Beneficial Owners and Management

      Incorporated by reference from “Security Ownership of Certain Beneficial Owners and Management” in the Proxy Statement to be filed with the Securities and Exchange Commission for the 2002 Annual Meeting of IRIS Stockholders.

Item 13.     Certain Relationships and Related Transactions

      Incorporated by reference from “Certain Relationships and Related Transactions” in the Proxy Statement to be filed with the Securities and Exchange Commission for the 2002 Annual Meeting of IRIS Stockholders.

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PART IV

Item 14.     Exhibits, Financial Statement Schedules, and Reports on Form 8-K

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

		Page
1. Index To Financial Statements
	Report of Independent Accountants		F-2
	Consolidated Balance Sheets at December 31, 2001 and 2000		F-3
	Consolidated Statements of Operations for the Years Ended December 31, 2001, 2000 and 1999		F-4
	Consolidated Statements of Shareholders’ Equity for the Years Ended December 31, 2001, 2000 and 1999		F-5
	Consolidated Statements of Cash Flows for the Years Ended December 31, 2001, 2000 and 1999		F-8
	Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2001, 2000 and 1999		F-9
	Notes to Consolidated Financial Statements		F-10
2. Financial Statement Schedules Covered by the Foregoing Report of Independent Accountants
	Schedule II — Valuation and Qualifying Accounts		F-28

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

3. Exhibits

Exhibit			Reference
Number		Description	Document
	3.1(a)	Certificate of Incorporation, as amended		(1	)
	3.1(b)	Certificate of Designations of Series B Callable Preferred Stock		(3	)
	3.1(c)	Certificate of Designations, Preferences and Rights of Series C Preferred Stock		(4	)
	3.2	Restated Bylaws		(5	)
	4.1	Specimen of Common Stock Certificate		(5	)
	4.2	Certificate of Designations of Series B Callable Preferred Stock		(3	)
	4.3	Certificate of Designations, Preferences and Rights of Series C Preferred Stock		(4	)
	10.1(a)	Lease of the Company’s headquarters facility, as amended		—
	10.1(b)	Lease of the Company’s adjacent headquarters facility		—
	10.2(a)	1994 Stock Option Plan and forms of Stock Option Agreements		(8	)
	10.2(b)	Certificate of Officer With Respect to Amendment of 1994 Stock Option Plan		(9	)
	10.2(c)	Employee Stock Purchase Plan		(20	)
	10.2(d)	1997 Stock Option Plan and form of Stock Option Agreement		(10	)
	10.2(e)	1998 Stock Option Plan and form of Stock Option Agreement		(11	)
	10.3(a)	Patent License Agreement dated April 1, 1997 between the Company and Sysmex Corporation, formerly TOA Medical Electronics Company, Ltd.		(13	)
	10.3(b)	Amendment No. 1 to Patent License Agreement dated February 29, 2000		(20	)
	10.4(a)	Agreement for a Strategic Alliance in Urinalysis dated January 7, 1994 between the Company and Boehringer Mannheim Corporation		(14	)
	10.4(b)	Amendment to Distribution Agreements		(15	)
	10.5(a)	Registration Rights and Standstill Agreement dated July 31, 1996 between the Company and Digital Imaging Technologies, Inc.		(9	)
	10.5(b)	Warrant Certificate dated March 14, 2001 issued to Digital Imaging Technologies, Inc. to purchase 853,040 shares of Common Stock of the Company		(21	)

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Exhibit			Reference
Number		Description	Document
	10.6	Registration Rights Agreement dated December 31, 1996 by and between the Company and Thermo Amex Convertible Growth Fund I, L.P.		(19	)
	10.7	Asset Purchase Agreement dated as of July 6, 2000 among the company, Perceptive Scientific Instruments, LLC and Applied Imaging Corporation		(20	)
	11.1(a)	Business Loan Agreements dated February 7, 2002 by and between the Company and California Bank & Trust		—
	11.1(b)	Promissory Notes dated February 7, 2002 by and between the Company and California Bank & Trust		—
	11.1(c)	Commercial Security Agreements dated February 7, 2002 by and between the Company and California Bank & Trust		—
	11.1(d)	Landlord’s Consent dated February 7, 2002 by and between the Company, the Company’s Landlord and California Bank & Trust		—
	11.1(e)	Subordination Agreement dated February 7, 2002 by and between the Company, Digital Imaging Technologies, Inc. and California Bank & Trust		—
	11.1(f)	Commercial Guaranty Agreement dated February 7, 2002 by and between the Company, Statspin, Inc (the Company’s affiliate) and California Bank & Trust		—
	11.1(g)	Commercial Guaranty Agreement dated February 7, 2002 by and between the Company, Advanced Digital Imaging Research, LLP (the Company’s affiliate) and California Bank & Trust		—
	23	Consent of BDO Seidman, LLP		—
	24	Consent of PricewaterhouseCoopers LLP		—
	99	Disclosure Regarding Risk Factors And Forward-Looking Statements		—

      Exhibits followed by a number in parenthesis are incorporated by reference to the similarly numbered Company document cited below:

(1)	Current Report on Form 8-K dated August 13, 1987 and Quarterly Report on Form 10-Q for the quarter ended September 30, 1993.
(2)	Current Report on Form 8-K dated January 15, 1997.
(3)	Quarterly Report on Form 10-Q for the quarter ended June 30, 1999.
(4)	Current Report on Form 8-K dated January 26, 2000.
(5)	Quarterly Report on Form 10-Q for the quarter ended September 30, 1994.
(6)	Registration Statement on Form S-3, as filed with the Securities and Exchange Commission on March 27, 1996 (File No. 333-002001).
(7)	Annual Report on Form 10-K for the year ended December 31, 1989, Quarterly Report on Form 10-Q for the quarter ended September 30, 1993 and Annual Report on Form 10-K for the year ended December 31, 1994.
(8)	Registration Statement on Form S-8, as filed with the Securities and Exchange Commission on August 8, 1994 (File No. 33-82560).
(9)	Quarterly Report on Form 10-Q for the quarter ended June 30, 1996.

(10)	Registration Statement on Form S-8, as filed with the Securities and Exchange Commission on July 16, 1997 (File No. 333-31393).
(11)	Registration Statement on Form S-8, as filed with the Securities and Exchange Commission on October 9, 1998 (File No. 333-65547).
(12)	Current Report on Form 8-K dated July 15, 1988 and Quarterly Report on Form 10-Q for the quarter ended June 30, 1995.
(13)	Annual Report on Form 10-K for the year ended December 31, 1997.

19

(14)	Annual Report on Form 10-K for the year ended December 31, 1994.
(15)	Quarterly Report on Form 10-Q for the quarter ended September 30, 1996.
(16)	Quarterly Report on Form 10-Q for the quarter ended September 31, 1995.
(17)	Quarterly Report on Form 10-Q for the quarter ended March 31, 1998.
(18)	Annual Report on Form 10-K for the year ended December 31, 1998.
(19)	Quarterly Report on Form 10-Q for the quarter ended June 30, 2000.
(20)	Annual Report on Form 10-K for the year ended December 31, 1999.
(21)	Annual Report on Form 10-K for the year ended December 31, 2000.

      (b) Reports on Form 8-K.

      We did not file any reports on Form 8-K during the quarter ended December 31, 2001.

      (c) See (a)(3) above.

      (d) See (a) (1) and (2) above.

20

SIGNATURES

      Pursuant to the requirements of Section 13 of the Securities Exchange Act of 1934, the Registrant has duly caused this report on Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized, in Chatsworth, California, on March 29, 2002.

INTERNATIONAL REMOTE IMAGING

SYSTEMS, INC.

/s/ JOHN A. O’MALLEY

John A. O’Malley

Chairman of the Board,

President and Chief Executive Officer

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

Signature	Title	Date
/s/ JOHN A. O’MALLEY John A. O’Malley	Chairman of the Board, President, March and Chief Executive Officer (Principal Executive Officer)	29, 2002
Vice /s/ JOHN CALOZ John Caloz	President, Finance, Chief March Financial Officer and Secretary (Principal Financial Officer)	29, 2002
/s/ DONALD E. HORACEK Donald E. Horacek	Controller March (Principal Accounting Officer)	29, 2002
/s/ STEVEN M. BESBECK Steven M. Besbeck	Director March	29, 2002
/s/ THOMAS F. KELLEY Thomas F. Kelley	Director March	29, 2002
/s/ RICHARD G. NADEAU Richard G. Nadeau	Director March	29, 2002

21

EXHIBIT INDEX

Exhibit			Reference
Number		Description	Document
	3.1(a)	Certificate of Incorporation, as amended		(1	)
	3.1(b)	Certificate of Designations of Series B Callable Preferred Stock		(3	)
	3.1(c)	Certificate of Designations, Preferences and Rights of Series C Preferred Stock		(4	)
	3.2	Restated Bylaws		(5	)
	4.1	Specimen of Common Stock Certificate		(5	)
	4.2	Certificate of Designations of Series B Callable Preferred Stock		(3	)
	4.3	Certificate of Designations, Preferences and Rights of Series C Preferred Stock		(4	)
	10.1(a)	Lease of the Company’s headquarters facility, as amended		—
	10.1(b)	Lease of the Company’s adjacent headquarters facility		—
	10.2(a)	1994 Stock Option Plan and forms of Stock Option Agreements		(8	)
	10.2(b)	Certificate of Officer With Respect to Amendment of 1994 Stock Option Plan		(9	)
	10.2(c)	Employee Stock Purchase Plan		(20	)
	10.2(d)	1997 Stock Option Plan and form of Stock Option Agreement		(10	)
	10.2(e)	1998 Stock Option Plan and form of Stock Option Agreement		(11	)
	10.3(b)	Patent License Agreement dated April 1, 1997 between the Company and Sysmex Corporation, formerly TOA Medical Electronics Company, Ltd.		(13	)
	10.3(c)	Amendment No. 1 to Patent License Agreement dated February 29, 2000		(20	)
	10.4(a)	Agreement for a Strategic Alliance in Urinalysis dated January 7, 1994 between the Company and Boehringer Mannheim Corporation		(14	)
	10.4(b)	Amendment to Distribution Agreements		(15	)
	10.5(a)	Registration Rights and Standstill Agreement dated July 31, 1996 between the Company and Digital Imaging Technologies, Inc.		(9	)
	10.5	Warrant Certificate dated March 14, 2001 issued to Digital Imaging Technologies, Inc. to purchase 853,040 shares of Common Stock of the Company		(21	)
	10.6	Registration Rights Agreement dated December 31, 1996 by and between the Company and Thermo Amex Convertible Growth Fund I, L.P.		(19	)
	10.7	Asset Purchase Agreement dated as of July 6, 2000 among the company, Perceptive Scientific Instruments, LLC and Applied Imaging Corporation		(20	)
	11.1(a)	Business Loan Agreements dated February 7, 2002 by and between the Company and California Bank & Trust		—
	11.1(b)	Promissory Notes dated February 7, 2002 by and between the Company and California Bank & Trust		—
	11.1(c)	Commercial Security Agreements dated February 7, 2002 by and between the Company and California Bank & Trust		—
	11.1(d)	Landlord’s Consent dated February 7, 2002 by and between the Company, the Company’s Landlord and California Bank & Trust		—
	11.1(e)	Subordination Agreement dated February 7, 2002 by and between the Company, Digital Imaging Technologies, Inc. and California Bank & Trust		—
	11.1(f)	Commercial Guaranty Agreement dated February 7, 2002 by and between the Company, StatSpin, Inc (the Company’s affiliate) and California Bank & Trust		—
	11.1(g)	Commercial Guaranty Agreement dated February 7, 2002 by and between the Company, Advanced Digital Imaging Research, LLP (the Company’s affiliate) and California Bank & Trust		—
	23	Consent of BDO Seidman, LLP		—

Exhibit			Reference
Number		Description	Document
	24	Consent of PricewaterhouseCoopers LLP		—
	99	Disclosure Regarding Risk Factors And Forward-Looking Statements		—

      Exhibits followed by a number in parenthesis are incorporated by reference to the similarly numbered Company document cited below:

(1)	Current Report on Form 8-K dated August 13, 1987 and Quarterly Report on Form 10-Q for the quarter ended September 30, 1993.
(2)	Current Report on Form 8-K dated January 15, 1997.
(3)	Quarterly Report on Form 10-Q for the quarter ended June 30, 1999.
(4)	Current Report on Form 8-K dated January 26, 2000.
(5)	Quarterly Report on Form 10-Q for the quarter ended September 30, 1994.
(6)	Registration Statement on Form S-3, as filed with the Securities and Exchange Commission on March 27, 1996 (File No. 333-002001).
(7)	Annual Report on Form 10-K for the year ended December 31, 1989, Quarterly Report on Form 10-Q for the quarter ended September 30, 1993 and Annual Report on Form 10-K for the year ended December 31, 1994.
(8)	Registration Statement on Form S-8, as filed with the Securities and Exchange Commission on August 8, 1994 (File No. 33-82560).
(9)	Quarterly Report on Form 10-Q for the quarter ended June 30, 1996.

(10)	Registration Statement on Form S-8, as filed with the Securities and Exchange Commission on July 16, 1997 (File No. 333-31393).
(11)	Registration Statement on Form S-8, as filed with the Securities and Exchange Commission on October 9, 1998 (File No. 333-65547).
(12)	Current Report on Form 8-K dated July 15, 1988 and Quarterly Report on Form 10-Q for the quarter ended June 30, 1995.
(13)	Annual Report on Form 10-K for the year ended December 31, 1997.
(14)	Annual Report on Form 10-K for the year ended December 31, 1994.
(15)	Quarterly Report on Form 10-Q for the quarter ended September 30, 1996.
(16)	Quarterly Report on Form 10-Q for the quarter ended September 31, 1995.
(17)	Quarterly Report on Form 10-Q for the quarter ended March 31, 1998.
(18)	Annual Report on Form 10-K for the year ended December 31, 1998.
(19)	Quarterly Report on Form 10-Q for the quarter ended June 30, 2000.
(20)	Annual Report on Form 10-K for the year ended December 31, 1999.
(22)	Annual Report on Form 10-K for the year ended December 31, 2000.

REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and Shareholders

of International Remote Imaging Systems, Inc.

      We have audited the accompanying consolidated balance sheet of International Remote Imaging Systems, Inc. as of December 31, 2001, the related consolidated statements of operations, stockholders’ equity, cash flows and comprehensive income for the year then ended. We have also audited the schedule listed in the accompanying index. These financial statements and schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and schedule based on our audit.

      We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and schedule are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements and schedule. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements and schedule. We believe that our audit provides 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 International Remote Imaging Systems, Inc. at December 31, 2001, and the results of its operations, cash flows and comprehensive income for the year then ended in conformity with accounting principles generally accepted in the United States of America.

      Also, in our opinion, the schedule presents fairly in all material respects, the information set forth therein.

BDO SEIDMAN LLP

Los Angeles, California

March 5, 2002

F-1

REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and Shareholders

of International Remote Imaging Systems, Inc.

      In our opinion, the accompanying consolidated balance sheet and the related consolidated statements of operations, shareholders’ equity, cash flows and comprehensive income present fairly, in all material respects, the financial position of International Remote Imaging Systems, Inc., and its subsidiaries at December 31, 2000, and the results of their operations and their cash flows for each of the two years in the period ended December 31, 2000 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule for each of the two years in the period ended December 31, 2000 presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. These financial statements and financial statement schedule are the responsibility of the Company’s management; our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, which 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, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. We have not audited the consolidated financial statements and financial statement schedule of International Remote Imaging Systems, Inc. for any period subsequent to December 31, 2000.

/s/ PRICEWATERHOUSECOOPERS LLP

Los Angeles, California

March 16, 2001

F-2

INTERNATIONAL REMOTE IMAGING SYSTEMS, INC.

CONSOLIDATED BALANCE SHEETS

			At December 31,
			2001			2000
ASSETS
Current assets:
Cash and cash equivalents (note 2)			$	2,312,451		$	3,661,310
Accounts receivable, net of allowance for doubtful accounts of $286,127 in 2001 and $334,696 in 2000 (notes 2 and 8)				4,838,252			5,446,466
Inventories (notes 2, 3 and 8)				5,578,139			5,184,272
Prepaid expenses and other current assets				268,348			507,604
Investments available for sale (note 2)				1,036,648			1,396,970
Deferred tax asset (note 9)				1,568,466			983,812
		Total current assets		15,602,304			17,180,434
Property and equipment, at cost, net of accumulated depreciation (notes 2 and 4)				1,666,226			1,344,418
Purchased intangibles (notes 2 and 6)				188,911			223,603
Software development costs, net of accumulated amortization of $1,532,011 in 2001 and $1,375,569 in 2000 (note 2)				1,146,204			435,517
Deferred tax asset (note 9)				7,280,718			8,348,179
Other assets				618,677			755,388
		Total assets	$	26,503,040		$	28,287,539
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Short-term borrowings (note 8)			$	—		$	648,972
Current portion of long-term debt (note 8)				1,993,783			1,972,333
Accounts payable				2,295,637			2,676,398
Accrued expenses (note 7)				1,792,829			2,683,274
Deferred income — service contracts and other				883,819			727,158
		Total current liabilities		6,966,068			8,708,135
Long-term debt (note 8)				3,254,801			5,527,667
Deferred income — service contracts and other				317,416			432,459
		Total liabilities		10,538,285			14,668,261
Commitments and contingencies (note 11)
Shareholders’ equity: (note 10)
Preferred stock, $.01 par value; Authorized: 3,000,000 shares:
	Callable Series B shares issued and outstanding:
	2000 — 204,000 ($612,000 liquidation preference)			2,050			2,040
	2001 — 205,000 ($615,000 liquidation preference)
Common stock, $.01 par value
	Authorized: 50,000,000 shares
	Shares issued and outstanding: 2001 — 10,264,926; 2000 — 9,868,855;			102,648			98,687
Additional paid-in capital				41,311,847			40,444,269
Unearned compensation				(54,343	)		(205,091	)
Accumulated other comprehensive income				72,835			289,028
Accumulated deficit				(25,470,282	)		(27,009,655	)
		Total shareholders’ equity		15,964,755			13,619,278
Total liabilities and shareholders’ equity			$	26,503,040		$	28,287,539

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

F-3

INTERNATIONAL REMOTE IMAGING SYSTEMS, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

		For the Year Ended December 31,
		2001			2000			1999
Sales of IVD imaging systems		$	5,824,832		$	6,981,886		$	6,505,821
Sales IVD imaging system supplies and services			15,735,336			14,849,392			13,611,676
Sales of small instruments and supplies			6,694,145			6,209,967			5,297,385
Royalty and license revenues			393,356			601,511			310,587
Net revenues			28,647,669			28,642,756			25,725,469
Cost of goods — IVD imaging systems			4,525,702			4,356,133			4,310,069
Cost of goods — IVD imaging system supplies and services			5,378,063			5,466,194			5,982,376
Cost of goods — small instruments and supplies			3,175,410			3,216,269			2,765,261
Cost of goods sold			13,079,175			13,038,596			13,057,706
Gross margin			15,568,494			15,604,160			12,667,763
Marketing and selling			3,839,882			3,555,622			3,300,576
General and administrative			4,416,792			4,227,851			3,463,345
Research and development, net			3,861,006			2,526,465			1,124,240
Amortization of intangibles			145,204			142,604			230,784
Unusual charges			—			—			4,158,894
Total operating expenses			12,262,884			10,452,542			12,277,839
Operating income			3,305,610			5,151,618			389,924
Other income (expense):
	Interest income		118,771			197,012			35,310
	Interest expense		(858,760	)		(979,269	)		(966,001	)
	Other income (expense)		—			19,049			(16,255	)
Income (loss) from continuing operations before provision for income taxes			2,565,621			4,388,410			(557,022	)
Provision for income taxes			(1,026,248	)		(1,594,899	)		(530,902	)
Income (loss) from continuing operations			1,539,373			2,793,511			(1,087,924	)
Loss from discontinued operations:
	Loss from operations of discontinued segment prior to March 31, 2000, net of tax benefit of $2,958,566 in 1999, $61,015 in 2000 and $0 in 2001		—			(286,385	)		(5,187,221	)
	Loss on disposal of discontinued segment, including tax provision of $29,374		—			(199,159	)		—
Loss from discontinued operations			—			(485,544	)		(5,187,221	)
Net income (loss)		$	1,539,373		$	2,307,967		$	(6,275,145	)
Income (loss) per share — basic:
	Income (loss) from continuing operations	$	0.15		$	0.29		$	(0.15	)
	Loss from discontinued operations		—			(0.05	)		(0.71	)
Income (loss) per share attributable to common shareholders — basic		$	0.15		$	0.24		$	(0.86	)
Income (loss) per share — diluted:
	Income (loss) from continuing operations	$	0.14		$	0.27		$	(0.15	)
	Loss from discontinued operations		—			(0.05	)		(0.71	)
Income (loss) per share attributable to common shareholders — diluted		$	0.14		$	0.22		$	(0.86	)
Weighted average number of common shares outstanding — basic			9,978,532			9,654,272			7,260,390
Weighted average number of common shares outstanding — diluted			11,002,586			10,404,797			7,260,390

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

F-4

INTERNATIONAL REMOTE IMAGING SYSTEMS, INC.

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

		Convertible Series A						Callable Series B														Accumulated
		Preferred Stock						Preferred Stock				Common Stock				Additional						Other
																Paid-In			Unearned			Comprehensive		Accumulated
		Shares			Amount			Shares		Amount		Shares		Amount		Capital			Compensation			Income		Deficit			Total
Balance, at December 31, 1998			3,000		$	30			—	$	—		6,432,875	$	64,328	$	38,134,290		$	(204,294	)	$	47,510	$	(23,042,477	)	$	14,999,387
Common Stock issued under Employee Stock Purchase Plan for:
	Cash		—			—			—		—		300,050		3,001		220,161			(111,582	)		—		—			111,580
	Services		—			—			—		—		20,400		204		15,096			(7,650	)		—		—			7,650
Issuance of stock options for services			—			—			—		—		—		—		12,000			(12,000	)		—		—			—
Issuance of Series B Convertible Preferred Stock and common stock in connection with litigation settlement			—			—			198,000		1,980		594,000		5,940		1,168,200			—			—		—			1,176,120
Conversion of Series A Preferred stock			(3,000	)		(30	)		—		—		2,000,000		20,000		(19,970	)		—			—		—			—
Amortization of unearned Compensation			—			—			—		—		—		—		—			182,418			—		—			182,418
Foreign currency translation adjustment			—			—			—		—		—		—		—			—			19,697		—			19,697
Net loss			—			—			—		—		—		—		—			—			—		(6,275,145	)		(6,275,145	)
Balance at December 31, 1999			—		$	—			198,000	$	1,980		9,347,325	$	93,473		39,529,777		$	(153,108	)	$	67,207	$	(29,317,622	)	$	10,221,707

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

F-5

INTERNATIONAL REMOTE IMAGING SYSTEMS, INC.

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

	Callable Series B													Accumulated
	Preferred Stock				Common Stock				Additional					Other
									Paid-In		Unearned			Comprehensive			Accumulated
	Shares		Amount		Shares		Amount		Capital		Compensation			Income			Deficit			Total
Balance, December 31, 1999		198,000	$	1,980		9,347,325	$	93,473	$	39,529,777	$	(153,108	)	$	67,207		$	(29,317,622	)	$	10,221,707
Common stock issued under Employee Stock Purchase Plan for Cash		—		—		32,826		328		47,672		(24,000	)		—			—			24,000
Common stock issued on exercise stock options and warrants		—		—		179,148		1,791		229,833		—			—			—			231,624
Issuance of stock options and warrants for services		—		—		—		—		133,000		(133,000	)		—			—			—
Issuance of Series B Convertible Preferred Stock and common stock in connection with litigation settlement		6,000		60		309,556		3,095		360,484		—			—			—			363,639
Charge for extension of warrants		—		—		—		—		63,815		(63,815	)		—			—			—
Charge for grant of employee stock options at less than market value		—		—		—		—		79,688		(79,688	)		—			—			—
Amortization of unearned compensation		—		—		—		—		—		248,520			—			—			248,520
Unrealized gains on investments, net of taxes		—		—		—		—		—		—			289,028			—			289,028
Foreign currency translation adjustment		—		—		—		—		—		—			(67,207	)		—			(67,207	)
Net income		—		—		—		—		—		—			—			2,307,967			2,307,967
Balance, December 31, 2000		204,000	$	2,040		9,868,855	$	98,687	$	40,444,269	$	(205,091	)	$	289,028		$	(27,009,655	)	$	13,619,278

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

F-6

INTERNATIONAL REMOTE IMAGING SYSTEMS, INC.

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

	Callable Series B														Accumulated
	Preferred Stock				Common Stock				Additional						Other
									Paid-In			Unearned			Comprehensive			Accumulated
	Shares		Amount		Shares		Amount		Capital			Compensation			Income			Deficit			Total
Balance, December 31, 2000		204,000	$	2,040		9,868,855	$	98,687	$	40,444,269		$	(205,091	)	$	289,028		$	(27,009,655	)	$	13,619,278
Common stock issued on exercise stock options and warrants		—		—		382,201		3,822		428,248			—			—			—			432,070
Common stock issued under employee stock purchase plan for cash		—		—		10,870		109		19,891			(10,000	)		—			—			10,000
Issuance of stock options and warrants for services		—		—		—		—		35,000			(35,000	)		—			—			—
Issuance of Series B Convertible Preferred Stock and common stock in connection with litigation settlement		1,000		10		3,000		30		14,261			—			—			—			14,301
Issuance of warrants in connection with debt financing		—		—		—		—		374,768			—			—			—			374,768
Redemption of warrants		—		—		—		—		(4,590	)		—			—			—			(4,590	)
Amortization of unearned compensation		—		—		—		—		—			195,748			—			—			195,748
Unrealized gains on investments, net of taxes		—		—		—		—		—			—			(216,193	)		—			(216,193	)
Net income		—		—		—		—		—			—			—			1,539,373			1,539,373
Balance, December 31, 2001		205,000	$	2,050		10,264,926	$	102,648	$	41,311,847		$	(54,343	)	$	72,835		$	(25,470,282	)	$	15,964,755

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

F-7

INTERNATIONAL REMOTE IMAGING SYSTEMS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

			For the Year Ended December 31,
			2001			2000			1999
Cash flows from operating activities:
	Net income (loss)		$	1,539,373		$	2,307,967		$	(6,275,145	)
	Adjustments to reconcile net income (loss) to net cash provided by operations:
		Loss from discontinued operations		—			485,544			—
		Deferred taxes		933,912			1,832,567			(2,500,526	)
		Depreciation and amortization		1,034,498			881,743			2,006,332
		Provision for impairment of certain assets		—			—			8,160,978
		Common stock and stock option compensation		195,748			240,661			182,417
		Litigation settlement payable in equity securities		14,301			—			1,520,371
		Gain on disposal of property and equipment		—			(1,677	)		(87,158	)
		Allowance for doubtful accounts		48,569			—			534,653
		Changes in assets and liabilities:
		Accounts receivable — trade and other		652,320			7,803			(931,541	)
		Service contracts, net		(2,488	)		(415,906	)		405,695
		Inventories		(393,867	)		(2,106,813	)		850,661
		Prepaid expenses and other current assets		(119,101	)		(224,695	)		(105,939	)
		Other assets		5,441			(88,022	)		(14,382	)
		Accounts payable		(382,361	)		573,432			(399,525	)
		Accrued expenses		(853,791	)		901,111			419,087
Net cash provided by continuing operations				2,672,554			4,393,715			3,765,978
Net cash used by discontinued operations				—			(858,988	)		—
Net cash provided by operating activities				2,672,554			3,534,727			3,765,978
Cash flows from investing activities:
	Acquisition of property and equipment			(938,708	)		(522,643	)		(438,069	)
	Sale of property and equipment			—			—			125,000
	Software development costs			(866,639	)		(278,543	)		(367,502	)
		Investing activities of discontinued operations		—			(136,694	)		—
Net cash used by investing activities				(1,805,347	)		(937,880	)		(680,571	)
Cash flows from financing activities:
	Issuance of common and preferred stock and warrants for cash			442,070			255,623			111,580
	Borrowings under line of credit			15,369,068			21,255,000			8,903,395
	Redemption of warrants			(4,540	)		—			—
	Repayments of line of credit			(16,018,091	)		(21,261,064	)		(8,713,128	)
	Borrowings under term loan			3,000,000			—			—
	Repayments of term loan			(1,083,331	)		(1,200,000	)		(1,200,000	)
	Repayments of notes payable			(3,889,000	)		—			(542,027	)
	Payments of capital lease obligations			(32,242	)		(19,689	)		(11,363	)
Net cash used in financing activities				(2,216,066	)		(970,130	)		(1,451,543	)
Effect of foreign currency rate fluctuation on cash and cash equivalents				—			—			11,234
Net increase (decrease) in cash and cash equivalents				(1,348,859	)		1,626,717			1,645,098
Cash and cash equivalents at beginning of year				3,661,310			2,034,593			389,495
Cash and cash equivalents at end of year			$	2,312,451		$	3,661,310		$	2,034,593
Supplemental schedule of non-cash financing activities:
	Non-cash issuance of common stock and common stock warrants		$	45,000		$	157,000		$	138,881
	Issuance of series B convertible preferred stock and common stock in connection with litigation settlement			14,301			—			—
	Equipment acquired through issuance of capital lease			—			103,977			—
	Issuance of warrants in connection with debt financing			374,768			—			—
Supplemental disclosure of cash flow information:
	Cash paid for income taxes			47,312			25,536			57,468
	Cash paid for interest			778,028			865,153			838,122

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

F-8

INTERNATIONAL REMOTE IMAGING SYSTEMS, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

	For the Year Ended December 31,
	2001			2000			1999
Net income (loss)	$	1,539,373		$	2,307,967		$	(6,275,145	)
Unrealized gains (losses) on investments, net of taxes		(216,193	)		289,028			—
Foreign currency translation adjustment		—			(67,207	)		19,697
Comprehensive income (loss)	$	1,323,180		$	2,529,788		$	(6,255,448	)

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

F-9

INTERNATIONAL REMOTE IMAGING SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.     Formation and Business of the Company.

      International Remote Imaging Systems, Inc. (collectively “IRIS” or the “Company”), was incorporated in California in 1979 and reincorporated during 1987 in Delaware. The Company designs, develops, manufactures and markets in vitro diagnostic (“IVD”) equipment, including IVD imaging systems based on patented and proprietary automated intelligent microscopy (“AIM”) technology, as well as special purpose centrifuges and other small instruments for automating microscopic procedures performed in clinical laboratories.

2.     Summary of Significant Accounting Policies.

Use of Estimates

      The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. The significant estimates in the preparation of the consolidated financial statements relate to the assessment of the carrying value of accounts receivables, inventories, purchased intangibles, estimated provisions for warranty costs and deferred tax assets. Actual results could differ materially from those estimates.

Principles of Consolidation

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

Cash Equivalents and Short-Term Investments

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

Accounts Receivable

      IRIS sells predominantly to entities in the healthcare industry. IRIS grants uncollateralized credit to its customers, primarily hospitals, clinical and research laboratories, and distributors. IRIS performs ongoing credit evaluations of its customers before granting uncollateralized credit. The Company does not have any single customer, which accounts for 10% or more of its consolidated revenues or 10% or more of its accounts receivable at the balance sheet date.

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.

F-10

INTERNATIONAL REMOTE IMAGING SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Investments Available for Sale

      Management classifies the investment in the 385,371 common shares of Applied Imaging Corporation (NASDAQ: AICX) that were received as consideration for the sale of its wholly owned subsidiary, Perceptive Scientific Instruments, LLC (“PSI”), as available for sale. Investments in available for sale securities are reported at fair value with unrealized holding gains and losses, net of tax, reported as a separate component of shareholders’ equity until realized. Realized gains and losses are included in earnings and derived using the specific identification method for determining the cost of the security sold. There were no realized gains and losses for the year ended December 31, 2001 and 2000.

      The cost, gross unrealized holding gains and fair value as of December 31, 2001 are as follows:

			Gross
			Unrealized
			Holding		Fair
	Cost		Gains		Fair Value
Available for sale securities	$	915,256	$	121,392	$	1,036,648

      The cost, gross unrealized holding gains and fair value as of December 31, 2000 are as follows:

			Gross
			Unrealized
			Holding		Fair
	Cost		Gains		Fair Value
Available for sale securities	$	915,256	$	481,714	$	1,396,970

Property and Equipment and Depreciation

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

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

Purchased Intangibles

      Purchased intangibles are recorded at cost and consist of goodwill, which is being amortized on a straight-line basis over ten years. The realizability of purchased intangibles is evaluated periodically as events or circumstances indicate a possible inability to recover the carrying amount. Such evaluation is based on various analyses, including cash flow and profitability projections. The analysis necessarily involves significant management judgement to evaluate the capacity of an acquired business to perform within projections. In the event the projected undiscounted cash flows are less than net book value of the assets, the carrying value of the assets will be written down to their fair value.

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 its 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 (a) the ratio of current revenues for a product to the total of current

F-11

INTERNATIONAL REMOTE IMAGING SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

and anticipated future revenues or (b) the straight-line method over the remaining estimated economic life of the product. Generally, an original estimated economic life of one and one half years to three years is assigned to capitalized software development costs. Amortization expense of software development costs, excluding the write off of costs relating to the White IRIS of $796,887 in 1999, was $155,957, $90,975 and $223,813 for 2001, 2000 and 1999, respectively.

Long-Lived Assets

      The Company identifies and records for long-lived assets whenever events or changes in circumstances result in the carrying amount of the assets exceeding the sum of the expected future undiscounted cash flows associated with such assets. The measurement of the impairment losses recognized is based on the difference between the fair values and the carrying amounts of the assets.

Stock Based Compensation

      The Company has adopted the disclosure-only provisions of SFAS No. 123, “Accounting for Stock-Based Compensation.” SFAS No. 123 defines a fair value based method of accounting for an employee stock option. Fair value of the stock option is determined considering factors such as the exercise price, the expected life of the option, the current price of the underlying stock and its volatility, expected dividends on the stock, and the risk-free interest rate for the expected term of the option. Under the fair value based method, compensation cost is measured at the grant date based on the fair value of the award and is recognized over the service period. Pro forma disclosures for entities that elect to continue to measure compensation cost under the intrinsic method provided by Accounting Principles Board Opinion No. 25 must include the effects of all awards granted in fiscal years that begin after December 15, 1994. The Company accounts for stock-based awards to non-employees in accordance with SFAS No. 123 and EITF 96-18. An expense is recognized for common stock, warrants or options issued or repriced, for services rendered by non-employees based on the estimated fair value of the security exchanged.

Revenue Recognition

      IRIS derives revenue from the sale of IVD imaging systems, sales of supplies and services for its IVD imaging systems and sales of small instruments and related supplies. For sales of supplies and small instruments, IRIS generally recognizes product revenues once all of the following conditions have been met: a) an authorized purchase order has been received in writing, b) customer credit worthiness has been established, and c) delivery of the product based on shipping terms.

      Certain of IRIS’s domestic IVD system sales generally require installation and training to be performed. Management believes that installation and training is not essential to the functionality of the product and accordingly, the Company recognizes revenue on delivery based on shipping terms, provided title has transferred, collectibility of the resulting receivable is probable, the Company has received an authorized purchase order and the price is fixed and determinable. The estimated fair value of installation and training is deferred and recognized as these services are performed. Sales of IVD systems internationally are recognized on delivery based on shipping terms, provided collectability of the resulting receivable is probable, the Company has received an authorized purchase order and the price is fixed and determinable.

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

F-12

INTERNATIONAL REMOTE IMAGING SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Warranties

      IRIS recognizes the full estimated cost of warranty expense at the time of product delivery.

Research and Development Expenditures

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

Income Taxes

      IRIS 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.

Marketing Costs

      All costs related to marketing and advertising the Company’s products are expensed at the time the advertising takes place.

Fair Value of Financial Instruments

      The amount recorded for financial instruments in the Company’s consolidated financial statements approximates fair value as defined in SFAS No. 107, “Disclosures about Fair Value of Financial Instruments,” the fair value of short term borrowings and notes payable described in note 8 approximate their carrying value due to the variable nature of the interest rates in these instruments.

Earnings Per Share

      Basic earnings per share are computed by dividing net income (loss) by the weighted average number of common shares outstanding. Diluted earnings per share is computed by dividing net income (loss) by the weighted average number of common shares and common stock equivalents outstanding, calculated on the treasury stock method for options and warrants or the converted method for convertible preferred stock. Common stock equivalents are excluded from the computation when their effect is antidilutive.

Segment Reporting

      The Company determines and discloses its 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 the Company’s reportable segments. SFAS No. 131 also requires disclosures about products and services, geographic areas, and major customers. The adoption of SFAS No. 131 did not affect results of operations or financial position but did affect the disclosure of segment information. See Note 17 — “Segment and Geographic Information”.

F-13

INTERNATIONAL REMOTE IMAGING SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Reclassifications

      Certain reclassifications have been made to the 1999 and 2000 financial statements to conform to the 2001 presentation.

     New Accounting Pronouncements

      In September 2001, the Financial Accounting Standards Board finalized FASB Statements No. 141, Business Combinations (SFAS 141), and No. 142, Goodwill and Other Intangible Assets (SFAS 142). SFAS 141 requires the use of the purchase method of accounting and prohibits the use of the pooling-of-interests method of accounting for business combinations initiated after September 30, 2001. SFAS 141 also requires that the Company recognize acquired intangible assets apart from goodwill if the acquired intangible assets meet certain criteria. SFAS 141 applies to all business combinations initiated after September 30, 2001 and for purchase business combinations completed on or after July 1, 2001. It also requires, upon adoption of SFAS 142 that the Company reclassify the carrying amounts of intangible assets and goodwill based on the criteria in SFAS 141.

      SFAS 142 requires, among other things, that companies no longer amortize goodwill, but instead test goodwill for impairment at least annually. In addition, SFAS 142 requires that the Company identify reporting units for the purposes of assessing potential future impairments of goodwill, reassess the useful lives of other existing recognized intangible assets, and cease amortization of intangible assets with an indefinite useful life. An intangible asset with an indefinite useful life should be tested for impairment in accordance with the guidance in SFAS 142. SFAS 142 is required to be applied in fiscal years beginning after December 15, 2001 to all goodwill and other intangible assets recognized at that date, regardless of when those assets were initially recognized. SFAS 142 requires the Company to complete a transitional goodwill impairment test nine months from the date of adoption. The Company is also required to reassess the useful lives of other intangible assets within the first interim quarter after adoption of SFAS 142.

      The Company’s previous business combinations were accounted for using the purchase method. As of December 31, 2001, the net carrying amount of goodwill is $188,911. Amortization expense during the year ended December 31, 2001 was $34,692. Currently, the Company is assessing but has not yet determined how the adoption of SFAS 141 and SFAS 142 will impact its financial position and results of operations.

      In August 2001, the FASB issued SFAS No. 143, Accounting for Asset Retirement Obligations. SFAS 143 requires the fair value of a liability for an asset retirement obligation to be recognized in the period in which it is incurred if a reasonable estimate of fair value can be made. The associated asset retirement costs are capitalized as part of the carrying amount of the long-lived asset. SFAS No. 143 is effective for fiscal years beginning after June 15, 2002. The Company believes the adoption of this Statement will have no material impact on its financial statements.

      In October 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. SFASB 144 requires that those long-lived assets be measured at the lower of carrying amount or fair value less cost to sell, whether reported in continuing operations or in discontinued operations. Therefore, discontinued operations will no longer be measured at net realizable value or include amounts for operating losses that have not yet occurred. SFASB 144 is effective for financial statements issued for fiscal years beginning after December 15, 2001 and, generally, are to be applied prospectively. The Company believes the adoption of this Statement will have no material impact on its financial statements.

Certain Risks and Uncertainties

      Dependence on Instrument Sales: The Company derives most of its revenues from the sale of the urinalysis workstations, and related supplies and services. These instruments have list prices ranging from

F-14

INTERNATIONAL REMOTE IMAGING SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

$100,000 to $195,000 depending on model and configuration, and relatively modest declines in unit sales or gross margins could have a material adverse effect on the Company’s revenues and profits.

      Reliance on Single Source Suppliers: Certain key components of the Company’s instruments are manufactured according to the Company’s specifications or are available only from single suppliers. For example, Roche Diagnostics is the sole supplier for the Company’s proprietary CHEMSTRIP/ IRIStrip urine test strips and related test reader used in The Yellow IRIS Models 300 and 500. From time to time, single source suppliers have discontinued production of key components or encountered production problems, which potentially could have a material adverse effect on instrument sales. Although, in the past, the Company has successfully transitioned to new components to replace discontinued components, there can be no assurance that the Company can always successfully transition to satisfactory replacement components or that the Company will always have access to adequate supplies of discontinued components on satisfactory terms during the transition period. The Company’s inability to transition successfully to replacement components or to secure adequate supplies of discontinued components on satisfactory terms could have a material adverse effect on the Company.

3.     Inventories.

      Inventories consist of the following:

	At December 31,
	2001			2000
Finished goods	$	2,270,973		$	1,715,881
Work-in-process		479,809			216,050
Raw materials, parts and sub-assemblies		4,042,659			4,229,972
		6,793,441			6,161,903
Reserved for Obsolescence		(1,215,302	)		(977,631	)
Net inventories	$	5,578,139		$	5,184,272

4.     Property and Equipment.

      Property and equipment consist of the following:

	At December 31,
	2001			2000
Leasehold improvements	$	771,029		$	606,959
Furniture and fixtures		244,217			231,953
Machinery and equipment		2,950,271			2,654,866
Construction in progress		228,442			—
Tooling, dies and mold		1,087,600			927,158
Rental units		1,023,343			985,343
		6,304,902			5,406,279
Less accumulated depreciation		(4,638,676	)		(4,061,861	)
	$	1,666,226		$	1,344,418

      Property and equipment includes and $2,575,199 and $2,399,053, respectively, at December 31, 2001 and 2000, of fully depreciated assets which remain in service. Depreciation expense was $616,900, $601,186 and $653,901 for 2001, 2000 and 1999, respectively.

F-15

INTERNATIONAL REMOTE IMAGING SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

5.     Equipment Leasing.

      For sales-type leases, the components of net investment in sales-type leases recorded in other assets are as follows at December 31, 2001 and 2000.

	At December 31,
	2001			2000
Total minimum lease payments	$	348,457		$	513,601
Less: Estimated executory costs including profit thereon		(120,274	)		(177,418	)
		228,183			336,183
		(65,779	)		(96,367	)
		162,404			239,816
Less accumulated depreciation		(77,412	)		(77,412	)
	$	84,992		$	162,404

      Any lease that does not meet the criteria for a sales-type or a financing lease is accounted for as an operating lease. Under these leases the Company also provides supplies and services. Generally operating leases are for periods less than one year and contain provisions for renewal and early termination penalties. The cost of leased systems is depreciated to a zero value on a straight-line basis over five years. Accumulated depreciation on leased systems was $970,793 and $769,334 at December 31, 2001 and 2000, respectively.

      Future minimum lease payments due from customers under sales-type leases and noncancellable operating leases as of December 31, 2001 are as follows:

	Sales - Type		Operating
	Leases		Leases
2002	$	165,144	$	178,645
2003		132,888		—
2004		50,425		—
	$	348,457	$	178,645

6.     Purchased Intangibles.

      Purchased intangibles, at cost, consist of the following:

	At December 31,
	2001			2000
Goodwill	$	383,108		$	383,108
Less accumulated amortization		(194,197	)		(159,505	)
Total	$	188,911		$	223,603

F-16

INTERNATIONAL REMOTE IMAGING SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

7.     Accrued Expenses.

      Accrued expenses consist of the following:

	At December 31,
	2001		2000
Accrued bonuses	$	339,026	$	942,642
Accrued commissions		100,943		170,250
Accrued payroll		100,466		41,655
Accrued vacation		363,587		262,818
Accrued professional fees		130,494		133,896
Accrued warranty expense		281,683		379,546
Accrued interest		40,527		134,562
Accrued — other		436,103		617,905
	$	1,792,829	$	2,683,274

8.     Short-Term Borrowings and Notes Payable.

      The Company refinanced the $7.0 million subordinated note with a new $3.0 million term loan from Foothill Capital, the issuance of a new $3.5 million subordinated note to the existing note holder and $500,000 from the Company’s cash reserves. The term loan and the new subordinated note both amortize over three years. In connection with the refinancing, the Company issued a new 3 year warrant to purchase 853,040 shares of common stock at $1.90 per share. The new warrant replaced an old warrant expiring July 31, 2001 for the same number of shares.

      At December 31, 2001, the outstanding amounts under the Company’s credit facility consists of $2.4 million outstanding under a $3 million term loan and $0 outstanding under a $4.0 million revolving line of credit. Borrowings under the line of credit are limited to a percentage of eligible accounts receivable. The Company had approximately $1.9 million available under the line of credit at December 31, 2001. The term loan bears interest at the lender’s prime rate (4.75% on December 31, 2001) plus 3.0% and is payable in monthly installments of approximately $83,000. The revolving credit line bears interest at the lender’s prime rate plus 1.0%, but has a minimum interest rate of 7%. The credit facility is subject to minimum interest charges, prepayment penalties and customary fees and is collateralized by a first priority lien on all assets of the Company. It also contains financial covenants based primarily on tangible net worth and cash flows and imposes restrictions on acquisition, capital expenditures and cash dividends. At December 31, 2001, the Company was in compliance with all of its financial covenants.

      At December 31, 2001, the outstanding principal balance on the unsecured Subordinated Note Payable was $3.1 million. The note is payable in monthly installments of approximately $97,000 plus interest on the unpaid balance. The note bears interest at the prime rate (4.75% on December 31, 2001) plus 2% and matures on July 31, 2004.

      In February 2002, the Company refinanced its existing credit facility and replaced it with a new $8 million credit facility with California Bank and Trust. The new facility consists of a $500,000 term loan, a $1 million term loan and a $6.5 million revolving line of credit. The $500,000 term loan is payable in 60 equal monthly installments. The $1 million term loan shall carry interest only for the first 12 months, followed by 48 months of equal principal payments plus interest. The $6.5 million credit line matures in June 2004. Borrowings under the line of credit are limited to a percentage of eligible receivables and inventory. The entire credit facility bears interest at the lender’s prime rate, or LIBOR rate plus 2%.

F-17

INTERNATIONAL REMOTE IMAGING SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

      After considering the effects of the refinanced credit facility, maturity of the Company’s long term debt obligations under the credit facility and the subordinated note payable are $1.4 million in 2002, $1.5 million in 2003, $1 million in 2004, $350,000 in 2005, $350,000 in 2006 and $60,000 in 2007.

9.     Income Taxes.

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

		For the Year Ended December 31,
		2001		2000			1999
Current:		$	40,000	$	139,000		$	4,000
	Federal		52,000		(376,000	)		32,000
	State		—		—			36,000
Foreign
			92,000		(237,000	)		72,000
Deferred:
	Federal		859,000		1,120,000			422,000
	State		75,000		712,000			37,000
			934,000		1,832,000			459,000
		$	1,026,000	$	1,595,000		$	531,000

      The provision for income taxes from continuing operations differs from the amount obtained by applying the federal statutory income tax rate to income from continuing operations before provision for income taxes for the years ended December 31, 2001, 2000 and 1999 as follows:

	For the Year Ended December 31,
	2001			2000			1999
Tax provision (benefit) computed at Federal statutory rate	$	872,000		$	1,492,000		$	(189,000	)
Increase (decrease) in taxes due to change in valuation allowance		(426,000	)		(1,655,000	)		649,000
Expiration of Federal NOL		426,000			1,655,000			—
State taxes, net of federal benefit		128,000			201,000			(11,000	)
Nondeductible expenses		38,000			23,000			38,000
Other		(12,000	)		(121,000	)		44,000
	$	1,026,000		$	1,595,000		$	531,000

      At December 31, 2001, the Company had federal net operating loss carryforwards of approximately $20.4 million, which expire in fiscal years ending in 2002 through 2021.

F-18

INTERNATIONAL REMOTE IMAGING SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

      The primary components of temporary differences, which give rise to the Company’s net deferred tax asset at December 31, 2001 and 2000 are as follows:

	At December 31,
	2001			2000
Depreciation and amortization	$	356,000		$	588,000
Allowance for doubtful accounts		112,000			130,000
Accrued liabilities		477,000			357,000
Deferred revenue-service contracts		499,000			219,000
Net operating loss carry-forwards		7,277,000			8,752,000
Other		698,000			280,000
Valuation allowance		(569,000	)		(994,000	)
	$	8,850,000		$	9,332,000

      Realization of deferred tax assets associated with net operating losses (“NOL”) and tax credit carryforwards is dependent upon generating sufficient taxable income prior to their expiration. Management believes that there is a risk that certain of these NOL and tax credit carryforwards may expire unused and accordingly, has established a valuation reserve against them. Although realization is not assured for the remaining deferred tax assets, management believes it is more likely than not that they will be realized through future taxable income or alternative tax strategies. However, the net deferred tax assets could be reduced in the near term if management’s estimates of taxable income during the carryforward period are significantly reduced or alternative tax strategies are not available. The Company will continue to review its valuation allowances and make adjustments, if necessary. Also, although a valuation allowance has been provided against a portion of its NOL’s, should the Company undergo an ownership change as defined in Section 382 of the Internal Revenue Code, the Company’s NOL generated prior to the ownership change would be subject to an annual limitation. If this occurs, a further adjustment of the valuation allowance may be necessary.

10.     Capital Stock.

Issuance of Common and Preferred Stock

      During the year ended December 31, 1999, the Company successfully completed a tender offer for the common stock of Poly UA Systems, Inc., a Company-sponsored research and development entity. In exchange for the tendered shares and a release of claims, the Company issued to the tendering stockholders a total of 594,000 shares of common stock, 198,000 shares of a new Series B Callable Preferred Stock and Series G Warrants to purchase an additional 594,000 shares of the common stock. During the year ended December 31, 2000, the Company issued 309,556 shares of common stock, 6,000 shares of preferred stock and warrants to purchase an additional 18,000 shares of common stock in exchange for 57,000 shares of the common stock of Poly U/ A Systems that had not been acquired through the tender offer. During the year ended December 31, 2001, in connection with legal settlement with Poly U/ A equity instrument, the Company issued 3,000 shares of common stock, 1,000 shares of preferred stock and warrants to purchase an additional 3,000 shares of common stock in exchange for the remaining common stock of Poly U/ A Systems. The Series B shares have a liquidation preference of $3 per share (or an aggregate liquidation preference of $615,000). The “callable” feature entitles the Company to convert the preferred stock at any time into a number of shares of common stock equal to the liquidation value divided by the market price of the common stock at the time of conversion (subject to a minimum value of $2 per share of common stock). The preferred stock will automatically convert under the same formula on August 3, 2002, if not converted sooner by the Company. The Series B Callable Preferred Stock is non-voting, is not entitled to any preferred dividends and

F-19

INTERNATIONAL REMOTE IMAGING SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

is not subject to any mandatory or optional redemption provisions. The Company may not pay cash dividends on the common stock or repurchase any shares of the common stock without the written consent of the holders of a majority of the Series B Callable Preferred Stock.

      In December 2001, the Company announced its decision to redeem all of the outstanding rights to purchase One Dollar Warrant Shares at $0.10 per share under the terms of the Series “G” One Dollar Stock Purchase Warrants. In response to this announcement, most warrant holders exercised their warrants and purchased the Company’s common stock under the terms of the warrant. Two hundred fifty one thousand one hundred (251,100) warrants were exercised during the year leaving 45,900 unexercised series “G” One Dollar Stock Purchase Warrants, which the company subsequently redeemed.

Shareholders’ Rights Plan

      The Company has a shareholders’ rights plan under which each holder of a share of common stock also has one right to purchase one one-thousandth of a preferred Series C share at $9 per one one-thousandth of a share. The rights are not presently exercisable. Upon the occurrence of certain “flip-in” events, each right becomes exercisable and then entitles its holder to receive the number of common shares having an aggregate per share market price equal to two times the purchase price. Upon certain “flip-over” events, each right when exercised entitles its holder to receive common share of the acquiring company having a value equal to two times the purchase price. One flip-in event is when a person or group (an “acquiring person”) acquires 20 percent or more of the company’s common stock. Rights held by an acquiring person are void. The Company may redeem the rights for one cent per share. The rights expire on December 22, 2009.

Stock Issuances

      During 1990, the IRIS Board of Directors adopted an Employee Stock Purchase Plan designed to allow employees of the Company to buy its shares at 50% of the then current market price, provided that the employee agrees to hold the shares purchased for a minimum of two years. The employee’s 50% portion of stock purchases under the plan may not exceed 15% of the employee’s total compensation during any year. The remaining 50% portion is recorded as deferred compensation and amortized over the vesting period. The shares purchased pursuant to this plan may not be transferred, except following the death of the employee or a change in control, for a period of two years following the date of purchase. During the period of the limitation on transfer, the Company has the option to repurchase the shares at the employee’s purchase price if the employee terminates employment with the Company either voluntarily or as a result of termination for cause. During 2001, 2000 and 1999, IRIS issued 10,870, 32,826 and 320,450 shares of common stock, respectively, in exchange for $20,000, $48,000 and $238,462 in cash and services, respectively, under this plan.

Stock Option Plans and Employee Benefit Plans

      As of December 31, 2001, the Company had three stock option plans under which it may grant non-qualified stock options, incentive stock options and stock appreciation rights. No stock appreciation rights or incentive stock options have been granted under these plans.

F-20

INTERNATIONAL REMOTE IMAGING SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

      The following schedule sets forth options authorized, exercised, outstanding and available for grant under the Company’s three stock option plans as of December 31, 2001.

	Number of Option Shares
							Available
Plan	Authorized		Exercised		Outstanding		for Grant
1994		700,000		167,733		528,500		3,767
1997		600,000		114,492		482,034		3,474
1998		1,900,000		27,848		1,317,813		554,339
		3,200,000		310,073		2,328,347		561,580

      The exercise price of options is determined by the Compensation Committee. Payment of the exercise price may be made in cash or with shares of common stock. The options generally vest over three years and expire either five or ten years from the date of grant.

      IRIS has adopted the disclosure only provisions of Statement of Financial Accounting Standards No. 123, “Accounting for Stock Based Compensation.” If compensation expense for the stock options had been determined using “fair value” at the grant date for awards in 2001, 2000 and 1999, consistent with the provisions of Statement of Financial Accounting Standards No. 123, the Company’s net income (loss) and income (loss) per share would have been reduced to the pro forma amounts indicated below:

	For the Year Ended December 31,
	2001		2000		1999
Income (loss) attributable to Common stockholders as reported	$	1,539,373	$	2,307,967	$	(6,275,145	)
Income (loss) attributable to Common stockholders pro forma		1,226,688		2,071,305		(6,665,244	)
Income (loss) per diluted share as reported		0.14		0.22		(0.86	)
Income (loss) per diluted share pro forma		0.11		0.20		(0.92	)

      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 used for grants in 1999, 2000 and 2001.

	For the Year Ended
	December 31,
	2001			2000			1999
Risk free interest rate		4.68	%		6.43	%		5.82	%
Expected lives (years)		5			5			5
Expected volatility		53	%		81	%		74	%
Expected dividend yield

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

F-21

INTERNATIONAL REMOTE IMAGING SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

      The following table sets forth certain information relative to stock options during the years ended December 31, 1999, 2000 and 2001.

								Fair Value at
								Grant Date
						Weighted		Weighted
		Shares			Range	Average		Average
Outstanding at December 31, 1998			1,501,001		$0.81 to $4.50	$	1.46
	Granted		488,250		0.69 to  1.38		1.11	$	1.11
	Exercised		—		—		—		—
	Canceled or expired		(122,800	)	0.88 to  4.50		2.35		—
Outstanding at December 31, 1999			1,866,451		$0.69 to $4.38	$	1.31
	Granted		542,050		0.88 to  2.38		1.35	$	1.35
	Exercised		(170,148	)	1.25 to  1,31		1.31		—
	Canceled or expired		(235,469	)	0.88 to  3.69		1.41		—
Outstanding at December 31, 2000			2,002,884		$0.69 to $4.38	$	1.30
	Granted		473,005		2.00 to  2.70		2.17	$	1.10
	Exercised		(116,101	)	0.75 to  1.50		1.31		—
	Canceled or expired		(31,441	)	1.25 to  1.37		1.37		—
Outstanding at December 31, 2001			2,328,347		$0.69 to $4.38	$	1.47		—
Outstanding at December 31, 2001			2,328,347			$	1.47
	Weighted average life — 85 months
Exercisable at December 31, 2001			1,661,261			$	1.47
	Weighted average life — 47 months

      In 1996, the Company adopted a 401(k) Plan. All employees are eligible to participate in the plan. Contributions by the Company are discretionary. Employees vest in amounts contributed by the Company immediately. The Company contributed $55,931 and $48,948 to the plan for 2001 and 2000, respectively.

Warrants

      At December 31, 2001, the following warrants to purchase common stock were outstanding and exercisable:

Number of Shares	Per Share Price		Expiration Date
100,000		1.50	February 10, 2002
10,000		4.31	May 15, 2002
294,000		2.00	August 6, 2002
853,040		1.90	July 31, 2004
50,000		2.13	October 31, 2005
45,045		2.22	October 1, 2006

11.     Commitments and Contingencies.

Leases

      The Company leases real property under agreements, which expire at various times over the next five years. Certain leases contain renewal options and generally require the Company to pay utilities, insurance, taxes and other operating expenses.

F-22

INTERNATIONAL REMOTE IMAGING SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

      Future minimum rental payments required under capital and operating leases that have an initial term in excess of one year as of December 31, 2001, are as follows:

		Capital		Operating
		Leases		Leases
Year Ended December 31,
	2002	$	39,489	$	555,649
	2003		39,489		540,477
	2004		39,489		516,594
	2005		18,051		460,208
	2006		—		427,917
		$	136,518	$	2,500,845

      Rent expense under all operating leases during 2001, 2000 and 1999 was $569,768, $512,842 and $530,000 respectively.

Litigation

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

12.     Earnings per Share.

      The computation of per share amounts for 2001, 2000 and 1999 is based on the average number of common shares outstanding for the period. Options and warrants to purchase 3,951,354 shares of common stock and 297,000 shares on conversion of preferred stock were not considered in the computation of diluted EPS for 1999 because their inclusion would have been antidilutive. Options and warrants to purchase 197,445 and 1,660,237 shares of common stock were not considered in the computation of diluted EPS for 2001 and 2000, respectively, because their inclusion would have been antidilutive.

      The following is a reconciliation of shares used in computing basic and diluted earnings per share for 2000 and 2001:

		2001		2000
Weighted average number of shares — basic			9,978,532		9,654,272
Effect of dilutive securities:
	Options		463,349		300,041
	Warrants		254,493		145,294
	Preferred stock		306,212		305,190
Weighed average number of shares — diluted			11,002,586		10,404,797

13.     License.

      Sysmex Corporation, formerly known as TOA Medical Electronics Co., Ltd., has developed several urine sediment analyzers under license from IRIS using pre-1989 IRIS technology. IRIS received royalties under this license of $393,356, $601,511 and $310,587 in 2001, 2000 and 1999 respectively.

F-23

INTERNATIONAL REMOTE IMAGING SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

14.     Discontinued Operations.

      In March 2000, the Board of Directors approved a plan of disposal for its wholly-owned subsidiary, Perceptive Scientific Instruments, LLC (“PSI”), the Company’s genetic analysis business segment. The Company completed the sale of substantially all of PSI’s U.S. operations to Applied Imaging Corporation (Nasdaq: AICX) on July 6, 2000. The purchase price consisted of 385,371 shares of Applied Imaging common stock, the assumption of certain liabilities and potential cash payments based on future performance of Applied Imaging’s business. The Company was unable to sell PSI’s international operations and placed Perceptive Scientific International Limited (a wholly-owned subsidiary of PSI) into a voluntary liquidation under United Kingdom law on June 6, 2000.

      The results of discontinued operations through the date of disposal consisted of the following:

		Amount
Operating losses, net of tax through March 31, 2000		$	(286,385	)
Loss on disposal:
	Operating losses, net of tax from March 31, 2000 to July 6, 2000	$	(340,827	)
Gain on disposal of net assets			141,668
			(199,159	)
Total loss from discontinued operations		$	(485,544	)

      Revenues from discontinued operations for the year ended December 31, 2000 were $1,227,400.

      The operating results of the discontinued operations for the year ended December 31, 1999 are summarized as follows:

	Amount
Revenues	$	4,218,647
Loss from discontinued operations		(5,187,221	)

      The cash flow data of the discontinued operations for the year ended December 31, 1999 were not separately detailed in the statement of cash flows, but are summarized below:

	1999
Cash provided by (used in) operations	$	279,321
Cash used by investing activities		(230,166	)
Effect of foreign currency fluctuations on cash equivalents		11,234
Cash provided (used) by discontinued operations	$	60,389

15.     Unusual Charges.

      The results of operations for year ended December 31, 1999 include litigation settlement and other unusual charges totaling $4,158,894. These charges primarily consist of (1) the settlement expense recorded in connection with the tender offer for Poly U/ A Systems, Inc. ($1,670,127), (2) the cost of the arbitration with DITI ($391,831), (3) the write-off of deferred warrant costs for technology rights from Poly U/ A Systems ($807,244), (4) the write-off of deferred costs related to The White IRIS leukocyte differential analyzer program ($796,887), and (5) expenses in connection with the prior CEO’s retirement agreement ($443,805).

      There were no unusual charges to earnings for the year ended December 31, 2001 and 2000.

F-24

INTERNATIONAL REMOTE IMAGING SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

16.     Segment and Geographic Information.

      The Company’s continuing operations are organized on the basis of products and related services and under SFAS No. 131 operates in two segments: (1) urinalysis and (2) small laboratory devices.

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

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

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

F-25

INTERNATIONAL REMOTE IMAGING SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

      The tables below present information about reported segments for the three years ended December 31, 2001:

				Small			Unallocated
				Laboratory			Corporate
	Urinalysis			Devices			Expenses			Total
For the Year Ended December 31, 2001:
Revenues	$	21,953,524		$	6,694,145			—		$	28,647,669
Interest income	$	116,394		$	2,377			—		$	118,771
Interest expense	$	7,244			—		$	851,516		$	858,760
Depreciation and amortization	$	935,390		$	120,661		$	174,195		$	1,230,246
Other non-cash items	$	8,360			—			—		$	8,360
Segment profit (loss)	$	3,742,299		$	1,907,307		$	(3,083,985	)	$	2,565,621
Segment assets	$	15,756,750		$	2,255,463		$	8,490,827		$	26,503,040
Investment in long-lived assets	$	1,754,033		$	51,314			—		$	1,805,347
For the Year Ended December 31, 2000:
Revenues	$	22,432,789		$	6,209,967			—		$	28,642,756
Interest income	$	197,012			—			—		$	197,012
Interest expense	$	3,794			—		$	975,475		$	979,269
Depreciation and amortization	$	815,765		$	118,062		$	188,577		$	1,122,404
Other non-cash items	$	(1,677	)		—			—		$	(1,677	)
Segment profit (loss)	$	5,792,100		$	1,579,554		$	(2,983,244	)	$	4,388,410
Segment assets	$	16,921,799		$	2,033,749		$	9,331,991		$	28,287,539
Investment in long-lived assets	$	742,770		$	58,416			—		$	801,186
For the Year Ended December 31, 1999:
Revenues	$	20,428,084		$	5,297,385			—		$	25,725,469
Interest income	$	32,546		$	2,764			—		$	35,310
Interest expense	$	5,155			—		$	960,846		$	966,001
Depreciation and amortization	$	2,552,196	(1)	$	131,700		$	47,572		$	2,731,468
Other non-cash items	$	472,011		$	(82,225	)		—		$	389,786
Unusual items	$	1,732,746			—		$	2,426,148		$	4,158,894
Segment profit (loss)	$	3,676,900		$	1,414,313		$	(5,648,235	)	$	(557,022	)
Segment assets	$	11,068,096		$	2,189,013		$	11,357,238		$	24,614,347
Investment in long-lived assets	$	517,854		$	57,551			—		$	575,405

(1)  Includes write-off totaling $1,604,131 relating to deferred warrant cost for technology costs and deferred software costs.

      For continuing operations, the Company ships products from two locations in the United States.

      Long-lived assets for continuing operations were all located in the United States and totaled $3,620,018 and $2,758,926 as of December 31, 2001 and 2000, respectively.

F-26

INTERNATIONAL REMOTE IMAGING SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

17.     Selected Quarterly Data (unaudited).

      The following table summarizes certain financial information by quarter for 2001 and 2000:

	2001 Quarter Ended
	March 31		June 30		September 30		December 31
Net revenues	$	7,277,824	$	7,006,084	$	6,911,735	$	7,452,026
Gross margin	$	3,891,479	$	3,951,033	$	3,850,427	$	3,875,555
Income from continuing operations	$	360,666	$	375,376	$	279,564	$	523,767
Net income	$	360,666	$	375,376	$	279,564	$	523,767
Income per share — basic
Income from continuing operations	$	0.04	$	0.04	$	0.03	$	0.05
Income per share attributable to common shareholders — basic	$	0.04	$	0.04	$	0.03	$	0.05
Income per share — diluted:
Income from continuing operations	$	0.03	$	0.03	$	0.02	$	0.05
Income per share attributable to common shareholders — diluted	$	0.03	$	0.03	$	0.02	$	0.05

	2000 Quarter Ended
	March 31			June 30			September 30		December 31
Net revenues	$	6,753,138		$	7,476,481		$	7,145,775	$	7,270,362
Gross margin	$	3,536,932		$	3,838,670		$	3,934,044	$	4,294,514
Income from continuing operations	$	637,310		$	674,132		$	719,185	$	762,884
Loss from discontinued operations	$	(286,385	)	$	(199,159	)		—		—
Net income	$	350,925		$	474,973		$	719,185	$	762,884
Income per share — basic:
Income from continuing operations	$	0.07		$	0.07		$	0.07	$	0.08
Loss from discontinued operations	$	(0.03	)	$	(0.02	)		—		—
Income (loss) per share attributable to common shareholders — basic	$	0.04		$	0.05		$	0.07	$	0.08
Income per share — diluted:
Income from continuing operations	$	0.06		$	0.07		$	0.07	$	0.07
Loss from discontinued operations	$	(0.03	)	$	(0.02	)		—		—
Income per share attributable to common shareholders — diluted	$	0.03		$	0.05		$	0.07	$	0.07

F-27

INTERNATIONAL REMOTE IMAGING SYSTEMS, INC.

SCHEDULE II

VALUATION AND QUALIFYING ACCOUNTS

					Additions
			Charged to		Charged to
	Beginning		cost and		other					Ending
	Balance		expenses		accounts		Deductions			Balance
Year Ended December 31, 2001
Allowance for Doubtful Accounts	$	334,696		—		—	$	(48,569	)(1)	$	286,127
Reserve for Inventory Obsolescence	$	977,631	$	237,671		—		—		$	1,215,302
Deferred Tax Asset Valuation Allowance	$	994,000		—		—		(425,000	)(2)		569,000
Year Ended December 31, 2000
Allowance for Doubtful Accounts	$	516,047		—		—	$	(181,351	)(1)	$	334,696
Reserve for Inventory Obsolescence	$	995,253	$	343,983		—	$	(361,605	)(1)	$	977,631
Deferred Tax Asset Valuation Allowance	$	2,649,000		—		—	$	(1,655,000	)(2)	$	994,000
Year Ended December 31, 1999
Allowance for Doubtful Accounts	$	271,544	$	254,503		—	$	(10,000	)(1)	$	516,047
Reserve for Inventory Obsolescence	$	705,103	$	372,375		—	$	(82,225	)(1)	$	995,253
Deferred Tax Asset Valuation Allowance	$	2,000,000	$	649,000		—		—		$	2,649,000

(1)	Relates to the write-off of accounts receivable or disposal of obsolete inventory.
(2)	Relates to the decrease in deferred tax assets due to the expiration of certain NOL tax credit carry-forwards.

      This schedule contains summary financial information extracted from the consolidated balance sheet at December 31, 2001 and the consolidated statement of operation for the year then ended and is qualified in its entirety by reference to such financial statement.

F-28 EX-10.1(A) 3 v80280ex10-1a.txt EXHIBIT 10.1(A) EXHIBIT 10.1(a) [LOGO] AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION STANDARD INDUSTRIAL/COMMERCIAL SINGLE-TENANT LEASE -- NET (DO NOT USE THIS FORM FOR MULTI-TENANT BUILDINGS) 1. BASIC PROVISIONS ("BASIC PROVISIONS") 1.1 PARTIES: This Lease ("Lease"), dated for reference purposes only November 29, 2001 is made by and between NORTHPARK INDUSTRIAL ("LESSOR") and INTERNATIONAL REMOTE IMAGING SYSTEMS, INC., a Delaware Corporation ("LESSEE"), (collectively the "PARTIES," or individually a "PARTY"). 1.2 PREMISES: That certain real property, including all improvements therein or to be provided by Lessor under the terms of this Lease, and commonly known as 9162 Eton Avenue located in the County of Los Angeles, State of California and generally described as (describe briefly the nature of the property and, if applicable, the "PROJECT", if the property is located within a Project) the northerly portion of a larger concrete tilt-up industrial building consisting of approximately 23,254 square feet of area, aka Lot #5/6, Tract No. 33398, City of Los Angeles, in an MR-2 zone ("PREMISES"). (See also Paragraph 2) 1.3 TERM: Five (5) years and -0- months ("ORIGINAL TERM") commencing January 1, 2002 ("COMMENCEMENT DATE") and ending December 31st 2006 ("EXPIRATION DATE"). (See also Paragraph 3). 1.4 EARLY POSSESSION: ("EARLY POSSESSION DATE"). (See also Paragraphs 3.2 and 3.3) 1.5 BASE RENT: $13,720.00 per month ("BASE RENT"), payable on the First (1st) day of each month commencing (See also Paragraph 4) [X] If this box is checked, there are provisions in this Lease for the Base Rent to be adjusted. See Paragraph 50 1.6 BASE RENT PAID UPON EXECUTION: $________________________________ as Base Rent for the period ___________________________________________________. 1.7 SECURITY DEPOSIT: $15,442.00 ("SECURITY DEPOSIT"). (See also Paragraph 5) 1.8 AGREED USE: research, development and manufacturing of medical and electronic equipment and related activity. (See also Paragraph 6) 1.9 INSURING PARTY: Lessor is the "INSURING PARTY" unless otherwise stated herein. (See also Paragraph 8) 1.10 GUARANTOR. The obligations of the Lessee under this Lease are to be guaranteed by ________________________ ("GUARANTOR"). (See also Paragraph 37) 1.11 ADDENDA AND EXHIBITS. Attached hereto is an Addendum or Addenda consisting of Paragraphs 50 through 65, all of which constitute a part of this Lease. 2. PREMISES. 2.1 LETTING. Lessor hereby leases to Lessee, and Lessee hereby leases from Lessor, the Premises, for the term, at the rental, and upon all of the terms, covenants and conditions set forth in this Lease. Unless otherwise provided herein, any statement of size set forth in this Lease, or that may have been used in calculating rental, is an approximation which the Parties agree is reasonable and the rental based thereon is not subject to revision whether or not the actual size is more or less. 2.2 CONDITION. Lessor shall deliver the Premises to Lessee broom clean and free of debris on the Commencement Date or the Early Possession Date, whichever first occurs ("START DATE"), and, so long as the required service contracts described in Paragraph 7.1(b) below are obtained by Lessee within thirty (30) days following the Start Date, warrants that the existing electrical, plumbing, fire sprinkler, lighting, heating, ventilating and air conditioning systems ("HVAC"), loading doors, if any, and all other such elements in the Premises, other than those constructed by Lessee, shall be in good operating condition on said date and that the structural elements of the roof, bearing walls and foundation of any buildings on the Premises (the "BUILDING") shall be free of material defects. If a non-compliance with said warranty exists as of the Start Date, Lessor shall, as Lessor's sole obligation with respect to such matter, except as otherwise provided in this Lease, promptly after receipt of written notice from Lessee setting forth with specificity the nature and extent of such non-compliance, rectify same at Lessor's expense. If, after the Start Date, Lessee does not give Lessor written notice of any non-compliance with this warranty within: (i) one year as to the surface of the roof and the structural portions of the roof, foundations and bearing walls, (ii) six (6) months as to the HVAC systems, (iii) thirty (30) days as to the remaining systems and other elements of the Building, correction of such non-compliance shall be the obligation of Lessee at Lessee's sole cost and expense. 2.3 COMPLIANCE. Lessor warrants that the improvements on the Premises comply with all applicable laws, covenants or restrictions of record, building codes, regulations and ordinances ("APPLICABLE REQUIREMENTS") in effect on the Start Date. Said warranty does not apply to the use to which Lessee will put the Premises or to any Alterations or Utility Installations (as defined in Paragraph 7.3(a)) made or to be made by Lessee. NOTE: Lessee is responsible for determining whether or not the zoning is appropriate for Lessee's intended use, and acknowledges that past uses of the Premises may no longer be allowed. If the Premises do not comply with said warranty, Lessor shall, except as otherwise provided, promptly after receipt of written notice from Lessee setting forth with specificity the nature and extent of such non-compliance, rectify the same at Lessor's expense. If Lessee does not give Lessor written notice of a non-compliance with this warranty within six (6) months following the Start Date, correction of that non-compliance shall be the obligation of Lessee at Lessee's sole cost and expense. If the Applicable Requirements are hereafter changed (as opposed to being in existence at the Start Date, which is addressed in Paragraph 6.2(e) below) so as to require during the term of this Lease the construction of an addition to or an alteration of the Building, the remediation of any Hazardous Substance, or the reinforcement or other physical modification of the Building ("CAPITAL EXPENDITURE"), Lessor and Lessee shall allocate the cost of such work as follows: PAGE 1 (a) Subject to Paragraph 2.3(c) below, if such Capital Expenditures are required as a result of the specific and unique use of the Premises by Lessee as compared with uses by tenants in general, Lessee shall be fully responsible for the cost thereof, provided, however that if such Capital Expenditure is required during the last two (2) years of this Lease and the cost thereof exceeds six (6) months' Base Rent, Lessee may instead terminate this Lease unless Lessor notifies Lessee, in writing, within ten (10) days after receipt of Lessee's termination notice that Lessor has elected to pay the difference between the actual cost thereof and the amount equal to six (6) months' Base Rent. If Lessee elects termination, Lessee shall immediately cease the use of the Premises which requires such Capital Expenditure and deliver to Lessor written notice specifying a termination date at least ninety (90) days thereafter. Such termination date shall, however, in no event be earlier than the last day that Lessee could legally utilize the Premises without commencing such Capital Expenditure. (b) If such Capital Expenditure is not the result of the specific and unique use of the Premises by Lessee (such as governmentally mandated seismic modifications), then Lessor and Lessee shall allocate the obligation to pay for such costs pursuant to the provisions of Paragraph 7.1(c); provided, however, that if such Capital Expenditure is required during the last two years of this Lease or if Lessor reasonably determines that it is not economically feasible to pay its share thereof, Lessor shall have the option to terminate this Lease upon ninety (90) days prior written notice to Lessee unless Lessee notifies Lessor, in writing, within ten (10) days after receipt of Lessor's termination notice that Lessee will pay for such Capital Expenditure. If Lessor does not elect to terminate, and fails to tender its share of any such Capital Expenditure, Lessee may advance such funds and deduct same, with Interest, from Rent until Lessor's share of such costs have been fully paid. If Lessee is unable to finance Lessor's share, or if the balance of the Rent due and payable for the remainder of this Lease is not sufficient to fully reimburse Lessee on an offset basis, Lessee shall have the right to terminate this Lease upon thirty (30) days written notice to Lessor. (c) Notwithstanding the above, the provisions concerning Capital Expenditures are intended to apply only to non-voluntary, unexpected, and new Applicable Requirements. If the Capital Expenditures are instead triggered by Lessee as a result of an actual or proposed change in use, change in intensity of use, or modification to the Premises then, and in that event, Lessee shall be fully responsible for the cost thereof, and Lessee shall not have any right to terminate this Lease. 2.4 ACKNOWLEDGEMENTS. Lessee acknowledges that: (a) it has been advised by Lessor and/or Brokers to satisfy itself with respect to the condition of the Premises (including but not limited to the electrical, HVAC and fire sprinkler systems, security, environmental aspects, and compliance with Applicable Requirements), and their suitability for Lessee's intended use, (b) Lessee has made such investigation as it deems necessary with reference to such matters and assumes all responsibility therefor as the same relate to its occupancy of the Premises, and (c) neither Lessor, Lessor's agents, nor any Broker has made any oral or written representations or warranties with respect to said matters other than as set forth in this Lease. In addition, Lessor acknowledges that: (a) Broker has made no representations, promises or warranties concerning Lessee's ability to honor the Lease or suitability to occupy the Premises, and (b) it is Lessor's sole responsibility to investigate the financial capability and/or suitability of all proposed tenants. 2.5 LESSEE AS PRIOR OWNER/OCCUPANT. The warranties made by Lessor in Paragraph 2 shall be of no force or effect if immediately prior to the Start Date Lessee was the owner or occupant of the Premises. In such event, Lessee shall be responsible for any necessary corrective work. 3. TERM. 3.1 TERM. The Commencement Date, Expiration Date and Original Term of this Lease are as specified in Paragraph 1.3. 3.2 EARLY POSSESSION. If Lessee totally or partially occupies the Premises prior to the Commencement Date, the obligation to pay Base Rent shall be abated for the period of such early possession. All other terms of this Lease (including but not limited to the obligations to pay Real Property Taxes and insurance premiums and to maintain the Premises) shall, however, be in effect during such period. Any such early possession shall not affect the Expiration Date. 3.3 DELAY IN POSSESSION. Lessor agrees to use its best commercially reasonable efforts to deliver possession of the Premises to Lessee by the Commencement Date. If, despite said efforts, Lessor is unable to deliver possession as agreed, Lessor shall not be subject to any liability therefor, nor shall such failure affect the validity of this Lease. Lessee shall not, however, be obligated to pay Rent or perform its other obligations until it receives possession of the Premises. If possession is not delivered within sixty (60) days after the Commencement Date, Lessee may, at its option, by notice in writing within ten (10) days after the end of such sixty (60) day period, cancel this Lease, in which event the Parties shall be discharged from all obligations hereunder. If such written notice is not received by Lessor within said ten (10) day period, Lessee's right to cancel shall terminate. Except as otherwise provided, if possession is not tendered to Lessee by the Start Date and Lessee does not terminate this Lease, as aforesaid, any period of rent abatement that Lessee would otherwise have enjoyed shall run from the date of delivery of possession and continue for a period equal to what Lessee would otherwise have enjoyed under the terms hereof, but minus any days of delay caused by the acts or omissions of Lessee. If possession of the Premises is not delivered within four (4) months after the Commencement Date, this Lease shall terminate unless other agreements are reached between Lessor and Lessee, in writing. 3.4 LESSEE COMPLIANCE. Lessor shall not be required to tender possession of the Premises to Lessee until Lessee complies with its obligation to provide evidence of insurance (Paragraph 8.5). Pending delivery of such evidence, Lessee shall be required to perform all of its obligations under this Lease from and after the Start Date, including the payment of Rent, notwithstanding Lessor's election to withhold possession pending receipt of such evidence of insurance. Further, if Lessee is required to perform any other conditions prior to or concurrent with the Start Date, the Start Date shall occur but Lessor may elect to withhold possession until such conditions are satisfied. 4. RENT. 4.1. RENT DEFINED. All monetary obligations of Lessee to Lessor under the terms of this Lease (except for the Security Deposit) are deemed to be rent ("RENT"). 4.2 PAYMENT. Lessee shall cause payment of Rent to be received by Lessor in lawful money of the United States, without offset or deduction (except as specifically permitted in this Lease), on or before the day on which it is due. Rent for any period during the term hereof which is for less than one (1) full calendar month shall be prorated based upon the actual number of days of said month. Payment of Rent shall be made to Lessor at its address stated herein of to such other persons or place as Lessor may from time to time designate in writing. Acceptance of a payment which is less than the amount then due shall not be a waiver of Lessor's rights to the balance of such Rent, regardless of Lessor's endorsement of any check so stating. 5. SECURITY DEPOSIT. Lessee shall deposit with Lessor upon execution hereof the Security Deposit as security for Lessee's faithful performance of its obligations under this Lease. If Lessee fails to pay Rent, or otherwise Defaults under this Lease, Lessor may use, apply or retain all or any portion of said Security Deposit for the payment of any amount due Lessor or to reimburse or compensate Lessor for any liability, expense, loss or damage which Lessor may suffer or incur by reason thereof. If Lessor uses or applies all or any portion of said Security Deposit, Lessee shall within ten (10) days after written request therefor deposit monies with Lessor sufficient to restore said Security Deposit to the full amount required by this Lease. If the Base Rent increases during the term of this Lease, Lessee shall, upon written request from Lessor, deposit additional monies with Lessor so that the total amount of the Security Deposit shall at all times bear the same proportion to the increased Base Rent as the initial Security Deposit bore to the initial Base Rent. Should the Agreed Use be amended to accommodate a material change in the business of Lessee or to accommodate a sublessee or assignee, Lessor shall have the right to increase the Security Deposit to the extent necessary, in Lessor's reasonable judgment, to account for any increased wear and tear that the Premises may suffer as a result thereof. If a change in control of Lessee occurs during this Lease and following such change the financial condition of Lessee is, in Lessor's reasonable judgment, significantly reduced, Lessee shall deposit such additional monies with Lessor as shall be sufficient to cause the Security Deposit to be at a commercially reasonable level based on said change in financial condition. Lessor shall not be required to keep the Security Deposit separate from its general accounts. Within fourteen (14) days after the expiration or termination of this Lease, if Lessor elects to apply the Security Deposit only to unpaid Rent, and otherwise within thirty (30) days after the Premises have been vacated pursuant to Paragraph 7.4(c) below, Lessor shall return that portion of the Security Deposit not used or applied by Lessor. No part of the Security Deposit shall be considered to be held in trust, to bear interest or to be prepayment for any monies to be paid by Lessee under this Lease. PAGE 2 6. USE. 6.1 USE. Lessee shall use and occupy the Premises only for the Agreed Use, or any other legal use which is reasonably comparable thereto, and for no other purpose. Lessee shall not use or permit the use of the Premises in a manner that is unlawful, creates damage, waste or a nuisance, or that disturbs owners and/or occupants of, or causes damage to neighboring properties. Lessor shall not unreasonably withhold or delay its consent to any written request for a modification of the Agreed Use, so long as the same will not impair the structural integrity of the improvements on the Premises or the mechanical or electrical systems therein, is not significantly more burdensome to the Premises. If Lessor elects to withhold consent, Lessor shall within five (5) business days after such request give written notification of same, which notice shall include an explanation of Lessor's objections to the change in use. 6.2 HAZARDOUS SUBSTANCES. (a) REPORTABLE USES REQUIRE CONSENT. The term "HAZARDOUS SUBSTANCE" as used in this Lease shall mean any product, substance, or waste whose presence, use, manufacture, disposal, transportation, or release, either by itself or in combination with other materials expected to be on the Premises, is either: (i) potentially injurious to the public health, safety or welfare, the environment or the Premises, (ii) regulated or monitored by any governmental authority, or (iii) a basis for potential liability of Lessor to any governmental agency or third party under any applicable statute or common law theory. Hazardous Substances shall include, but not be limited to, hydrocarbons, petroleum, gasoline, and/or crude oil or any products, by-products or fractions thereof. Lessee shall not engage in any activity in or on the Premises which constitutes a Reportable Use of Hazardous Substances without the express prior written consent of Lessor and timely compliance (at Lessee's expense) with all Applicable Requirements. "REPORTABLE USE" shall mean (i) the installation or use of any above or below ground storage tank, (ii) the generation, possession, storage, use, transportation, or disposal of a Hazardous Substance that requires a permit from, or with respect to which a report, notice, registration or business plan is required to be filed with, any governmental authority, and/or (iii) the presence at the Premises of a Hazardous Substance with respect to which any Applicable Requirements requires that a notice be given to persons entering or occupying the Premises or neighboring properties. Notwithstanding the foregoing, Lessee may use any ordinary and customary materials reasonably required to be used in the normal course of the Agreed Use, so long as such use is in compliance with all Applicable Requirements, is not a Reportable Use, and does not expose the Premises or neighboring property to any meaningful risk of contamination or damage or expose Lessor to any liability therefor. In addition, Lessor may condition its consent to any Reportable Use upon receiving such additional assurances as Lessor reasonably deems necessary to protect itself, the public, the Premises and/or the environment against damage, contamination, injury and/or liability, including, but not limited to, the installation (and removal on or before Lease expiration or termination) of protective modifications (such as concrete encasements) and/or increasing the Security Deposit. (b) DUTY TO INFORM LESSOR. If Lessee knows, or has reasonable cause to believe, that a Hazardous Substance has come to be located in, on, under or about the Premises, other than as previously consented to by Lessor, Lessee shall immediately give written notice of such fact to Lessor, and provide Lessor with a copy of any report, notice, claim or other documentation which it has concerning the presence of such Hazardous Substance. (c) LESSEE REMEDIATION. Lessee shall not cause or permit any Hazardous Substance to be spilled or released in, on, under, or about the Premises (including through the plumbing or sanitary sewer system) and shall promptly, at Lessee's expense, take all investigatory and/or remedial action reasonably recommended, whether or not formally ordered or required, for the cleanup of any contamination of, and for the maintenance, security and/or monitoring of the Premises or neighboring properties, that was caused or materially contributed to by Lessee, or pertaining to or involving any Hazardous Substance brought onto the Premises during the term of this Lease, by or for Lessee, or any third party. (d) LESSEE INDEMNIFICATION. Lessee shall indemnify, defend and hold Lessor, its agents, employees, lenders and ground lessor, if any, harmless from and against any and all loss of rents and/or damages, liabilities, judgments, claims, expenses, penalties, and attorneys' and consultants' fees arising out of or involving any Hazardous Substance brought onto the Premises by or for Lessee, or any third party (provided, however, that Lessee shall have no liability under this Lease with respect to underground migration of any Hazardous Substance under the Premises from adjacent properties). Lessee's obligations shall include, but not be limited to, the effects of any contamination or injury to person, property or the environment created or suffered by Lessee, and the cost of investigation, removal, remediation, restoration and/or abatement, and shall survive the expiration or termination of this Lease. NO TERMINATION, CANCELLATION OR RELEASE AGREEMENT ENTERED INTO BY LESSOR AND LESSEE SHALL RELEASE LESSEE FROM ITS OBLIGATIONS UNDER THIS LEASE WITH RESPECT TO HAZARDOUS SUBSTANCES, UNLESS SPECIFICALLY SO AGREED BY LESSOR IN WRITING AT THE TIME OF SUCH AGREEMENT. (e) LESSOR INDEMNIFICATION. Lessor and its successors and assigns shall indemnify, defend, reimburse and hold Lessee, its employees and lenders, harmless from and against any and all environmental damages, including the cost of remediation, which existed as a result of Hazardous Substances on the Premises prior to the Start Date or which are caused by the gross negligence or willful misconduct of Lessor, its agents or employees. Lessor's obligations, as and when required by the Applicable Requirements, shall include, but not be limited to, the cost of investigation, removal, remediation, restoration and/or abatement, and shall survive the expiration or termination of this Lease. (f) INVESTIGATIONS AND REMEDIATIONS. Lessor shall retain the responsibility and pay for any investigations or remediation measures required by governmental entities having jurisdiction with respect to the existence of Hazardous Substances on the Premises prior to the Start Date, unless such remediation measure is required as a result of Lessee's use (including "Alterations", as defined in Paragraph 7.3(a) below) of the Premises, in which event Lessee shall be responsible for such payment. Lessee shall cooperate fully in any such activities at the request of Lessor, including allowing Lessor and Lessor's agents to have reasonable access to the Premises at reasonable times in order to carry out Lessor's investigative and remedial responsibilities. (g) LESSOR TERMINATION OPTION. If a Hazardous Substance Condition occurs during the term of this Lease, unless Lessee is legally responsible therefor (in which case Lessee shall make the investigation and remediation thereof required by the Applicable Requirements and this Lease shall continue in full force and effect, but subject to Lessor's rights under Paragraph 6.2(d) and Paragraph 13), Lessor may, at Lessor's option, either (i) investigate and remediate such Hazardous Substance Condition, if required, as soon as reasonably possible at Lessor's expense, in which event this Lease shall continue in full force and effect, or (ii) if the estimated cost to remediate such condition exceeds twelve (12) times the then monthly Base Rent or $100,000, whichever is greater, give written notice to Lessee, within thirty (30) days after receipt by Lessor of knowledge of the occurrence of such Hazardous Substance Condition, of Lessor's desire to terminate this Lease as of the date sixty (60) days following the date of such notice. In the event Lessor elects to give a termination notice, Lessee may, within ten (10) days thereafter, give written notice to Lessor of Lessee's commitment to pay the amount by which the cost of the remediation of such Hazardous Substance Condition exceeds an amount equal to twelve (12) times the then monthly Base Rent or $100,000, whichever is greater. Lessee shall provide Lessor with said funds or satisfactory assurance thereof within thirty (30) days following such commitment. In such event, this Lease shall continue in full force and effect, and Lessor shall proceed to make such remediation as soon as reasonably possible after the required funds are available. If Lessee does not give such notice and provide the required funds or assurance thereof within the time provided, this Lease shall terminate as of the date specified in Lessor's notice of termination. 6.3 LESSEE'S COMPLIANCE WITH APPLICABLE REQUIREMENTS. Except as otherwise provided in this Lease, Lessee shall, at Lessee's sole expense, fully, diligently and in a timely manner, materially comply with all Applicable Requirements, the requirements of any applicable fire insurance underwriter or rating bureau, and the recommendations of Lessor's engineers and/or consultants which relate in any manner to the Premises, without regard to whether said requirements are now in effect or become effective after the Start Date. Lessee shall, within ten (10) days after receipt of Lessor's written request, provide Lessor with copies of all permits and other documents, and other information evidencing Lessee's compliance with any Applicable Requirements specified by Lessor, and shall immediately upon receipt, notify Lessor in writing (with copies of any documents involved) of any threatened or actual claim, notice, citation, warning, complaint or report pertaining to or involving the failure of Lessee or the Premises to comply with any Applicable Requirements. 6.4 INSPECTION; COMPLIANCE. Lessor and Lessor's "Lender" (as defined in Paragraph 30 below) and consultants shall have the right to enter into Premises at any time, in the case of an emergency, and otherwise at reasonable times, for the purpose of inspecting the condition of the Premises and for verifying compliance by Lessee with this Lease. The cost of any such inspections shall be paid by Lessor, unless a violation of Applicable Requirements, or a contamination is found to exist or be imminent, or the inspection is requested or ordered by a governmental authority. In such case, Lessee shall upon request reimburse Lessor for the cost of such inspections, so long as such inspection is reasonably related to the violation or contamination. PAGE 3 7. MAINTENANCE; REPAIRS, UTILITY INSTALLATIONS; TRADE FIXTURES AND ALTERATIONS. 7.1 LESSEE'S OBLIGATIONS. (a) IN GENERAL. Subject to the provisions of Paragraph 2.2 (Condition), 2.3 (Compliance), 6.3 (Lessee's Compliance with Applicable Requirements), 7.2 (Lessor's Obligations), 9 (Damage or Destruction), and 14 (Condemnation), Lessee shall, at Lessee's sole expense, keep the Premises, Utility Installations, and Alterations in good order, condition and repair (whether or not the portion of the Premises requiring repairs, or the means of repairing the same, are reasonably or readily accessible to Lessee, and whether or not the need for such repairs occurs as a result of Lessee's use, any prior use, the elements or the age of such portion of the Premises), including, but not limited to, all equipment or facilities, such as plumbing, heating, ventilating, air-conditioning, electrical, lighting facilities, boilers, pressure vessels, fire protection system, fixtures, walls (interior and exterior), foundations, ceilings, roofs, floors, windows, doors, plate glass, skylights, landscaping, driveways, parking lots, fences, retaining walls, signs, sidewalks and parkways located in, on, or adjacent to the Premises. Lessee, in keeping the Premises in good order, condition and repair, shall exercise and perform good maintenance practices, specifically including the procurement and maintenance of the service contracts required by Paragraph 7.1(b) below. Lessee's obligations shall include restorations, replacements or renewals when necessary to keep the Premises and all improvements thereon or a part thereof in good order, condition and state of repair. Lessee shall, during the term of this Lease, keep the exterior appearance of the Building in a first-class condition consistent with the exterior appearance of other similar facilities of comparable age and size in the vicinity, including, when necessary, the exterior repainting of the Building. (b) SERVICE CONTRACTS. Lessee shall, at Lessee's sole expense, procure and maintain contracts, with copies to Lessor, in customary form and substance for, and with contractors specializing and experienced in the maintenance of the following equipment and improvements, if any, if and when installed on the Premises: (i) HVAC equipment, (ii) boiler, and pressure vessels, (iii) fire extinguishing systems, including fire alarm and/or smoke detection, (iv) landscaping and irrigation systems, (v) roof covering and drains, (vi) driveways and parking lots, (vii) clarifiers (viii) basic utility feed to the perimeter of the Building, and (ix) any other equipment, if reasonably required by Lessor. (c) REPLACEMENT. Subject to Lessee's indemnification of Lessor as set forth in Paragraph 8.7 below, and without relieving Lessee of liability resulting from Lessee's failure to exercise and perform good maintenance practices, if the Basic Elements described in Paragraph 7.1(b) cannot be repaired other than at a cost which is in excess of 50% of the cost of replacing such Basic Elements, then such Basic Elements shall be replaced by Lessor, and the cost thereof shall be prorated between the Parties and Lessee shall only be obligated to pay, each month during the remainder of the term of this Lease, on the date on which Base Rent is due, an amount equal to the product of multiplying the cost of such replacement by a fraction, the numerator of which is one, and the denominator of which is the number of months of the useful life of such replacement as such useful life is specified pursuant to Federal income tax regulations or guidelines for depreciation thereof (including interest on the unamortized balance as is then commercially reasonable in the judgment of Lessor's accountants), with Lessee reserving the right to prepay its obligation at any time. 7.2 LESSOR'S OBLIGATIONS. Subject to the provisions of Paragraphs 2.2 (Condition), 2.3 (Compliance), 9 (Damage or Destruction) and 14 (Condemnation), it is intended by the Parties hereto that Lessor have no obligation, in any manner whatsoever, to repair and maintain the Premises, or the equipment therein, all of which obligations are intended to be that of the Lessee. It is the intention of the Parties that the terms of this Lease govern the respective obligations of the Parties as to maintenance and repair of the Premises, and they expressly waive the benefit of any statute now or hereafter in effect to the extent it is inconsistent with the terms of this Lease. 7.3 UTILITY INSTALLATIONS; TRADE FIXTURES; ALTERATIONS. (a) DEFINITIONS; CONSENT REQUIRED. The term "UTILITY INSTALLATIONS" refers to all floor and window coverings, air lines, power panels, electrical distribution, security and fire protection systems, communication systems, lighting fixtures, HVAC equipment, plumbing, and fencing in or on the Premises. The term "TRADE FIXTURES" shall mean Lessee's machinery and equipment that can be removed without doing material damage to the Premises. The term "ALTERATIONS" shall mean any modification of the improvements, other than Utility Installations or Trade Fixtures, whether by addition or deletion. "LESSEE OWNED ALTERATIONS AND/OR UTILITY INSTALLATIONS" are defined as Alterations and/or Utility Installations made by Lessee that are not yet owned by Lessor pursuant to Paragraph 7.4(a). Lessee shall not make any Alterations or Utility Installations to the Premises without Lessor's prior written consent. Lessee may, however, make non-structural Utility Installations to the interior of the Premises (excluding the roof) without such consent but upon notice to Lessor, as long as they are not visible from the outside, do not involve puncturing, relocating or removing the roof or any existing walls, and the cumulative cost thereof during this Lease as extended does not exceed $50,000 in the aggregate or $10,000 in any one year. (b) CONSENT. Any Alterations or Utility Installations that Lessee shall desire to make and which require the consent of the Lessor shall be presented to Lessor in written form with detailed plans. Consent shall be deemed conditioned upon Lessee's: (i) acquiring all applicable governmental permits, (ii) furnishing Lessor with copies of both the permits and the plans and specifications prior to commencement of the work, and (iii) compliance with all conditions of said permits and other Applicable Requirements in a prompt and expeditious manner. Any Alterations or Utility Installations shall be performed in a workmanlike manner with good and sufficient materials. Lessee shall promptly upon completion furnish Lessor with as-built plans and specifications. For work which costs an amount equal to the greater of one month's Base Rent, or $10,000, Lessor may condition its consent upon Lessee providing a lien and completion bond in an amount equal to one and one-half times the estimated cost of such Alteration or Utility Installation and/or upon Lessee's posting an additional Security Deposit with Lessor. (c) INDEMNIFICATION. Lessee shall pay, when due, all claims for labor or materials furnished or alleged to have been furnished to or for Lessee at or for use on the Premises, which claims are or may be secured by any mechanic's or materialmen's lien against the Premises or any interest therein. Lessee shall give Lessor not less than ten (10) days' notice prior to the commencement of any work in, on or about the Premises, and Lessor shall have the right to post notices of non-responsibility. If Lessee shall contest the validity of any such lien, claim or demand, then Lessee shall, at its sole expense defend and protect itself, Lessor and the Premises against the same and shall pay and satisfy any such adverse judgment that may be rendered thereon before the enforcement thereof. If Lessor shall require, Lessee shall furnish a surety bond in an amount equal to one and one-half times the amount of such contested lien, claim or demand, indemnifying Lessor against liability for the same. If Lessor elects to participate in any such action, Lessee shall pay Lessor's attorneys' fees and costs. 7.4 OWNERSHIP; REMOVAL; SURRENDER; AND RESTORATION. (a) OWNERSHIP. Subject to Lessor's right to require removal or elect ownership as hereinafter provided, all Alterations and Utility Installations made by Lessee shall be the property of Lessee, but considered a part of the Premises. Lessor may, at any time, elect in writing to be the owner of all or any specified part of the Lessee Owned Alterations and Utility Installations. Unless otherwise instructed per Paragraph 7.4(b) hereof, all Lessee Owned Alterations and Utility Installations shall, at the expiration or termination of this Lease, become the property of Lessor and be surrendered by Lessee with the Premises. (b) REMOVAL. By delivery to Lessee of written notice from Lessor not earlier than ninety (90) and not later than thirty (30) days prior to the end of the term of this Lease, Lessor may require that any or all Lessee Owned Alterations or Utility Installations be removed by the expiration or termination of this Lease. Lessor may require the removal at any time of all or any part of any Lessee Owned Alterations or Utility Installations made without the required consent. (c) SURRENDER/RESTORATION. Lessee shall surrender the Premises by the Expiration Date or any earlier termination date, with all of the improvements, parts and surfaces thereof broom clean and free of debris, and in good operating order, condition and state of repair, ordinary wear and tear excepted. "Ordinary wear and tear" shall not include any damage or deterioration that would have been prevented by good maintenance practice. Lessee shall repair any damage occasioned by the installation, maintenance or removal of Trade Fixtures, Lessee Owned Alterations and/or Utility Installations, furnishings, and equipment as well as the removal of any storage tank installed by or for Lessee, and the removal, replacement, or remediation of any soil, material or groundwater contaminated by Lessee. Trade Fixtures shall remain the property of Lessee and shall be removed by Lessee. The failure by Lessee to timely vacate the Premises pursuant to this Paragraph 7.4(c) without the express written consent of Lessor shall constitute a holdover under the provisions of Paragraph 26 below. PAGE 4 8. INSURANCE; INDEMNITY. 8.1 PAYMENT FOR INSURANCE. Lessee shall pay for all insurance required under Paragraph 8 except to the extent of the cost attributable to liability insurance carried by Lessor under Paragraph 8.2(b) in excess of $2,000,000 per occurrence. Premiums for policy periods commencing prior to or extending beyond the Lease term shall be prorated to correspond to the Lease term. Payment shall be made by Lessee to Lessor within ten (10) days following receipt of an invoice. 8.2 LIABILITY INSURANCE. (a) CARRIED BY LESSEE. Lessee shall obtain and keep in force a Commercial General Liability Policy of Insurance protecting Lessee and Lessor against claims for bodily injury, personal injury and property damage based upon or arising out of the ownership, use, occupancy or maintenance of the Premises and all areas appurtenant thereto. Such insurance shall be on an occurrence basis providing single limit coverage in an amount not less than $2,000,000 per occurrence with an "ADDITIONAL INSURED - MANAGERS OR LESSORS OF PREMISES ENDORSEMENT" and contain the "AMENDMENT OF THE POLLUTION EXCLUSION ENDORSEMENT" for damage caused by heat, smoke or fumes from a hostile fire. The Policy shall not contain any intra-insured exclusions as between insured persons or organizations, but shall include coverage for liability assumed under this Lease as an "insured contract" for the performance of Lessee's indemnity obligations under this Lease. The limits of said insurance shall not, however, limit the liability of Lessee nor relieve Lessee of any obligation hereunder. All insurance carried by Lessee shall be primary to and not contributory with any similar insurance carried by Lessor, whose insurance shall be considered excess insurance only. (b) CARRIED BY LESSOR. Lessor shall maintain liability insurance as described in Paragraph 8.2(a), in addition to, and not in lieu of, the insurance required to be maintained by Lessee. Lessee shall not be named as an additional insured therein. 8.3 PROPERTY INSURANCE -- BUILDING, IMPROVEMENTS AND RENTAL VALUE. (a) BUILDING AND IMPROVEMENTS. The Insuring Party shall obtain and keep in force a policy or policies in the name of Lessor, with loss payable to Lessor, any groundlessor, and to any Lender(s) insuring loss or damage to the Premises. The amount of such insurance shall be equal to the full replacement cost of the Premises, as the same shall exist from time to time, or the amount required by any Lenders, but in no event more than the commercially reasonable and available insurable value thereof. If Lessor is the Insuring Party, however, Lessee Owned Alterations and Utility Installations, Trade Fixtures, and Lessee's personal property shall be insured by Lessee under Paragraph 8.4 rather than by Lessor. If the coverage is available and commercially appropriate, such policy or policies shall insure against all risks of direct physical loss or damage (except the perils of flood and/or earthquake unless required by a Lender), including coverage for debris removal and the enforcement of any Applicable Requirements requiring the upgrading, demolition, reconstruction or replacement of any portion of the Premises as the result of a covered loss. Said policy or policies shall also contain an agreed valuation provision in lieu of any coinsurance clause, waiver of subrogation, and inflation guard protection causing an increase in the annual property insurance coverage amount by a factor of not less than the adjusted U.S. Department of Labor Consumer Price Index for All Urban Consumers for the city nearest to where the Premises are located. If such insurance coverage has a deductible clause, the deductible amount shall not exceed $1,000 per occurrence, and Lessee shall be liable for such deductible amount in the event of an Insured Loss. (b) RENTAL VALUE. The Insuring Party shall obtain and keep in force a policy or policies in the name of Lessor, with loss payable to Lessor and any Lender, insuring the loss of the full Rent for one (1) year. Said insurance shall provide that in the event the Lease is terminated by reason of an insured loss, the period of indemnity for such coverage shall be extended beyond the date of the completion of repairs or replacement of the Premises, to provide for one full year's loss of Rent from the date of any such loss. Said insurance shall contain an agreed valuation provision in lieu of any coinsurance clause, and the amount of coverage shall be adjusted annually to reflect the projected Rent otherwise payable by Lessee, for the next twelve (12) month period. Lessee shall be liable for any deductible amount in the event of such loss. (c) ADJACENT PREMISES. If the Premises are part of a larger building, or of a group of buildings owned by Lessor which are adjacent to the Premises, the Lessee shall pay for any increase in the premiums for the property insurance of such building or buildings if said increase is caused by Lessee's acts, omissions, use or occupancy of the Premises. 8.4 LESSEE'S PROPERTY/BUSINESS INTERRUPTION INSURANCE. (a) PROPERTY DAMAGE. Lessee shall obtain and maintain insurance coverage on all of Lessee's personal property, Trade Fixtures, and Lessee Owned Alterations and Utility Installations. Such insurance shall be full replacement cost coverage with a deductible of not to exceed $1,000 per occurrence. The proceeds from any such insurance shall be used by Lessee for the replacement of personal property, Trade Fixtures and Lessee Owned Alterations and Utility Installations. Lessee shall provide Lessor with written evidence that such insurance is in force. (b) BUSINESS INTERRUPTION. Lessee shall obtain and maintain loss of income and extra expense insurance in amounts as will reimburse Lessee for direct or indirect loss of earnings attributable to all perils commonly insured against by prudent lessees in the business of Lessee or attributable to prevention of access to the Premises as a result of such perils. (c) NO REPRESENTATION OF ADEQUATE COVERAGE. Lessor makes no representation that the limits or forms of coverage of insurance specified herein are adequate to cover Lessee's property, business operations or obligations under this Lease. 8.5 INSURANCE POLICIES. Insurance required herein shall be by companies duly licensed or admitted to transact business in the state where the Premises are located, and maintaining during the policy term a "General Policyholders Rating" of at least B+, V, as set forth in the most current issue of "Best's Insurance Guide", or such other rating as may be required by a Lender. Lessee shall not do or permit to be done anything which invalidates the required insurance policies. Lessee shall, prior to the Start Date, deliver to Lessor certified copies of policies of such insurance or certificates evidencing the existence and amounts of the required insurance. No such policy shall be cancelable or subject to modification except after thirty (30) days prior written notice to Lessor. Lessee shall, at least thirty (30) days prior to the expiration of such policies, furnish Lessor with evidence of renewals or "insurance binders" evidencing renewal thereof, or Lessor may order such insurance and charge the cost thereof to Lessee, which amount shall be payable by Lessee to Lessor upon demand. Such policies shall be for a term of at least one year, or the length of the remaining term of this Lease, whichever is less. If either Party shall fail to procure and maintain the insurance required to be carried by it, the other Party may, but shall not be required to, procure and maintain the same. 8.6 WAIVER OF SUBROGATION. Without affecting any other rights or remedies, Lessee and Lessor each hereby release and relieve the other, and waive their entire right to recover damages against the other, for loss of or damage to its property arising out of or incident to the perils required to be insured against herein. The effect of such releases and waivers is not limited by the amount of insurance carried or required, or by any deductibles applicable hereto. The Parties agree to have their respective property damage insurance carriers waive any right to subrogation that such companies may have against Lessor or Lessee, as the case may be, so long as the insurance is not invalidated thereby. 8.7 INDEMNITY. Except for Lessor's gross negligence or willful misconduct, Lessee shall indemnify, protect, defend and hold harmless the Premises, Lessor and its agents, Lessor's master or ground lessor, partners and Lenders, from and against any and all claims, loss of rents and/or damages, liens, judgments, penalties, attorneys' and consultants' fees, expenses and/or liabilities arising out of, involving, or in connection with, the use and/or occupancy of the Premises by Lessee. If any action or proceeding is brought against Lessor by reason of any of the foregoing matters, Lessee shall upon notice defend the same at Lessee's expense by counsel reasonably satisfactory to Lessor and Lessor shall cooperate with Lessee in such defense. Lessor need not have first paid any such claim in order to be defended or indemnified. 8.8 EXEMPTION OF LESSOR FROM LIABILITY. Lessor shall not be liable for injury or damage to the person or goods, wares, merchandise or other property of Lessee, Lessee's employees, contractors, invitees, customers, or any other person in or about the Premises, whether such damage or injury is caused by or results from fire, steam, electricity, gas, water or rain, or from the breakage, leakage, obstruction or other defects of pipes, fire sprinklers, wires, appliances, plumbing, HVAC or lighting fixtures, or from any other cause, whether the said injury or damage results from conditions arising upon the Premises or upon other portions of the Building of which the Premises are a part, or from other sources or places. Lessor shall not be liable for any damages arising from any act or neglect of any other tenant of Lessor. Notwithstanding Lessor's negligence or breach of this Lease, Lessor shall under no circumstances be liable for injury to Lessee's business or for any loss of income or profit therefrom. 9. DAMAGE OR DESTRUCTION. 9.1 DEFINITIONS. (a) "PREMISES PARTIAL DAMAGE" shall mean damage or destruction to the improvements on the Premises, other than Lessee Owned Alterations and Utility Installations, which can reasonably be repaired in six (6) months or less from the date of the damage or destruction. PAGE 5 Lessor shall notify Lessee in writing within thirty (30) days from the date of the damage or destruction as to whether or not the damage is Partial or Total. (b) "PREMISES TOTAL DESTRUCTION" shall mean damage or destruction to the Premises, other than Lessee Owned Alterations and Utility Installations and Trade Fixtures, which cannot reasonably be repaired in six (6) months or less from the date of the damage or destruction. Lessor shall notify Lessee in writing within thirty (30) days from the date of the damage or destruction as to whether or not the damage is Partial or Total. (c) "INSURED LOSS" shall mean damage or destruction to improvements on the Premises, other than Lessee Owned Alterations and Utility Installations and Trade Fixtures, which was caused by an event required to be covered by the insurance described in Paragraph 8.3(a), irrespective of any deductible amounts or coverage limits involved. (d) "REPLACEMENT COST" shall mean the cost to repair or rebuild the improvements owned by Lessor at the time of the occurrence to their condition existing immediately prior thereto, including demolition, debris removal and upgrading required by the operation of Applicable Requirements, and without deduction for depreciation. (e) "HAZARDOUS SUBSTANCE CONDITION" shall mean the occurrence or discovery of a condition involving the presence of, or a contamination by, a Hazardous Substance as defined in Paragraph 6.2(a), in, on, or under the Premises. 9.2 PARTIAL DAMAGE -- INSURED LOSS. If a Premises Partial Damage that is an Insured Loss occurs, then Lessor shall, at Lessor's expense, repair such damage (but not Lessee's Trade Fixtures or Lessee Owned Alterations and Utility Installations) as soon as reasonably possible and this Lease shall continue in full force and effect; provided, however, that Lessee shall, at Lessor's election, make the repair of any damage or destruction the total cost to repair of which is $10,000 or less, and, in such event, Lessor shall make any applicable insurance proceeds available to Lessee on a reasonable basis for that purpose. Notwithstanding the foregoing, if the required insurance was not in force or the insurance proceeds are not sufficient to effect such repair, the Insuring Party shall promptly contribute the shortage in proceeds (except as to the deductible which is Lessee's responsibility) as and when required to complete said repairs. In the event, however, such shortage was due to the fact that, by reason of the unique nature of the improvements, full replacement cost insurance coverage was not commercially reasonable and available, Lessor shall have no obligation to pay for the shortage in insurance proceeds or to fully restore the unique aspects of the Premises unless Lessee provides Lessor with the funds to cover same, or adequate assurance thereof, within ten (10) days following receipt of written notice of such shortage and request therefor. If Lessor receives said funds or adequate assurance thereof within said ten (10) day period, the party responsible for making the repairs shall complete them as soon as reasonably possible and this Lease shall remain in full force and effect. If such funds or assurance are not received, Lessor may nevertheless elect by written notice to Lessee within ten (10) days thereafter to: (i) make such restoration and repair as is commercially reasonable with Lessor paying any shortage in proceeds, in which case this Lease shall remain in full force and effect, or have this Lease terminate thirty (30) days thereafter. Lessee shall not be entitled to reimbursement of any funds contributed by Lessee to repair any such damage or destruction. Premises Partial Damage due to flood or earthquake shall be subject to Paragraph 9.3, notwithstanding that there may be some insurance coverage, but the net proceeds of any such insurance shall be made available for the repairs if made by either Party. 9.3 PARTIAL DAMAGE -- UNINSURED LOSS. If a Premises Partial Damage that is not an Insured Loss occurs, unless caused by a negligent or willful act of Lessee (in which event Lessee shall make the repairs at Lessee's expense), Lessor may either: (i) repair such damage as soon as reasonably possible at Lessor's expense, in which event this Lease shall continue in full force and effect, or (ii) terminate this Lease by giving written notice to Lessee within thirty (30) days after receipt by Lessor of knowledge of the occurrence of such damage. Such termination shall be effective sixty (60) days following the date of such notice. In the event Lessor elects to terminate this Lease, Lessee shall have the right within ten (10) days after receipt of the termination notice to give written notice to Lessor of Lessee's commitment to pay for the repair of such damage without reimbursement from Lessor. Lessee shall provide Lessor with said funds or satisfactory assurance thereof within thirty (30) days after making such commitment. In such event this Lease shall continue in full force and effect, and Lessor shall proceed to make such repairs as soon as reasonably possible after the required funds are available. If Lessee does not make the required commitment, this Lease shall terminate as of the date specified in the termination notice. 9.4 TOTAL DESTRUCTION. Notwithstanding any other provision hereof, if a Premises Total Destruction occurs, this Lease shall terminate sixty (60) days following such Destruction. If the damage or destruction was caused by the gross negligence or willful misconduct of Lessee, Lessor shall have the right to recover Lessor's damages from Lessee, except as provided in Paragraph 8.6. 9.5 DAMAGE NEAR END OF TERM. If at any time during the last six (6) months of this Lease there is damage for which the cost to repair exceeds one (1) month's Base Rent, whether or not an Insured Loss, Lessor may terminate this Lease effective sixty (60) days following the date of occurrence of such damage by giving a written termination notice to Lessee within thirty (30) days after the date of occurrence of such damage. Notwithstanding the foregoing, if Lessee at that time has an exercisable option to extend this Lease or to purchase the Premises, then Lessee may preserve this Lease by, (a) exercising such option and (b) providing Lessor with any shortage in insurance proceeds (or adequate assurance thereof) needed to make the repairs on or before the earlier of (i) the date which is ten days after Lessee's receipt of Lessor's written notice purporting to terminate this Lease, or (ii) the day prior to the date upon which such option expires. If Lessee duly exercises such option during such period and provides Lessor with funds (or adequate assurance thereof) to cover any shortage in insurance proceeds, Lessor shall, at Lessor's commercially reasonable expense, repair such damage as soon as reasonably possible and this Lease shall continue in full force and effect. If Lessee fails to exercise such option and provide such funds or assurance during such period, then this Lease shall terminate on the date specified in the termination notice and Lessee's option shall be extinguished. 9.6 ABATEMENT OF RENT; LESSEE'S REMEDIES. (a) ABATEMENT. In the event of Premises Partial Damage or Premises Total Destruction or a Hazardous Substance Condition for which Lessee is not responsible under this Lease, the Rent payable by Lessee for the period required for the repair, remediation or restoration of such damage shall be abated in proportion to the degree to which Lessee's use of the Premises is impaired, but not to exceed the proceeds received from the Rental Value insurance. All other obligations of Lessee hereunder shall be performed by Lessee, and Lessor shall have no liability for any such damage, destruction, remediation, repair or restoration except as provided herein. (b) REMEDIES. If Lessor shall be obligated to repair or restore the Premises and does not commence, in a substantial and meaningful way, such repair or restoration within ninety (90) days after such obligation shall accrue, Lessee may, at any time prior to the commencement of such repair or restoration, give written notice to Lessor and to any Lenders of which Lessee has actual notice, of Lessee's election to terminate this Lease on a date not less than sixty (60) days following the giving of such notice. If Lessee gives such notice and such repair or restoration is not commenced within thirty (30) days thereafter, this Lease shall terminate as of the date specified in said notice. If the repair or restoration is commenced within said thirty (30) days, this Lease shall continue in full force and effect. "COMMENCE" shall mean either the unconditional authorization of the preparation of the required plans, or the beginning of the actual work on the Premises, whichever first occurs. 9.7 TERMINATION -- ADVANCE PAYMENTS. Upon termination of this Lease pursuant to Paragraph 6.2(g) or Paragraph 9, an equitable adjustment shall be made concerning advance Base Rent and any other advance payments made by Lessee to Lessor. Lessor shall, in addition, return to Lessee so much of Lessee's Security Deposit as has not been, or is not then required to be, used by Lessor. 9.8 WAIVE STATUTES. Lessor and Lessee agree that the terms of this Lease shall govern the effect of any damage to or destruction of the Premises with respect to the termination of this Lease and hereby waive the provisions of any present or future statute to the extent inconsistent herewith. 10. REAL PROPERTY TAXES. 10.1 DEFINITION OF "REAL PROPERTY TAXES." As used herein, the term "REAL PROPERTY TAXES" shall include any form of assessment; real estate, general, special, ordinary or extraordinary, or rental levy or tax (other than inheritance, personal income or estate taxes); improvement bond; and/or license fee imposed upon or levied against any legal or equitable interest of Lessor in the Premises, Lessor's right to other income therefrom, and/or Lessor's business of leasing, by any authority having the direct or indirect power to tax and where the PAGE 6 funds are generated with reference to the Building address and where the proceeds so generated are to be applied by the city, county or other local taxing authority of a jurisdiction within which the Premises are located. The term "REAL PROPERTY TAXES" shall also include any tax, fee, levy, assessment or charge, or any increase therein, imposed by reason of events occurring during the term of this Lease, including but not limited to, a change in the ownership of the Premises. 10.2 (a) PAYMENT OF TAXES. Lessee shall pay the Real Property Taxes applicable to the Premises during the term of this Lease. Subject to Paragraph 10.2(b), all such payments shall be made at least ten (10) days prior to any delinquency date. Lessee shall promptly furnish Lessor with satisfactory evidence that such taxes have been paid. If any such taxes shall cover any period of time prior to or after the expiration or termination of this Lease, Lessee's share of such taxes shall be prorated to cover only that portion of the tax bill applicable to the period that this Lease is in effect, and Lessor shall reimburse Lessee for any overpayment. If Lessee shall fail to pay any required Real Property Taxes, Lessor shall have the right to pay the same, and Lessee shall reimburse Lessor therefor upon demand. (b) ADVANCE PAYMENT. In the event Lessee incurs a late charge on any Rent payment, Lessor may, at Lessor's option, estimate the current Real Property Taxes, and require that such taxes be paid in advance to Lessor by Lessee, either: (i) in a lump sum amount equal to the installment due, at least twenty (20) days prior to the applicable delinquency date, or (ii) monthly in advance with the payment of the Base Rent. If Lessor elects to require payment monthly in advance, the monthly payment shall be an amount equal to the amount of the estimated installment of taxes divided by the number of months remaining before the month in which said installment becomes delinquent. When the actual amount of the applicable tax bill is known, the amount of such equal monthly advance payments shall be adjusted as required to provide the funds needed to pay the applicable taxes. If the amount collected by Lessor is insufficient to pay such Real Property Taxes when due, Lessee shall pay Lessor, upon demand, such additional sums as are necessary to pay such obligations. All monies paid to Lessor under this Paragraph may be intermingled with other monies of Lessor and shall not bear interest. In the event of a Breach by Lessee in the performance of its obligations under this Lease, then any balance of funds paid to Lessor under the provisions of this Paragraph may, at the option of Lessor, be treated as an additional Security Deposit. 10.3 JOINT ASSESSMENT. If the Premises are not separately assessed, Lessee's liability shall be an equitable proportion of the Real Property Taxes for all of the land and improvements included within the tax parcel assessed, such proportion to be conclusively determined by Lessor from the respective valuations assigned in the assessor's work sheets or such other information as may be reasonably available. 10.4 PERSONAL PROPERTY TAXES. Lessee shall pay, prior to delinquency, all taxes assessed against and levied upon Lessee Owned Alterations, Utility Installations, Trade Fixtures, furnishings, equipment and all personal property of Lessee. When possible, Lessee shall cause such property to be assessed and billed separately from the real property of Lessor. If any of Lessee's said personal property shall be assessed with Lessor's real property, Lessee shall pay Lessor the taxes attributable to Lessee's property within ten (10) days after receipt of a written statement. 11. UTILITIES. Lessee shall pay for all water, gas, heat, light, power, telephone, trash disposal and other utilities and services supplied to the Premises, together with any taxes thereon. If any such services are not separately metered to Lessee, Lessee shall pay a reasonable proportion, to be determined by Lessor, of all charges jointly metered. 12. ASSIGNMENT AND SUBLETTING. 12.1 LESSOR'S CONSENT REQUIRED. (a) Lessee shall not voluntarily or by operation of law assign, transfer, mortgage or encumber (collectively, "ASSIGN OR ASSIGNMENT") or sublet all or any part of Lessee's interest in this Lease or in the Premises without Lessor's prior written consent. (b) A change in the control of Lessee shall constitute an assignment requiring consent. See Paragraph 63 (c) See Paragraph 64 (d) An assignment or subletting without consent shall, at Lessor's option, be a Default curable after notice per Paragraph 13.1(c), or a noncurable Breach without the necessity of any notice and grace period. If Lessor elects to treat such unapproved assignment or subletting as a noncurable Breach, Lessor may either: (i) terminate this Lease, or (ii) upon thirty (30) days written notice, increase the monthly Base Rent to one hundred ten percent (110%) of the Base Rent then in effect. Further, in the event of such Breach and rental adjustment, (i) the purchase price of any option to purchase the Premises held by Lessee shall be subject to similar adjustment to one hundred ten percent (110%) of the price previously in effect, and (ii) all fixed and non-fixed rental adjustments scheduled during the remainder of the Lease term shall be increased to One Hundred Ten Percent (110%) of the scheduled adjusted rent. (e) Lessee's remedy for any breach of Paragraph 12.1 by Lessor shall be limited to compensatory damages and/or injunctive relief. 12.2 TERMS AND CONDITIONS APPLICABLE TO ASSIGNMENT AND SUBLETTING. (a) Regardless of Lessor's consent, any assignment or subletting shall not: (i) be effective without the express written assumption by such assignee or sublessee of the obligations of Lessee under this Lease; (ii) release Lessee of any obligations hereunder; or (iii) alter the primary liability of Lessee for the payment of Rent or for the performance of any other obligations to be performed by Lessee. (b) Lessor may accept Rent or performance of Lessee's obligations from any person other than Lessee pending approval or disapproval of an assignment. Neither a delay in the approval or disapproval of such assignment nor the acceptance of Rent or performance shall constitute a waiver or estoppel of Lessor's right to exercise its remedies for Lessee's Default or Breach. (c) Lessor's consent to any assignment or subletting shall not constitute a consent to any subsequent assignment or subletting. (d) In the event of any Default or Breach by Lessee, Lessor may proceed directly against Lessee, any Guarantors or anyone else responsible for the performance of Lessee's obligations under this Lease, including any assignee or sublessee, without first exhausting Lessor's remedies against any other person or entity responsible therefore to Lessor, or any security held by Lessor. (e) Each request for consent to an assignment or subletting shall be in writing, accompanied by information relevant to Lessor's determination as to the financial and operational responsibility and appropriateness of the proposed assignee or sublessee, including but not limited to the intended use and/or required modification of the Premises, if any. Lessee agrees to provide Lessor with such other or additional information and/or documentation as may be reasonably requested. Lessee shall reimburse Lessor for any actual costs affiliated with the request for consent, including but not limited to legal fees incurred by Lessor. (f) Any assignee of, or sublessee under, this Lease shall, by reason of accepting such assignment or entering into such sublease, be deemed to have assumed and agreed to conform and comply with each and every term, covenant, condition and obligation herein to be observed or performed by Lessee during the term of said assignment or sublease, other than such obligations as are contrary to or inconsistent with provisions of an assignment or sublease to which Lessor has specifically consented to in writing. 12.3 ADDITIONAL TERMS AND CONDITIONS APPLICABLE TO SUBLETTING. The following terms and conditions shall apply to any subletting by Lessee of all or any part of the Premises and shall be deemed included in all subleases under this Lease whether or not expressly incorporated therein: (a) Lessee hereby assigns and transfers to Lessor all of Lessee's interest in all Rent payable on any sublease, and Lessor may collect such Rent and apply same toward Lessee's obligations under this Lease; provided, however, that until a Breach shall occur in the performance of Lessee's obligations, Lessee may collect said Rent. Lessor shall not, by reason of the foregoing or any assignment of such sublease, nor by reason of the collection of Rent, be deemed liable to the sublessee for any failure of Lessee to perform and comply with any of Lessee's obligations to such sublessee. Lessee hereby irrevocably authorizes and directs any such sublessee, upon receipt of a written PAGE 7 notice from Lessor stating that a Breach exists in the performance of Lessee's obligations under this Lease, to pay to Lessor all Rent due and to become due under the sublease. Sublessee shall rely upon any such notice from Lessor and shall pay all Rents to Lessor without any obligation or right to inquire as to whether such Breach exists, notwithstanding any claim from Lessee to the contrary. (b) In the event of a Breach by Lessee, Lessor may, at its option, require sublessee to attorn to Lessor, in which event Lessor shall undertake the obligations of the sublessor under such sublease from the time of the exercise of said option to the expiration of such sublease; provided, however, Lessor shall not be liable for any prepaid rents or security deposit paid by such sublessee to such sublessor or for any prior Defaults or Breaches of such sublessor. (c) Any matter requiring the consent of the sublessor under a sublease shall also require the consent of Lessor. (d) No sublessee shall further assign or sublet all or any part of the Premises without Lessor's prior written consent. (e) Lessor shall deliver a copy of any notice of Default or Breach by Lessee to the sublessee, who shall have the right to cure the Default of Lessee within the grace period, if any, specified in such notice. The sublessee shall have a right of reimbursement and offset from and against Lessee for any such Defaults cured by the sublessee. 13. DEFAULT; BREACH; REMEDIES. 13.1 DEFAULT; BREACH. A "DEFAULT" is defined as a failure by the Lessee to comply with or perform any of the terms, covenants, conditions or rules under this Lease. A "BREACH" is defined as the occurrence of one or more of the following Defaults, and the failure of Lessee to cure such Default within any applicable grace period: (a) The abandonment of the Premises; or the vacating of the Premises without providing a commercially reasonable level of security, or where the coverage of the property insurance described in Paragraph 8.3 is jeopardized as a result thereof, or without providing reasonable assurances to minimize potential vandalism. (b) The failure of Lessee to make any payment of Rent or any Security Deposit required to be made by Lessee hereunder, whether to Lessor or to a third party, when due, to provide reasonable evidence of insurance or surety bond, or to fulfill any obligation under this Lease which endangers or threatens life or property, where such failure continues for a period of three (3) business days following written notice to Lessee. (c) The failure by Lessee to provide (i) reasonable written evidence of compliance with Applicable Requirements, (ii) the service contracts, (iii) the rescission of an unauthorized assignment or subletting, (iv) a Tenancy Statement, (v) a requested subordination, (vi) evidence concerning any guaranty and/or Guarantor, (vii) any document requested under Paragraph 42 (easements), or (viii) any other documentation or information which Lessor may reasonably require of Lessee under the terms of this Lease, where any such failure continues for a period of ten (10) days following written notice to Lessee. (d) A Default by Lessee as to the terms, covenants, conditions or provisions of this Lease, or of the rules adopted under Paragraph 40 hereof, other than those described in subparagraphs 13.1(a), (b) or (c), above, where such Default continues for a period of thirty (30) days after written notice; provided, however, that if the nature of Lessee's Default is such that more than thirty (30) days are reasonably required for its cure, then it shall not be deemed to be a Breach if Lessee commences such cure within said thirty (30) day period and thereafter diligently prosecutes such cure to completion. (e) The occurrence of any of the following events: (i) the making of any general arrangement or assignment for the benefit of creditors; (ii) becoming a "DEBTOR" as defined in 11 U.S.C. Section 101 or any successor statute thereto (unless, in the case of a petition filed against Lessee, the same is dismissed within sixty (60) days); (iii) the appointment of a trustee or receiver to take possession of substantially all of Lessee's assets located at the Premises or of Lessee's interest in this Lease, where possession is not restored to Lessee within thirty (30) days; or (iv) the attachment, execution or other judicial seizure of substantially all of Lessee's assets located at the Premises or of Lessee's interest in this Lease, where such seizure is not discharged within thirty (30) days; provided, however, in the event that any provision of this subparagraph (e) is contrary to any applicable law, such provision shall be of no force or effect, and not affect the validity of the remaining provisions. (f) The discovery that any financial statement of Lessee or of any Guarantor given to Lessor was materially false. (g) If the performance of Lessee's obligations under this Lease is guaranteed: (i) the death of a Guarantor, (ii) the termination of a Guarantor's liability with respect to this Lease other than in accordance with the terms of such guaranty, (iii) a Guarantor's becoming insolvent or the subject of a bankruptcy filing, (iv) a Guarantor's refusal to honor the guaranty, or (v) a Guarantor's breach of its guaranty obligation on an anticipatory basis, and Lessee's failure, within sixty (60) days following written notice of any such event, to provide written alternative assurance or security, which, when coupled with the then existing resources of Lessee, equals or exceeds the combined financial resources of Lessee and the Guarantors that existed at the time of execution of this Lease. 13.2 REMEDIES. If Lessee fails to perform any of its affirmative duties or obligations, within ten (10) days after written notice (or in case of an emergency, without notice), Lessor may, at its option, perform such duty or obligation on Lessee's behalf, including but not limited to the obtaining of reasonably required bonds, insurance policies, or governmental licenses, permits or approvals. The costs and expenses of any such performance by Lessor shall be due and payable by Lessee upon receipt of invoice therefor. If any check given to Lessor by Lessee shall not be honored by the bank upon which it is drawn, Lessor, at its option, may require all future payments to be made by Lessee to be by cashier's check. In the event of a Breach, Lessor may, with or without further notice or demand, and without limiting Lessor in the exercise of any right or remedy which Lessor may have by reason of such Breach: (a) Terminate Lessee's right to possession of the Premises by any lawful means, in which case this Lease shall terminate and Lessee shall immediately surrender possession to Lessor. In such event Lessor shall be entitled to recover from Lessee: (i) the unpaid Rent which had been earned at the time of termination; (ii) the worth at the time of award of the amount by which the unpaid rent which would have been earned after termination until the time of award exceeds the amount of such rental loss that the Lessee proves could have been reasonably avoided; (iii) the worth at the time of award of the amount by which the unpaid rent for the balance of the term after the time of award exceeds the amount of such rental loss that the Lessee proves could be reasonably avoided; and (iv) any other amount necessary to compensate Lessor for all the detriment proximately caused by the Lessee's failure to perform its obligations under this Lease or which in the ordinary course of things would be likely to result therefrom, including but not limited to the cost of recovering possession of the Premises, expenses of reletting, including necessary renovation and alteration of the Premises, reasonable attorneys' fees, and that portion of any leasing commission paid by Lessor in connection with this Lease applicable to the unexpired term of this Lease. The worth at the time of award of the amount referred to in provision (iii) of the immediately preceding sentence shall be computed by discounting such amount at the discount rate of the Federal Reserve Bank of the District within which the Premises are located at the time of award plus one percent (1%). Efforts by Lessor to mitigate damages caused by Lessee's Breach of this Lease shall not waive Lessor's right to recover damages under Paragraph 12. If termination of this Lease is obtained through the provisional remedy of unlawful detainer, Lessor shall have the right to recover in such proceeding any unpaid Rent and damages as are recoverable therein, or Lessor may reserve the right to recover all or any part thereof in a separate suit. If a notice and grace period required under Paragraph 13.1 was not previously given, a notice to pay rent or quit, or to perform or quit given to Lessee under the unlawful detainer statute shall also constitute the notice required by Paragraph 13.1. In such case, the applicable grace period required by Paragraph 13.1 and the unlawful detainer statute shall run concurrently, and the failure of Lessee to cure the Default within the greater of the two such grace periods shall constitute both an unlawful detainer and a Breach of this Lease entitling Lessor to the remedies provided for in this Lease and/or by said statute. (b) Continue the Lease and Lessee's right to possession and recover the Rent as it becomes due, in which event Lessee may sublet or assign, subject only to reasonable limitations. Acts of maintenance, efforts to relet, and/or the appointment of a receiver to protect the Lessor's interests, shall not constitute a termination of the Lessee's right to possession. (c) Pursue any other remedy now or hereafter available under the laws or judicial decisions of the state wherein the Premises are located. The expiration or termination of this Lease and/or the termination of Lessee's right to possession shall not relieve Lessee from liability under any indemnity provisions of this Lease as to matters occurring or accruing during the term hereof or by reason of PAGE 8 Lessee's occupancy of the Premises. 13.3 INDUCEMENT RECAPTURE. Any agreement for free or abated rent or other charges, or for the giving or paying by Lessor to or for Lessee of any cash or other bonus, inducement or consideration for Lessee's entering into this Lease, all of which concessions are hereinafter referred to as "INDUCEMENT PROVISIONS," shall be deemed conditioned upon Lessee's full and faithful performance of all of the terms, covenants and conditions of this Lease. Upon Breach of this Lease by Lessee, any such Inducement Provision shall automatically be deemed deleted from this Lease and of no further force or effect, and any rent, other charge, bonus, inducement or consideration theretofore abated, given or paid by Lessor under such an Inducement Provision shall be immediately due and payable by Lessee to Lessor, notwithstanding any subsequent cure of said Breach by Lessee. The acceptance by Lessor of rent or the cure of the Breach which initiated the operation of this paragraph shall not be deemed a waiver by Lessor of the provisions of this paragraph unless specifically so stated in writing by Lessor at the time of such acceptance. 13.4 LATE CHARGES. Lessee hereby acknowledges that late payment by Lessee of Rent will cause Lessor to incur costs not contemplated by this Lease, the exact amount of which will be extremely difficult to ascertain. Such costs include, but are not limited to, processing and accounting charges, and late charges which may be imposed upon Lessor by any Lender. Accordingly, if any Rent shall not be received by Lessor within five (5) days after such amount shall be due, then, without any requirement for notice to Lessee, Lessee shall pay to Lessor a one-time late charge equal to ten percent (10%) of each such overdue amount. The parties hereby agree that such late charge represents a fair and reasonable estimate of the costs Lessor will incur by reason of such late payment. Acceptance of such late charge by Lessor shall in no event constitute a waiver of Lessee's Default or Breach with respect to such overdue amount, nor prevent the exercise of any of the other rights and remedies granted hereunder. In the event that a late charge is payable hereunder, whether or not collected, for three (3) consecutive installments of Base Rent, then notwithstanding any provision of this Lease to the contrary, Base Rent shall, at Lessor's option, become due and payable quarterly in advance. 13.5 INTEREST. Any monetary payment due Lessor hereunder, other than late charges, not received by Lessor, when due as to scheduled payments (such as Base Rent) or within thirty (30) days following the date on which it was due for non-scheduled payment, shall bear interest from the date when due, as to scheduled payments, or the thirty-first (31st) day after it was due as to non-scheduled payments. The interest ("INTEREST") charged shall be equal to the prime rate reported in the Wall Street Journal as published closest prior to the date when due plus four percent (4%), but shall not exceed the maximum rate allowed by law. Interest is payable in addition to the potential late charge provided for in Paragraph 13.4. 13.6 BREACH BY LESSOR. (a) NOTICE OF BREACH. Lessor shall not be deemed in breach of this Lease unless Lessor fails within a reasonable time to perform an obligation required to be performed by Lessor. For purposes of this Paragraph, a reasonable time shall in no event be less than thirty (30) days after receipt by Lessor, and any Lender whose name and address shall have been furnished Lessee in writing for such purpose, of written notice specifying wherein such obligation of Lessor has not been performed; provided, however, that if the nature of Lessor's obligation is such that more than thirty (30) days are reasonably required for its performance, then Lessor shall not be in breach if performance is commenced within such thirty (30) day period and thereafter diligently pursued to completion. (b) PERFORMANCE BY LESSEE ON BEHALF OF LESSOR. In the event that neither Lessor nor Lender cures said breach within thirty (30) days after receipt of said notice, or if having commenced said cure they do not diligently pursue it to completion, then Lessee may elect to cure said breach at Lessee's expense and offset from Rent an amount equal to the greater of one month's Base Rent or the Security Deposit, and to pay an excess of such expense under protest, reserving Lessee's right to reimbursement from Lessor. Lessee shall document the cost of said cure and supply said documentation to Lessor. 14. CONDEMNATION. If the Premises or any portion thereof are taken under the power of eminent domain or sold under the threat of the exercise of said power (collectively "CONDEMNATION"), this Lease shall terminate as to the part taken as of the date the condemning authority takes title or possession, whichever first occurs. If more than ten percent (10%) of any building portion of the Premises, or more than twenty-five percent (25%) of the land area portion of the Premises not occupied by any building, is taken by Condemnation, Lessee may, at Lessee's option, to be exercised in writing within ten (10) days after Lessor shall have given Lessee written notice of such taking (or in the absence of such notice, within ten (10) days after the condemning authority shall have taken possession) terminate this Lease as of the date the condemning authority takes such possession. If Lessee does not terminate this Lease in accordance with the foregoing, this Lease shall remain in full force and effect as to the portion of the Premises remaining, except that the Base Rent shall be reduced in proportion to the reduction in utility of the Premises caused by such Condemnation. Condemnation awards and/or payments shall be the property of Lessor, whether such award shall be made as compensation for diminution in value of the leasehold, the value of the part taken, or for severance damages; provided, however, that Lessee shall be entitled to any compensation for Lessee's relocation expenses, loss of business goodwill and/or Trade Fixtures, without regard to whether or not this Lease is terminated pursuant to the provisions of this Paragraph. All Alterations and Utility Installations made to the Premises by Lessee, for purposes of Condemnation only, shall be considered the property of the Lessee and Lessee shall be entitled to any and all compensation which is payable therefor. In the event that this Lease is not terminated by reason of the Condemnation, Lessor shall repair any damage to the Premises caused by such Condemnation. 15. BROKERS' FEE. 16. ESTOPPEL CERTIFICATES. (a) Each Party (as "RESPONDING PARTY") shall within ten (10) days after written notice from the other Party (the "REQUESTING PARTY") execute, acknowledge and deliver to the Requesting Party a statement in writing in form similar to the then most current "ESTOPPEL CERTIFICATE" form published by the American Industrial Real Estate Association, plus such additional information, confirmation and/or statements as may be reasonably requested by the Requesting Party. (b) If the Responding Party shall fail to execute or deliver the Estoppel Certificate within such ten day period, the Requesting Party may execute an Estoppel Certificate stating that: (i) the Lease is in full force and effect without modification except as may be represented by the Requesting Party, (ii) there are no uncured defaults in the Requesting Party's performance, and (iii) if Lessor is the Requesting Party, not more than one month's Rent has been paid in advance. Prospective purchasers and encumbrancers may rely upon the Requesting Party's Estoppel Certificate, and the Responding Party shall be estopped from denying the truth of the facts contained in said Certificate. PAGE 9 (c) If Lessor desires to finance, refinance, or sell the Premises, or any part thereof, Lessee and all Guarantors shall deliver to any potential lender or purchaser designated by Lessor such financial statements as may be reasonably required by such lender or purchaser, including but not limited to Lessee's financial statements for the past three (3) years. All such financial statements shall be received by Lessor and such lender or purchaser in confidence and shall be used only for the purposes herein set forth. 17. DEFINITION OF LESSOR. The term "LESSOR" as used herein shall mean the owner or owners at the time in question of the fee title to the Premises, or, if this is a sublease, of the Lessee's interest in the prior lease. In the event of a transfer of Lessor's title or interest in the Premises or this Lease, Lessor shall deliver to the transferee or assignee (in cash or by credit) any unused Security Deposit held by Lessor. Except as provided in Paragraph 15, upon such transfer or assignment and delivery of the Security Deposit, as aforesaid, the prior Lessor shall be relieved of all liability with respect to the obligations and/or covenants under this Lease thereafter to be performed by the Lessor. Subject to the foregoing, the obligations and/or covenants in this Lease to be performed by the Lessor shall be binding only upon the Lessor as hereinabove defined. Notwithstanding the above, and subject to the provisions of Paragraph 20 below, the original Lessor under this Lease, and all subsequent holders of the Lessor's interest in this Lease shall remain liable and responsible with regard to the potential duties and liabilities of Lessor pertaining to Hazardous Substances as outlined in Paragraph 6 above. 18. SEVERABILITY. The invalidity of any provision of this Lease, as determined by a court of competent jurisdiction, shall in no way affect the validity of any other provision hereof. 19. DAYS. Unless otherwise specifically indicated to the contrary, the word "days" as used in this Lease shall mean and refer to calendar days. 20. LIMITATION ON LIABILITY. Subject to the provisions of Paragraph 17 above, the obligations of Lessor under this Lease shall not constitute personal obligations of Lessor, the individual partners of Lessor or its or their individual partners, directors, officers or shareholders, and Lessee shall look to the Premises, and to no other assets of Lessor, for the satisfaction of any liability of Lessor with respect to this Lease, and shall not seek recourse against the individual partners of Lessor, or its or their individual partners, directors, officers or shareholders, or any of their personal assets for such satisfaction. 21. TIME OF ESSENCE. Time is of the essence with respect to the performance of all obligations to be performed or observed by the Parties under this Lease. 22. NO PRIOR OR OTHER AGREEMENTS; BROKER DISCLAIMER. This Lease contains all agreements between the Parties with respect to any matter mentioned herein, and no other prior or contemporaneous agreement or understanding shall be effective. Lessor and Lessee each represents and warrants to the Brokers that it has made, and is relying solely upon, its own investigation as to the nature, quality, character and financial responsibility of the other Party to this Lease and as to the nature, quality and character of the Premises. Brokers have no responsibility with respect thereto or with respect to any default or breach hereof by either Party. The liability (including court costs and Attorneys' fees), of any Broker with respect to negotiation, execution, delivery or performance by either Lessor or Lessee under this Lease or any amendment or modification hereto shall be limited to an amount up to the fee received by such Broker pursuant to this Lease; provided, however, that the foregoing limitation on each Broker's liability shall not be applicable to any gross negligence or willful misconduct of such Broker. 23. NOTICES. 23.1 NOTICE REQUIREMENTS. All notices required or permitted by this Lease shall be in writing and may be delivered in person (by hand or by courier) or may be sent by regular, certified or registered mail or U.S. Postal Service Express Mail, with postage prepaid, or by facsimile transmission, and shall be deemed sufficiently given if served in a manner specified in this Paragraph 23. The addresses noted adjacent to a Party's signature on this Lease shall be that Party's address for delivery or mailing of notices. Either Party may by written notice to the other specify a different address for notice, except that upon Lessee's taking possession of the Premises, the Premises shall constitute Lessee's address for notice. A copy of all notices to Lessor shall be concurrently transmitted to such party or parties at such addresses as Lessor may from time to time hereafter designate in writing. 23.2 DATE OF NOTICE. Any notice sent by registered or certified mail, return receipt requested, shall be deemed given on the date of delivery shown on the receipt card, or if no delivery date is shown, the postmark thereon. If sent by regular mail the notice shall be deemed given forty-eight (48) hours after the same is addressed as required herein and mailed with postage prepaid. Notices delivered by United States Express Mail or overnight courier that guarantee next day delivery shall be deemed given twenty-four (24) hours after delivery of the same to the Postal Service or courier. Notices transmitted by facsimile transmission or similar means shall be deemed delivered upon telephone confirmation of receipt, provided a copy is also delivered via delivery or mail. If notice is received on a Saturday, Sunday or legal holiday, it shall be deemed received on the next business day. 24. WAIVERS. No waiver by Lessor of the Default or Breach of any term, covenant or condition hereof by Lessee, shall be deemed a waiver of any other term, covenant or condition hereof, or of any subsequent Default or Breach by Lessee of the same or of any other term, covenant or condition hereof. Lessor's consent to, or approval of, any act shall not be deemed to render unnecessary the obtaining of Lessor's consent to, or approval of, any subsequent or similar act by Lessee, or be construed as the basis of an estoppel to enforce the provision or provisions of this Lease requiring such consent. The acceptance of Rent by Lessor shall not be a waiver of any Default or Breach by Lessee. Any payment by Lessee may be accepted by Lessor on account of monies or damages due Lessor, notwithstanding any qualifying statements or conditions made by Lessee in connection therewith, which such statements and/or conditions shall be of no force or effect whatsoever unless specifically agreed to in writing by Lessor at or before the time of deposit of such payment. 25. RECORDING. Either Lessor or Lessee shall, upon request of the other, execute, acknowledge and deliver to the other a short form memorandum of this Lease for recording purposes. The Party requesting recordation shall be responsible for payment of any fees applicable thereto. 26. NO RIGHT TO HOLDOVER. Lessee has no right to retain possession of the Premises or any part thereof beyond the expiration or termination of this Lease. In the event that Lessee holds over, then the Base Rent shall be increased to one hundred fifty percent (150%) of the Base Rent applicable during the month immediately preceding the expiration or termination. Nothing contained herein shall be construed as consent by Lessor to any holding over by Lessee. 27. CUMULATIVE REMEDIES. No remedy or election hereunder shall be deemed exclusive but shall, wherever possible, be cumulative with all other remedies at law or in equity. 28. COVENANTS AND CONDITIONS; CONSTRUCTION OF AGREEMENT. All provisions of this Lease to be observed or performed by Lessee are both covenants and conditions. In construing this Lease, all headings and titles are for the convenience of the Parties only and shall not be considered a part of this Lease. Whenever required by the context, the singular shall include the plural and vice versa. This Lease shall not be construed as if prepared by one of the parties, but rather according to its fair meaning as a whole, as if both parties had prepared it. 29. BINDING EFFECT; CHOICE OF LAW. This Lease shall be binding upon the parties, their personal representatives, successors and assigns and be governed by the laws of the State in which the Premises are located. Any litigation between the Parties hereto concerning this Lease shall be initiated in the county in which the Premises are located. 30. SUBORDINATION; ATTORNMENT; NON-DISTURBANCE. 30.1 SUBORDINATION. This Lease and any Option granted hereby shall be subject and subordinate to any ground lease, mortgage, deed of trust, or other hypothecation or security device (collectively, "SECURITY DEVICE"), now or hereafter placed upon the Premises, to any and all advances made on the security thereof, and to all renewals, modifications, and extensions thereof. Lessee agrees that the holders of any such Security Devices (in this Lease together referred to as "Lessor's Lender") shall have no liability or obligation to perform any of the obligations of Lessor under this Lease. Any Lender may elect to have this Lease and/or any Option granted hereby superior to the lien of its Security Device by giving written notice thereof to Lessee, whereupon this Lease and such Options shall be deemed prior to such Security Device, notwithstanding the relative dates of the documentation or recordation thereof. 30.2 ATTORNMENT. Subject to the non-disturbance provisions of Paragraph 30.3, Lessee agrees to attorn to a Lender or any other party who acquires ownership of the Premises by reason of a foreclosure of a Security Device, and that in the event of such foreclosure, PAGE 10 such new owner shall not: (i) be liable for any act or omission of any prior lessor or with respect to events occurring prior to acquisition of ownership; (ii) be subject to any offsets or defenses which Lessee might have against any prior lessor; or (iii) be bound by prepayment of more than one (1) month's rent. 30.3 NON-DISTURBANCE. With respect to Security Devices entered into by Lessor after the execution of this Lease, Lessee's subordination of this Lease shall be subject to receiving a commercially reasonable non-disturbance agreement (a "NON-DISTURBANCE AGREEMENT") from the Lender which Non-Disturbance Agreement provides that Lessee's possession of the Premises, and this Lease, including any options to extend the term hereof, will not be disturbed so long as Lessee is not in Breach hereof and attorns to the record owner of the Premises. Further, within sixty (60) days after the execution of this Lease, Lessor shall use its commercially reasonable efforts to obtain a Non-Disturbance Agreement from the holder of any pre-existing Security Device which is secured by the Premises. In the event that Lessor is unable to provide the Non-Disturbance Agreement within said sixty (60) days, then Lessee may, at Lessee's option, directly contact Lessor's lender and attempt to negotiate for the execution and delivery of a Non-Disturbance Agreement. 30.4 SELF-EXECUTING. The agreements contained in this Paragraph 30 shall be effective without the execution of any further documents; provided, however, that, upon written request from Lessor or a Lender in connection with a sale, financing or refinancing of the Premises, Lessee and Lessor shall execute such further writings as may be reasonably required to separately document any subordination, attornment and/or Non-Disturbance Agreement provided for herein. 31. ATTORNEYS' FEES. If any Party or Broker brings an action or proceeding involving the Premises to enforce the terms hereof or to declare rights hereunder, the Prevailing Party (as hereafter defined) in any such proceeding, action, or appeal thereon, shall be entitled to reasonable attorneys' fees. Such fees may be awarded in the same suit or recovered in a separate suit, whether or not such action or proceeding is pursued to decision or judgment. The term, "PREVAILING PARTY" shall include, without limitation, a Party or Broker who substantially obtains or defeats the relief sought, as the case may be, whether by compromise, settlement, judgment, or the abandonment by the other Party or Broker of its claim or defense. The attorneys' fees award shall not be computed in accordance with any court fee schedule, but shall be such as to fully reimburse all attorneys' fees reasonably incurred. In addition, Lessor shall be entitled to attorneys' fees, costs and expenses incurred in the preparation and service of notices of Default and consultations in connection therewith, whether or not a legal action is subsequently commenced in connection with such Default or resulting Breach. 32. LESSOR'S ACCESS; SHOWING PREMISES; REPAIRS. Lessor and Lessor's agents shall have the right to enter the Premises at any time, in the case of an emergency, and otherwise at reasonable times for the purpose of showing the same to prospective purchasers, lenders, or lessees, and making such alterations, repairs, improvements or additions to the Premises as Lessor may deem necessary. All such activities shall be without abatement of rent or liability to Lessee. Lessor may at any time place on the Premises any ordinary "FOR SALE" signs and Lessor may during the last six (6) months of the term hereof place on the Premises any ordinary "FOR LEASE" signs. Lessee may at any time place on or about the Premises any ordinary "FOR SUBLEASE" sign. 33. AUCTIONS. Lessee shall not conduct, nor permit to be conducted, any auction upon the Premises without Lessor's prior written consent. Lessor shall not be obligated to exercise any standard of reasonableness in determining whether to permit an auction. 34. SIGNS. Except for ordinary "For Sublease" signs, Lessee shall not place any sign upon the Premises without Lessor's prior written consent. All signs must comply with all Applicable Requirements. 35. TERMINATION; MERGER. Unless specifically stated otherwise in writing by Lessor, the voluntary or other surrender of this Lease by Lessee, the mutual termination or cancellation hereof, or a termination hereof by Lessor for Breach by Lessee, shall automatically terminate any sublease or lesser estate in the Premises; provided, however, that Lessor may elect to continue any one or all existing subtenancies. Lessor's failure within ten (10) days following any such event to elect to the contrary by written notice to the holder of any such lesser interest, shall constitute Lessor's election to have such event constitute the termination of such interest. 36. CONSENTS. Except as otherwise provided herein, wherever in this Lease the consent of a Party is required to an act by or for the other Party, such consent shall not be unreasonably withheld or delayed. Lessor's actual reasonable costs and expenses (including but not limited to architects', attorneys', engineers' and other consultants' fees) incurred in the consideration of, or response to, a request by Lessee for any Lessor consent, including but not limited to consents to an assignment, a subletting or the presence or use of a Hazardous Substance, shall be paid by Lessee upon receipt of an invoice and supporting documentation therefor. Lessor's consent to any act, assignment or subletting shall not constitute an acknowledgment that no Default or Breach by Lessee of this Lease exists, nor shall such consent be deemed a waiver of any then existing Default or Breach, except as may be otherwise specifically stated in writing by Lessor at the time of such consent. The failure to specify herein any particular condition to Lessor's consent shall not preclude the imposition by Lessor at the time of consent of such further or other conditions as are then reasonable with reference to the particular matter for which consent is being given. In the event that either Party disagrees with any determination made by the other hereunder and reasonably requests the reasons for such determination, the determining party shall furnish its reasons in writing and in reasonable detail within ten (10) business days following such request. 37. GUARANTOR. 37.1 EXECUTION. The Guarantors, if any, shall each execute a guaranty in the form most recently published by the American Industrial Real Estate Association, and each such Guarantor shall have the same obligations as Lessee under this Lease. 37.2 DEFAULT. It shall constitute a Default of the Lessee if any Guarantor fails or refuses, upon request to provide: (a) evidence of the execution of the guaranty, including the authority of the party signing on Guarantor's behalf to obligate Guarantor, and in the case of a corporate Guarantor, a certified copy of a resolution of its board of directors authorizing the making of such guaranty, (b) current financial statements, (c) a Tenancy Statement, or (d) written confirmation that the guaranty is still in effect. 38. QUIET POSSESSION. Subject to payment by Lessee of the Rent and performance of all of the covenants, conditions and provisions on Lessee's part to be observed and performed under this Lease, Lessee shall have quiet possession and quiet enjoyment of the Premises during the term hereof. 39. OPTIONS. 39.1 DEFINITION. "OPTION" shall mean: (a) the right to extend the term of or renew this Lease or to extend or renew any lease that Lessee has on other property of Lessor; (b) the right of first refusal or first offer to lease either the Premises or other property of Lessor; (c) the right to purchase or the right of first refusal to purchase the Premises or other property of Lessor. 39.2 OPTIONS PERSONAL TO ORIGINAL LESSEE. Each Option granted to Lessee in this Lease is personal to the original Lessee, and cannot be assigned or exercised by anyone other than said original Lessee and only while the original Lessee is in full possession of the Premises and, if requested by Lessor, with Lessee certifying that Lessee has no intention of thereafter assigning or subletting. 39.3 MULTIPLE OPTIONS. In the event that Lessee has any multiple Options to extend or renew this Lease, a later Option cannot be exercised unless the prior Options have been validly exercised. 39.4 EFFECT OF DEFAULT ON OPTIONS. (a) Lessee shall have no right to exercise an Option: (i) during the period commencing with the giving of any notice of Default and continuing until said Default is cured, (ii) during the period of time any Rent is unpaid (without regard to whether notice thereof is given Lessee), (iii) during the time Lessee is in Breach of this Lease, or (iv) in the event that Lessee has been given three (3) or more notices of separate Default, whether or not the Defaults are cured, during the twelve (12) month period immediately preceding the exercise of the Option. (b) The period of time within which an Option may be exercised shall not be extended or enlarged by reason of Lessee's inability to exercise an Option because of the provisions of Paragraph 39.4(a). (c) An Option shall terminate and be of no further force or effect, notwithstanding Lessee's due and timely exercise of the Option, if, after such exercise and prior to the commencement of the extended term, (i) Lessee fails to pay Rent for a period of thirty (30) days after such Rent becomes due (without any necessity of Lessor to give notice thereof), (ii) Lessor gives to Lessee three (3) or more notices of separate Default during any twelve (12) month period, whether or not the Defaults are cured, or (iii) if Lessee commits a Breach of this Lease. 40. MULTIPLE BUILDINGS. If the Premises are a part of a group of buildings controlled by Lessor, Lessee agrees that it will observe all reasonable rules and regulations which Lessor may make from time to time for the management, safety, and care of said properties, including PAGE 11 the care and cleanliness of the grounds and including the parking, loading and unloading of vehicles, and that Lessee will pay its fair share of common expenses incurred in connection therewith. 41. SECURITY MEASURES. Lessee hereby acknowledges that the rental payable to Lessor hereunder does not include the cost of guard service or other security measures, and that Lessor shall have no obligation whatsoever to provide same. Lessee assumes all responsibility for the protection of the Premises, Lessee, its agents and invitees and their property from the acts of third parties. 42. RESERVATIONS. Lessor reserves to itself the right, from time to time, to grant, without the consent or joinder of Lessee, such easements, rights and dedications that Lessor deems necessary, and to cause the recordation of parcel maps and restrictions, so long as such easements, rights, dedications, maps and restrictions do not unreasonably interfere with the use of the Premises by Lessee. Lessee agrees to sign any documents reasonably requested by Lessor to effectuate any such easement rights, dedication, map or restrictions. 43. PERFORMANCE UNDER PROTEST. If at any time a dispute shall arise as to any amount or sum of money to be paid by one Party to the other under the provisions hereof, the Party against whom the obligation to pay the money is asserted shall have the right to make payment "under protest" and such payment shall not be regarded as a voluntary payment and there shall survive the right on the part of said Party to institute suit for recovery of such sum. If it shall be adjudged that there was no legal obligation on the part of said Party to pay such sum or any part thereof, said Party shall be entitled to recover such sum or so much thereof as it was not legally required to pay. 44. AUTHORITY. If either Party hereto is a corporation, trust, limited liability company, partnership, or similar entity, each individual executing this Lease on behalf of such entity represents and warrants that he or she is duly authorized to execute and deliver this Lease on its behalf. Each Party shall, within thirty (30) days after request, deliver to the other Party satisfactory evidence of such authority. 45. CONFLICT. Any conflict between the printed provisions of this Lease and the typewritten or handwritten provisions shall be controlled by the typewritten or handwritten provisions. 46. OFFER. Preparation of this Lease by either Party or their agent and submission of same to the other Party shall not be deemed an offer to lease to the other Party. This Lease is not intended to be binding until executed and delivered by all Parties hereto. 47. AMENDMENTS. This Lease may be modified only in writing, signed by the Parties in interest at the time of the modification. As long as they do not materially change Lessee's obligations hereunder, Lessee agrees to make such reasonable non-monetary modifications to this Lease as may be reasonably required by a Lender in connection with the obtaining of normal financing or refinancing of the Premises. 48. MULTIPLE PARTIES. If more than one person or entity is named herein as either Lessor or Lessee, such multiple Parties shall have joint and several responsibility to comply with the terms of this Lease. 49. MEDIATION AND ARBITRATION OF DISPUTES. An Addendum requiring the Mediation and/or the Arbitration of all disputes between the Parties and/or Brokers arising out of this Lease [ ] IS [X] IS NOT attached to this Lease. LESSOR AND LESSEE HAVE CAREFULLY READ AND REVIEWED THIS LEASE AND EACH TERM AND PROVISION CONTAINED HEREIN, AND BY THE EXECUTION OF THIS LEASE SHOW THEIR INFORMED AND VOLUNTARY CONSENT THERETO. THE PARTIES HEREBY AGREE THAT, AT THE TIME THIS LEASE IS EXECUTED, THE TERMS OF THIS LEASE ARE COMMERCIALLY REASONABLE AND EFFECTUATE THE INTENT AND PURPOSE OF LESSOR AND LESSEE WITH RESPECT TO THE PREMISES. ________________________________________________________________________________ ATTENTION: NO REPRESENTATION OR RECOMMENDATION IS MADE BY THE AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION OR BY ANY BROKER AS TO THE LEGAL SUFFICIENCY, LEGAL EFFECT, OR TAX CONSEQUENCES OF THIS LEASE OR THE TRANSACTION TO WHICH IT RELATES. THE PARTIES ARE URGED TO: 1. SEEK ADVICE OF COUNSEL AS TO THE LEGAL AND TAX CONSEQUENCES OF THIS LEASE. 2. RETAIN APPROPRIATE CONSULTANTS TO REVIEW AND INVESTIGATE THE CONDITION OF THE PREMISES. SAID INVESTIGATION SHOULD INCLUDE BUT NOT BE LIMITED TO: THE POSSIBLE PRESENCE OF HAZARDOUS SUBSTANCES, THE ZONING OF THE PREMISES, THE STRUCTURAL INTEGRITY, THE CONDITION OF THE ROOF AND OPERATING SYSTEMS, AND THE SUITABILITY OF THE PREMISES FOR LESSEE'S INTENDED USE. WARNING: IF THE PREMISES IS LOCATED IN A STATE OTHER THAN CALIFORNIA, CERTAIN PROVISIONS OF THE LEASE MAY NEED TO BE REVISED TO COMPLY WITH THE LAWS OF THE STATE IN WHICH THE PREMISES IS LOCATED. ________________________________________________________________________________ The parties hereto have executed this Lease at the place and on the dates specified above their respective signatures. Executed at: BEVERLY HILLS, CALIFORNIA Executed at: CHATSWORTH, CALIFORNIA on: December 27, 2001 on: December , 2001 By LESSOR: By LESSEE: NORTHPARK INDUSTRIAL INTERNATIONAL REMOTE IMAGING SYSTEMS, INC. By: /s/ Gary Siegel By: /s/ J.Y. Caloz Name Printed: GARY SIEGEL Name Printed: J.Y. CALOZ Title: Partner Title: CFO By: /s/ Thomas L. Harner By: /s/ Achille M. Bigliardi Name Printed: Thomas L. Harner Name Printed: Achille M. Bigliardi Title: West America Const. Corp. - Title: President, Iris Diagnostics Vice President Address: 8929 Wilshire Blvd., #400 Address: 9162 Elton Avenue Beverly Hills, CA 90211 Chatsworth, CA 91311 Telephone: (310) 652-8288 Telephone: (310) 709-1244 Facsimile: (310) 652-4972 Facsimile: (818) Federal ID No. 95-3146812 Federal ID No. NOTE: These forms are often modified to meet the changing requirements of law and industry needs. Always write or call to make sure you are utilizing the most current form: AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION, 700 So. Flower Street, Suite 600, Los Angeles, California 90017. (213) 687-8777. Fax No. (213) 687-8616 PAGE 12 STANDARD ADDENDUM TO LEASE - NET Lease dated: November 29, 2001 ------------------------------------------- Lessor: NORTHPARK INDUSTRIAL ------------------------------------------- Lessee: INTERNATIONAL REMOTE IMAGING SYSTEMS, INC. ------------------------------------------- IN THE EVENT OF ANY CONFLICT BETWEEN THE PRINTED PROVISIONS OF THE LEASE AND THIS ADDENDUM, THE PROVISIONS OF THIS ADDENDUM SHALL CONTROL 50) BASE RENT (PARAGRAPH 1.5, CONTINUED): In addition to the base rent that Lessee is obligated to pay under Paragraphs 1.5 and 4, Lessee will also be obligated to pay Lessor the sum of $1,440.00 per month as Lessor's monthly estimate for Lessee's share of Real Property Taxes, insurance, landscaping and irrigation system maintenance. The current average monthly costs for Real Property Taxes, insurance, landscaping and irrigation for the subject Premises are $1,100.00, $150.00, and $190.00, respectively. Every year of this Lease, during the month of July, and during the month immediately following the termination of this Lease, Lessor will prepare an accounting of all actual Real Property Taxes, insurance, landscaping and irrigation system maintenance for the just concluded twelve-month period. Any differences between the actual expenses and Lessor's estimates shall be either immediately refunded to Lessee or immediately due by the Lessee, whichever the case may be. Lessee or its authorized agent shall have the right, upon five (5) days prior written notice to Lessor, to inspect, at Lessor's main accounting offices, Lessor's unaudited books and records regarding these expenses. The monthly base rent shall be increased annually and paid in accordance with the following rent schedule: The rent payable for the period of January 1, 2002 through December 31, 2002 shall be $13,720.00 per month. The rent payable for the period of January 1, 2003 through December 31, 2003 shall be $14,131.00 per month. The rent payable for the period of January 1, 2004 through December 31, 2004 shall be $14,555.00 per month. The rent payable for the period of January 1, 2005 through December 31, 2005 shall be $14,992.00 per month. The rent payable for the period of January 1, 2006 through December 31, 2006 shall be $15,442.00 per month. 51) VEHICLE PARKING (PARAGRAPH 2.6, CONTINUED): Lessee shall be entitled to 44 parking spaces located on those portions of the parking lot and/or in the parking structure directly across the street from the Premises which have been designated by Lessor for parking. Lessee or Lessee's employees, visitors, customers, or guests shall not park in driveways, alleyways, easement ways or other areas not specifically marked as parking spaces. No automotive repair, car washing, waxing and detailing, or covered parking is permitted at any time. Prohibited vehicles are not permitted; examples of prohibited vehicles shall include, but shall not be limited to, trailers, campers, recreational vehicles, boats, "dead automobiles" or automobiles parked longer than 48 hours. If Lessee permits or allows parking other than in designated parking spaces or permits or allows any of the aforedescribed prohibited vehicles to park on any portion of the parking areas or anywhere else within the Premises, then Lessor shall have the right, without notice, in addition to other rights and remedies it may have, to remove or tow away the vehicle involved and charge the cost to Lessee, which cost shall be immediately payable by Lessee upon demand by Lessor. In addition to, and not in limitation of any of Lessor's rights under this Lease, Lessor shall have the right, at any time and from time to time, to relocate, modify, adjust, redesign and otherwise change the common areas available for parking within the Premises, provided the total number of parking spaces is not reduced, notwithstanding that some of Lessee's parking space(s) may be used as location for its trash containers, and establish, modify, amend and enforce rules, regulations and restrictions with respect thereto, including, but not limited to, time limits, for example, such as temporary loading zones or areas, redesigning parking spaces from diagonal or vertical, or vice versa, and changing the traffic patterns within the Premises. 52) SECURITY DEPOSIT (PARAGRAPH 5, CONTINUED) The security deposit shall be used and may be refunded only in accordance with Paragraph 5 and in connection with this paragraph. Lessee may not use any portion of the security deposit to satisfy any of Lessee's rental obligations hereunder including the last month's rental payment. Any failure of Lessee to pay any of Lessee's rental obligations when due constitutes a material breach of this Lease for which Lessor may re-enter and take possession of the Premises in accordance with law, notwithstanding the fact that Lessor may have possession of a security deposit. 53) USE (PARAGRAPH 6.1, CONTINUED) Lessee understands that there are no restrictions contained in this Lease as to the type of business which may be conducted by any other present or future tenant of any building located near or adjacent to the building in which the Premises are located, and that Lessor may lease space to other tenants whose business is the same or competitive with that of Lessee. Lessor Lessee ------------ ------------ Initial Here Initial Here STANDARD ADDENDUM TO LEASE - NET PAGE 2 OF 4 NO OUTSIDE STORAGE. Under no circumstances shall Lessee be permitted to use the exterior areas of the Premises, including driveways, alleyways or easement ways or anywhere else outside the building, for the temporary or permanent storage of any property, including but not limited to inventory, parts, work in process, pallets, or the installation of any type of equipment, including but not limited to air compressors or any other equipment. In the event that any unauthorized storage or installation of equipment or property shall occur, then Lessor shall have the right, without notice, in addition to such other rights and remedies that it may have, to remove the property and/or equipment at Lessee's expense, which shall be paid by Lessee upon demand by Lessor. No unauthorized seating areas, lunch areas or compressor sheds are permitted anywhere in the driveways, alleyways or easement ways, alleys or anywhere else outside the building. INGRESS AND EGRESS; LOADING AND UNLOADING. It is understood and agreed that the exterior portion of the premises and property are to be used by Lessee solely for ingress and egress and for the parking of vehicles as authorized by Lessor. The exterior portions of the premises at no time will be used by Lessee for loading or unloading, except at the loading dock. It is the parties' intention that Lessee will neither cause nor permit anything which will detract from keeping the exterior of the building and premises in a clean, orderly, and uncluttered condition fully in keeping with the highest standards and reflecting an image of the highest quality and standards. EXTERIOR WATER USE LIMITATIONS. Except for irrigation purposes, Lessee shall not use any water either from exterior sources or from sources within the building, on or about the exterior area of the Premises for any purpose whatsoever without Lessor's prior written consent. Any of Lessee's procedures, processes or other work which require the use of water shall be done solely within the confines of the building, and no water shall be allowed to drain onto the exterior area of the Premises. 54) MAINTENANCE; REPAIRS, UTILITY INSTALLATIONS; TRADE FIXTURES AND ALTERATIONS (PARAGRAPH 7, CONTINUED) Notwithstanding anything to the contrary in Paragraph 7.1(b), in order to maintain a cohesive landscaping appearance throughout the business park, Lessor shall maintain all landscaping and irrigation system contracts, and Lessee shall reimburse Lessor for those costs pursuant to Paragraph 50. ROOF. Lessee shall inform Lessor of any work anticipated on the roof, in conjunction with its operation and obtain permission to do same prior to commencement of same. Lessee shall not make any alterations, improvements or additions to the Premises, without Lessor's prior written consent. Should Lessee make any alterations, etc. without the prior written consent of Lessor, Lessor may, at any time during the term of this Lease or upon its termination, require that Lessee, at its expense, remove any or all of the same and that Lessee pay to Lessor the amount of any damage to the roof caused by Lessee, or Lessor may remove same at Lessee's expense. UNAUTHORIZED ALTERATIONS. Lessee shall obtain Lessor's prior written approval for the installation of any interior or exterior window coverings, including but not limited to drapes, blinds, sunshades, sunscreens, holiday or other decorations or any type of film window treatment. No exterior painting is permitted. In the event that any such unauthorized installations or alterations occur, then Lessor shall have the right, without notice, in addition to such other rights and remedies that it may have, to remove all of the same at Lessee's expense, which shall be paid by Lessee upon demand by Lessor. SECURITY. Security bars or other security measures installed by Lessee require prior written consent of Lessor. Such installations, except for electronic security systems, shall remain as part of the Premises upon termination of the Lease unless Lessor requests removal of such installations and restoration of the Premises in accordance with Paragraph 7.4. 55) OWNERSHIP; REMOVAL; SURRENDER; AND RESTORATION (PARAGRAPH 7.4, CONTINUED) Lessor's right under Paragraph 7.4(b) to require that any or all Lessee Owned Alterations or Utility Installations be removed by Lessee by the expiration or earlier termination of this Lease applies to all tenant improvements, including but not limited to improvements which were made to the Premises by Lessor at the request of Lessee and improvements the cost of which was amortized over the Lease term or a portion thereof in the form of additional rent. If Lessee desires to install wallpaper in the Premises, Lessor may require the removal and restoration of the walls upon Lessee's vacancy of the Premises, which shall be done at Lessee's sole cost and expense. 56) REPLACEMENT COST (PARAGRAPH 8.3(a), CONTINUED) With reference to the property insurance required by Paragraph 8.3(a), Lessor and Lessee agree that the full replacement cost of the Premises will be not less than $1,163,000.00 as of the Commencement Date of the term of this Lease. 57) ASSIGNMENT AND SUBLETTING (PARAGRAPH 12, CONTINUED) Subject to the provisions of Paragraph 12, Lessee may sublease the Premises upon Lessor's written consent. Within five (5) days of Lessee entering into a sublease of the Premises, Lessee shall deliver to Lessor a copy of any written sublease. Except as provided in Paragraph 12.2(e) in the case of Lessor's consent to an assignment or subletting and notwithstanding anything to the contrary contained in Paragraph 12, in the event that Lessee requests Lessor's signature or consent to any action or on any document, including but not limited to loan or security documents relating to loan transactions in which Lessee is taking part, Lessor may require Lessee to pay to Lessor an initial minimum fee of $350.00 to cover Lessor's legal and other fees and costs in reviewing and responding to each such request, and Lessee agrees to pay additional legal fees as are actually incurred by Lessor in reviewing and responding thereto. Lessor Lessee ------------ ------------ Initial Here Initial Here STANDARD ADDENDUM TO LEASE - NET PAGE 3 OF 4 58) HOLDOVER (PARAGRAPH 26, CONTINUED) If Lessee remains in possession of the Premises after the expiration of the Lease term, without Lessor's written consent, then Lessee's occupancy of the Premises shall be deemed to be a holdover tenancy upon all of the provisions of this Lease pertaining to obligations of Lessee, but not including any options or rights of first refusal, if any, granted to Lessee under this Lease. If Lessee's hold-over tenancy exceeds ten (10) days, Lessee may terminate the tenancy only by giving sixty (60) days written notice of termination to Lessor, whereas Lessor may terminate the tenancy or change the terms of the Lease upon giving to Lessee sixty (60) days written notice thereof. The termination date shall be the last day of the month in which the notice requirement has been met. Notwithstanding anything to the contrary contained in Paragraphs 1.3, 1.5, 3.1, 4 or elsewhere in this Lease, Lessee's obligation to pay rent shall continue until (i) Lessee has removed all of its property from the Premises, (ii) Lessee has made any repairs required under Paragraph 7.4(c), (iii) Lessee has removed all Alterations, improvements, additions and Utility Installations which Lessor requires Lessee to remove pursuant to Paragraph 7.4(b), and (iv) Lessee has notified Lessor in writing that all of the items (i) through (iii) of this paragraph, to the extent applicable, have been accomplished. 59) DECLARATION of COVENANTS, CONDITIONS AND RESTRICTIONS FOR NORTHPARK INDUSTRIAL CENTER. Lessee acknowledges receipt of a copy of the Declaration of Covenants, Conditions and Restrictions for Northpark Industrial Center recorded with the County of Los Angeles as document numbers 79-760182 and 85-1324915. Lessee has reviewed and approved said documents and agrees to be bound by all the terms and conditions therein. Lessee further agrees that said Covenants, Conditions and Restrictions shall be binding upon Lessee and any sublessee, successor and assigns which they may have. 60) TENANT IMPROVEMENTS (LESSOR'S COST): Subject to Lessee's execution of the Lease Agreement dated November 28, 2001 for the premises located 9172 Eton Avenue, Lessor shall, at Lessor's cost, cut one (1) opening in the north wall of the office area (and shall cut one opening in the southern wall of the office area in the premises located at 9172 Eton Avenue) to connect the premises located at 9162 Eton Avenue with the premises located at 9172 Eton Avenue . Said openings shall be a 3'0 x 6'8" cased opening. Upon Lessee's vacancy of either (or both) buildings, Lessee shall, at Lessee's cost, close said openings, which shall be done so as to create a similar condition to that prior to the cut-outs. 61) PREMISES (PARAGRAPHS 1.2(A), 1.4 AND 2, CONTINUED): a) Lessee acknowledges that it has been the Lessee of the Premises since August 1, 1993, pursuant to the lease made between Lessor and Lessee dated July 21, 1993, and that Lessee continuously leased the premises since August 1, 1993. By entering into this new Lease, the Lessee agrees that its responsibility for all of its actions and for use of the Premises since August 1, 1993 shall continue unabated. This Lease shall not relieve Lessee of the Lessee's responsibility for all its prior actions. This Lease and all prior leases between Lessor and Lessee shall be treated as one continuous lease for such purpose. b) AS DESCRIBED ABOVE IN PARAGRAPH 61(a), LESSEE HAS BEEN AND IS CURRENTLY LEASING THE PREMISES SINCE AUGUST 1, 1993. UPON EXECUTION OF THIS LEASE BY BOTH PARTIES, LESSOR SHALL AUTOMATICALLY TERMINATE ANY PRE-EXISTING LEASES. 62) The approximate leasable space in the Premises is 23,254 square feet which represents 41.6% of the total leasable space in the building complex of which the Premises area a part. Said percentage shall be used throughout the term of this Lease for the purpose of determining Insurance Premiums pursuant to Paragraphs 8 and 56, Property Taxes pursuant to paragraph 10, and other common area items pursuant to Paragraphs 7 and 11 of this Lease where increases in said items relate to the entire building complex of which the Premises are a part. 63) PARAGRAPH 12.1b (CONTINUED): For purposes of this Lease, a "change in the control of Lessee" means the happening of any of the following events: (i) When any "person" as such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934 (the "Exchange Act") becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Lessee fifty percent (50%) or more of the combined voting power of the Lessee's then outstanding securities entitled to vote generally in the election of directors; or (ii) The stockholders of the Lessee approve a merger, consolidation or sale of substantially all the assets of the Lessee with or to any other corporation, other than a merger, consolidation or sale of substantially all the assets which would result in the voting securities of the Lessee outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) more than fifty percent (50%) of the total voting power represented by the voting securities of the Lessee or such surviving entity outstanding immediately after such merger, consolidation or sale of substantially all the assets of the Lessee; or (iii) A change in the composition of the Board of Directors of the Lessee, as a result of which fewer than a majority of the directors are Incumbent Directors. "Incumbent Directors" shall mean directors who either (a) are directors of the Lessee as of the date of the commencement of this Lease or any applicable extension or renewal, or (b) are elected, or nominated for election to the Board of Directors of the Lessee with the affirmative votes of at least a majority of the Incumbent Directors at the time of such election or nomination (but shall not include an individual whose election or nomination is in connection with an actual or threatened proxy contest relation to the election of directors to the Lessee). Lessor Lessee /s/ [ILLEGIBLE] /s/ [ILLEGIBLE] --------------- --------------- Initial Here Initial Here STANDARD ADDENDUM TO LEASE - NET PAGE 4 OF 4 64) PARAGRAPH 12.1c (CONTINUED): The involvement of Lessee or its assets in any merger, bulk sale or leveraged buy-out, whether in a single transaction or series of related transactions and whether or not a formal assignment or hypothecation of this Lease or Lessee's assets occurs, which results or will result in a reduction of the Net Worth of Lessee by an amount greater than 25% of such Net Worth as it was represented at the time of the execution of this Lease or at the time of the most recent assignment to which Lessor has consented, or as it exists immediately prior to said transaction or transactions constituting such reduction, whichever was or is greater, shall be considered an assignment of this Lease requiring Lessor's consent which shall be unreasonably withheld. "Net Worth of Lessee" shall mean the net worth of Lessee (excluding any guarantors) established under generally accepted accounting principles as currently in effect on the date hereof. 65) OPTION TO EXTEND A. Lessor hereby grants to Lessee the option to extend the term of this Lease for a Five 5) year period commencing when the prior term expires upon each and all of the following terms and conditions: (i) Lessee gives to Lessor and Lessor receives written notice of the exercise of the option to extend this Lease for said additional term no earlier than nine months and no later than six months prior to the time that the option period would commence if the option were exercised, time being of the essence. If said notification of the exercise of said option is not so given and received, this option shall automatically expire; (ii) The provisions of paragraph 39, including the provision relating to default of Lessee set forth in paragraph 39.4 of this Lease are conditions of this Option; (iii) All of the terms and conditions of this Lease except where specifically modified by this option shall apply; (iv) On January 1, 2007, the monthly rent payable under paragraph 1.5 and 4 of the attached Lease shall be adjusted by the increase, if any, from the date this Lease commenced in the C.P.I. As used herein, the term "C.P.I. shall mean the Consumer Price Index of the Bureau of Labor Statistics of the U.S. Department of Labor for All Urban Consumers, Los Angeles-Anaheim-Riverside, California (1982/84=100), "All Items", herein referred to as "C.P.I." a. The monthly rent payable in accordance with paragraph A(iv) of this Addendum shall be calculated as follows: the rent payable for the first month of the term of this Lease, as set forth in paragraph 4 of the attached Lease, shall be multiplied by a fraction the numerator of which shall be the C.P.I. of the calendar month immediately preceding the effective date of the subject rent escalation, and the denominator of which shall be the C.P.I. for the calendar month in which the original Lease term commenced. The sum so calculated shall constitute the new monthly rent hereunder, but, in no event, shall such new monthly rent be less than 103% of the rent payable for the month immediately preceding the date for rent adjustment. b. In the event the compilation and/or publication of the C.P.I. shall be discontinued, then the index most nearly the same as the C.P.I. shall be used to make such calculation. In the event that Lessor and Lessee cannot agree on such alternative index, then the matter shall be submitted for decision to the American Arbitration Association in accordance with the rules of said association and the decision of the arbitrators shall be binding upon the parties. The cost of said Arbitrators shall be paid equally be Lessor and Lessee. c. Lessor shall notify Lessee of any rental increases pursuant to this paragraph as soon as practicable after the relevant C.P.I. figures have been released. Until such notification, Lessee shall continue to pay the rent in effect during the prior rental period. After notification of a rental increase, Lessee shall commence making rental payments in the increased amount and shall, within ten (10) days after such notification, pay to Lessor the amount of any rental increases due for previous months. B. If this option to extend is exercised, the option term shall commence on January. 1, 2007 and shall end on December 31, 2011 C. On January 1 2008 January 1 2009, January 1, 2010 and again on January 1, 2011 , the monthly rent payable shall be adjusted upward by 3% over the rent payable for the month immediately preceding each rental adjustment. LESSOR: LESSEE: NORTHPARK INDUSTRIAL INTERNATIONAL REMOTE IMAGING SYSTEMS, INC. By: [SIGNATURE ILLEGIBLE] By: [SIGNATURE ILLEGIBLE] ---------------------------- ------------------------------------- By: [SIGNATURE ILLEGIBLE] By: [SIGNATURE ILLEGIBLE] ---------------------------- ------------------------------------- PARKING AGREEMENT THIS PARKING AGREEMENT, DATED November 29, 2001 , for reference purposes only, is made by and between NORTHPARK INDUSTRIAL (herein called "Lessor") and INTERNATIONAL REMOTE IMAGING SYSTEMS, INC. (herein called "Lessee"). Lessor leases to Lessee under a separate written Lease the Premises known as 9162 Eton Avenue , Chatsworth, California, and the Agreements of the parties in this Parking Agreement are in addition to the agreements of the parties in said Lease. 1. Subject to the terms and conditions contained in this Agreement, Lessor hereby agrees that Lessee and persons designated by Lessee may use 21 parking spaces in the Parking Garage located at 9151 Eton Ave., Chatsworth, California (hereinafter the "Garage"). The parking spaces hereunder shall be provided on an unreserved "first come, first served" basis. 2. The term of this Agreement shall be concurrent with the term of this Lease Agreement ("Lease"). 3. Lessee shall at all times comply with all applicable ordinances, rules, regulations, codes, laws, statutes and requirements of all federal, state, county and municipal governmental bodies or their subdivisions respecting the use of the Garage. Lessee shall extend all of its insurance policies required under the Lease to include vehicles to be parked in the Garage hereunder and personal property located therein or thereon. Upon request, Lessee shall provide Lessor with certificates or other satisfactory evidence of such insurance. Lessor reserves the right to adopt, modify, and enforce reasonable Rules governing the use of the Garage from time to time, including any card-key, sticker or other identification or entrance system, and hours of operation. The Rules set forth hereinafter are currently in effect. Lessor may refuse to permit any person who violates such Rules to park in the Garage, and any violation of the Rules shall subject the car to removal from the Garage. 4. Lessee acknowledges receipt of one card-key for each parking space provided. Lessee shall be responsible for the return of said card-key upon its vacancy of the Garage. A replacement fee of $25.00 will be charged for any lost or damaged card-key. 5. Except for intentional acts of gross negligence by Lessor, Lessor shall have no liability whatsoever for any damage to property or any other items located in the Garage, nor for any personal injuries or death arising out of any incident or matter relating to the Garage. In all events, Lessee agrees to look first to its insurance carrier for payment of any losses sustained in connection with Lessee's use of the Garage. Lessee hereby waives on behalf of its insurance carriers all rights of subrogation against Lessor. Lessor reserves the right to assign specific spaces and to reserve spaces for visitors, small cars, handicapped persons and for other lessees, and Lessee and persons designated by Lessee shall not park in any such assigned or reserved spaces. Lessor also reserves the right to close all or any portion of the Garage in order to make repairs or perform maintenance services, or to alter, modify, re-stripe the Garage, or if required by casualty, strike, condemnation, act of God, governmental law or other reason beyond Lessor's reasonable control. In such event, Lessor shall refund any prepaid parking rent hereunder, pro-rated on a per diem basis. 6. Prior to furnishing any card-keys to any person, Lessee shall provide Lessor with a list including all names, type of automobile, year of manufacture, drivers license number and automobile license number for all persons using the Garage at any time. 7. If Lessee shall default under this Agreement, Lessor shall have the right to cancel this Agreement on ten (10) days written notice, unless within such ten (10) day period Lessee cures such default. If Lessee shall default under this Agreement a second time after receiving prior written notice for the same offense, Lessor shall have the right to cancel this Agreement on ten (10) days written notice. Lessor shall have the right to remove from the Garage any vehicles hereunder which are in breach of this Agreement or Rules contained herein, without any liability whatsoever. Accordingly, Lessor may then deactivate the respective card-key(s) with ten (10) days notice as stated above. 8. LESSEE ACKNOWLEDGES RECEIPT OF A COPY OF THE DECLARATION OF COVENANTS, CONDITIONS AND RESTRICTIONS FOR NORTHPARK INDUSTRIAL CENTER RECORDED WITH THE COUNTY OF LOS ANGELES AS DOCUMENT NUMBERS 79-760182 AND 85-1324915. LESSEE HAS REVIEWED AND APPROVED SAID DOCUMENTS AND AGREES TO BE BOUND BY ALL THE TERMS AND CONDITIONS THEREIN. LESSEE FURTHER AGREES THAT SAID COVENANTS, CONDITIONS AND RESTRICTIONS SHALL BE BINDING UPON LESSEE AND ANY SUBLESSEE, SUCCESSOR AND ASSIGNS WHICH THEY MAY HAVE. RULES a. Lessee agrees to acquaint all persons to whom Lessee assigns parking space of these Rules. b. Garage hours: Twenty-four (24) hours, seven (7) days a week. c. Cars must be parked entirely within the stall lines painted on the floor, and only small cars may be parked in areas reserved for compacts. All cars must be parked head-in only. d. All directional signs and arrows must be observed. e. Speed limit shall be 5 miles per hour. f. Parking is prohibited in all areas not expressly designated for parking, including without limitation: 1. Aisles. 2. Loading zones. 3. Areas not striped for parking. 4. Areas where "No Parking" signs are posted. 5. Ramps, right side up - left side down. g. Spaces reserved for handicapped parking must be used only by vehicles properly designated. Lessor Initial Here Lessee Initial Here [/s/ GS] [ ] [/s/ ILLEGIBLE] [/s/ ILLEGIBLE] PARKING AGREEMENT (continued) h. Parking stickers, card-key or any other devices or forms of identification or entry supplied by Lessor shall remain the property of Lessor. Such devices must be displayed as requested and may not be mutilated in any manner. The serial number of the parking identification device may not be obliterated. Devices are not transferable and any device in the possession of any unauthorized holder will be void. i. Monthly fees shall be payable in advance prior to the first day of each month. Failure to do so will automatically cancel parking privileges and the card-keys used by Lessee will be voided on the fifth (5th) day of the month. No deductions or allowances from the monthly rate will be made for days on which the Garage is not used by Lessee or its designees. j. Garage managers or personnel are not authorized to make or allow any exceptions to these Rules. k. Each driver of a vehicle is required to drive and park safely, and lock and secure their own vehicle. l. Loss or theft of parking identification, card-keys or other such devices must be reported to Lessor immediately. Any parking devices reported lost or stolen found on any unauthorized car will be confiscated and the illegal holder will be fined at the then prevailing written rate. Lost or stolen devices found by Lessee or its employees must be returned to Lessor. m. Washing, waxing, cleaning or servicing of any vehicle by Lessee or its employees or agents is prohibited. Parking spaces may only be used for parking automobiles. n. Parking spaces shall be used only for parking by vehicles no larger than full size passenger automobiles or pick-up trucks. Prohibited vehicles are not permitted; examples of prohibited vehicles shall include, but shall not be limited to, vehicles exceeding 6' 6" in height, trucks or trucking equipment, trailers, campers, recreational vehicles, boats, "dead automobiles" or automobiles parked longer than 24 hours. No automotive repair or work is permitted. If Lessee permits or allows any of the aforedescribed prohibited vehicles to park on any portion of the parking areas, then Lessor shall have the right, without notice, in addition to other rights and remedies it may have, to remove or tow away the vehicle involved and charge the cost to Lessee which cost shall be immediately payable by Lessee upon demand by Lessor. o. Other prohibitions include but are not limited to: eating in Garage, loitering, throwing trash, leaky vehicles, damage to gates, arms, card-key readers, entry or exit equipment, other vehicles, real or personal property, fences, rails or walls. p. Lessor may prohibit violators of Rules from using parking spaces provided to Lessee hereunder. In such case, Lessor shall void the violator's card-key and notify Lessee in writing. Said individual(s) would be prohibited from using Garage, but Lessee would continue leasing same until a fine of $75.00 is paid or until Lessor agrees to reinstate the violator, at Lessor's option. LESSOR: LESSEE: NORTHPARK INDUSTRIAL INTERNATIONAL REMOTE IMAGING SYSTEMS, INC. By: /s/ [SIGNATURE ILLEGIBLE] By: /s/ [SIGNATURE ILLEGIBLE] ---------------------------- ------------------------------------- By: /s/ [SIGNATURE ILLEGIBLE] By: /s/ [SIGNATURE ILLEGIBLE] ---------------------------- ------------------------------------- EX-10.1(B) 4 v80280ex10-1b.txt EXHIBIT 10.1(B) EXHIBIT 10.1(b) [LOGO] AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION STANDARD INDUSTRIAL/COMMERCIAL SINGLE-TENANT LEASE -- NET (DO NOT USE THIS FORM FOR MULTI-TENANT BUILDINGS) 1. BASIC PROVISIONS ("BASIC PROVISIONS") 1.1 PARTIES: This Lease ("Lease"), dated for reference purposes only November 28, 2001 is made by and between NORTHPARK INDUSTRIAL ("LESSOR") and INTERNATIONAL REMOTE IMAGING SYSTEMS, INC., a Delaware Corporation ("LESSEE"), (collectively the "PARTIES," or individually a "PARTY"). 1.2 PREMISES: That certain real property, including all improvements therein or to be provided by Lessor under the terms of this Lease, and commonly known as 9172 Eton Avenue, located in the County of Los Angeles, State of California, and generally described as (describe briefly the nature of the property and, if applicable, the "PROJECT", if the property is located within a Project) a concrete tilt-up industrial building consisting of approximately 20,338 square feet of area, aka Lot #7, Tract No. 33398, City of Los Angeles, in an MR-2 zone ("PREMISES"). (See also Paragraph 2) 1.3 TERM: Five (5) years and -0- months ("ORIGINAL TERM") commencing January 1, 2002 ("COMMENCEMENT DATE") and ending December 31, 2006 ("EXPIRATION DATE"). (See also Paragraph 3). 1.4 EARLY POSSESSION: ______________________________________________ ("EARLY POSSESSION DATE"). (See also Paragraphs 3.2 and 3.3) 1.5 BASE RENT: $11,999.00 per month ("BASE RENT"), payable on the First (1st) day of each month commencing _____________________________________. (See also Paragraph 4) [X] If this box is checked, there are provisions in this Lease for the Base Rent to be adjusted. -- See Paragraph 50 1.6 BASE RENT PAID UPON EXECUTION: $11,999.00 as Base Rent for the period January 1, 2002 through January 31, 2002. 1.7 SECURITY DEPOSIT: $13,505.00 ("SECURITY DEPOSIT"). (See also Paragraph 5) 1.8 AGREED USE: research, development and manufacturing of medical and electronic equipment and related activity. (See also Paragraph 6) 1.9 INSURING PARTY: Lessor is the "INSURING PARTY" unless otherwise stated herein. (See also Paragraph 8) 1.11 GUARANTOR. The obligations of the Lessee under this Lease are to be guaranteed by _______________________________________________________________ _________________________________________ ("GUARANTOR"). (See also Paragraph 37) 1.12 ADDENDA AND EXHIBITS. Attached hereto is an Addendum or Addenda consisting of Paragraphs 50 through 63, all of which constitute a part of this Lease. 2. PREMISES. 2.1 LETTING. Lessor hereby leases to Lessee, and Lessee hereby leases from Lessor, the Premises, for the term, at the rental, and upon all of the terms, covenants and conditions set forth in this Lease. Unless otherwise provided herein, any statement of size set forth in this Lease, or that may have been used in calculating rental, is an approximation which the Parties agree is reasonable and the rental based thereon is not subject to revision whether or not the actual size is more or less. 2.2 CONDITION. Lessor shall deliver the Premises to Lessee broom clean and free of debris on the Commencement Date or the Early Possession Date, whichever first occurs ("START DATE"), and, so long as the required service contracts described in Paragraph 7.1(b) below are obtained by Lessee within thirty (30) days following the Start Date, warrants that the existing electrical, plumbing, fire sprinkler, lighting, heating, ventilating and air conditioning systems ("HVAC"), loading doors, if any, and all other such elements in the Premises, other than those constructed by Lessee, shall be in good operating condition on said date and that the structural elements of the roof, bearing walls and foundation of any buildings on the Premises (the "BUILDING") shall be free of material defects. If a non-compliance with said warranty exists as of the Start Date, Lessor shall, as Lessor's sole obligation with respect to such matter, except as otherwise provided in this Lease, promptly after receipt of written notice from Lessee setting forth with specificity the nature and extent of such non-compliance, rectify same at Lessor's expense. If, after the Start Date, Lessee does not give Lessor written notice of any non-compliance with this warranty within: (i) one year as to the surface of the roof and the structural portions of the roof, foundations and bearing walls, (ii) six (6) months as to the HVAC systems, (iii) thirty (30) days as to the remaining systems and other elements of the Building, correction of such non-compliance shall be the obligation of Lessee at Lessee's sole cost and expense. 2.3 COMPLIANCE. Lessor warrants that the improvements on the Premises comply with all applicable laws, covenants or restrictions of record, building codes, regulations and ordinances ("APPLICABLE REQUIREMENTS") in effect on the Start Date. Said warranty does not apply to the use to which Lessee will put the Premises or to any Alterations or Utility Installations (as defined in Paragraph 7.3(a)) made or to be made by Lessee. NOTE: Lessee is responsible for determining whether or not the zoning is appropriate for Lessee's intended use, and acknowledges that past uses of the Premises may no longer be allowed. If the Premises do not comply with said warranty, Lessor shall, except as otherwise provided, promptly after receipt of written notice from Lessee setting forth with specificity the nature and extent of such non-compliance, rectify the same at Lessor's expense. If Lessee does not give Lessor written notice of a non-compliance with this warranty within six (6) months following the Start Date, correction of that non-compliance shall be the obligation of Lessee at Lessee's sole cost and expense. If the Applicable Requirements are hereafter changed (as opposed to being in existence at the Start Date, which is addressed in Paragraph 6.2(e) below) so as to require during the term of this Lease the construction of an addition to or an alteration of the Building, the remediation of any Hazardous Substance, or the reinforcement or other physical modification of the Building ("CAPITAL EXPENDITURE"), Lessor and Lessee shall allocate the cost of such work as follows: PAGE 1 (a) Subject to Paragraph 2.3(c) below, if such Capital Expenditures are required as a result of the specific and unique use of the Premises by Lessee as compared with uses by tenants in general, Lessee shall be fully responsible for the cost thereof, provided, however that if such Capital Expenditure is required during the last two (2) years of this Lease and the cost thereof exceeds six (6) months' Base Rent, Lessee may instead terminate this Lease unless Lessor notifies Lessee, in writing, within ten (10) days after receipt of Lessee's termination notice that Lessor has elected to pay the difference between the actual cost thereof and the amount equal to six (6) months' Base Rent. If Lessee elects termination, Lessee shall immediately cease the use of the Premises which requires such Capital Expenditure and deliver to Lessor written notice specifying a termination date at least ninety (90) days thereafter. Such termination date shall, however, in no event be earlier than the last day that Lessee could legally utilize the Premises without commencing such Capital Expenditure. (b) If such Capital Expenditure is not the result of the specific and unique use of the Premises by Lessee (such as governmentally mandated seismic modifications), then Lessor and Lessee shall allocate the obligation to pay for such costs pursuant to the provisions of Paragraph 7.1(c); provided, however, that if such Capital Expenditure is required during the last two years of this Lease or if Lessor reasonably determines that it is not economically feasible to pay its share thereof, Lessor shall have the option to terminate this Lease upon ninety (90) days prior written notice to Lessee unless Lessee notifies Lessor, in writing, within ten (10) days after receipt of Lessor's termination notice that Lessee will pay for such Capital Expenditure. If Lessor does not elect to terminate, and fails to tender its share of any such Capital Expenditure, Lessee may advance such funds and deduct same, with Interest, from Rent until Lessor's share of such costs have been fully paid. If Lessee is unable to finance Lessor's share, or if the balance of the Rent due and payable for the remainder of this Lease is not sufficient to fully reimburse Lessee on an offset basis, Lessee shall have the right to terminate this Lease upon thirty (30) days written notice to Lessor. (c) Notwithstanding the above, the provisions concerning Capital Expenditures are intended to apply only to non-voluntary, unexpected, and new Applicable Requirements. If the Capital Expenditures are instead triggered by Lessee as a result of an actual or proposed change in use, change in intensity of use, or modification to the Premises then, and in that event, Lessee shall be fully responsible for the cost thereof, and Lessee shall not have any right to terminate this Lease. 2.4 ACKNOWLEDGEMENTS. Lessee acknowledges that: (a) it has been advised by Lessor and/or Brokers to satisfy itself with respect to the condition of the Premises (including but not limited to the electrical, HVAC and fire sprinkler systems, security, environmental aspects, and compliance with Applicable Requirements), and their suitability for Lessee's intended use, (b) Lessee has made such investigation as it deems necessary with reference to such matters and assumes all responsibility therefor as the same relate to its occupancy of the Premises, and (c) neither Lessor, Lessor's agents, nor any Broker has made any oral or written representations or warranties with respect to said matters other than as set forth in this Lease. In addition, Lessor acknowledges that: (a) Broker has made no representations, promises or warranties concerning Lessee's ability to honor the Lease or suitability to occupy the Premises, and (b) it is Lessor's sole responsibility to investigate the financial capability and/or suitability of all proposed tenants. 2.5 LESSEE AS PRIOR OWNER/OCCUPANT. The warranties made by Lessor in Paragraph 2 shall be of no force or effect if immediately prior to the Start Date Lessee was the owner or occupant of the Premises. In such event, Lessee shall be responsible for any necessary corrective work. 3. TERM. 3.1 TERM. The Commencement Date, Expiration Date and Original Term of this Lease are as specified in Paragraph 1.3. 3.2 EARLY POSSESSION. If Lessee totally or partially occupies the Premises prior to the Commencement Date, the obligation to pay Base Rent shall be abated for the period of such early possession. All other terms of this Lease (including but not limited to the obligations to pay Real Property Taxes and insurance premiums and to maintain the Premises) shall, however, be in effect during such period. Any such early possession shall not affect the Expiration Date. 3.3 DELAY IN POSSESSION. Lessor agrees to use its best commercially reasonable efforts to deliver possession of the Premises to Lessee by the Commencement Date. If, despite said efforts, Lessor is unable to deliver possession as agreed, Lessor shall not be subject to any liability therefor, nor shall such failure affect the validity of this Lease. Lessee shall not, however, be obligated to pay Rent or perform its other obligations until it receives possession of the Premises. If possession is not delivered within sixty (60) days after the Commencement Date, Lessee may, at its option, by notice in writing within ten (10) days after the end of such sixty (60) day period, cancel this Lease, in which event the Parties shall be discharged from all obligations hereunder. If such written notice is not received by Lessor within said ten (10) day period, Lessee's right to cancel shall terminate. Except as otherwise provided, if possession is not tendered to Lessee by the Start Date and Lessee does not terminate this Lease, as aforesaid, any period of rent abatement that Lessee would otherwise have enjoyed shall run from the date of delivery of possession and continue for a period equal to what Lessee would otherwise have enjoyed under the terms hereof, but minus any days of delay caused by the acts or omissions of Lessee. If possession of the Premises is not delivered within four (4) months after the Commencement Date, this Lease shall terminate unless other agreements are reached between Lessor and Lessee, in writing. 3.4 LESSEE COMPLIANCE. Lessor shall not be required to tender possession of the Premises to Lessee until Lessee complies with its obligation to provide evidence of insurance (Paragraph 8.5). Pending delivery of such evidence, Lessee shall be required to perform all of its obligations under this Lease from and after the Start Date, including the payment of Rent, notwithstanding Lessor's election to withhold possession pending receipt of such evidence of insurance. Further, if Lessee is required to perform any other conditions prior to or concurrent with the Start Date, the Start Date shall occur but Lessor may elect to withhold possession until such conditions are satisfied. 4. RENT. 4.1. RENT DEFINED. All monetary obligations of Lessee to Lessor under the terms of this Lease (except for the Security Deposit) are deemed to be rent ("RENT"). 4.2 PAYMENT. Lessee shall cause payment of Rent to be received by Lessor in lawful money of the United States, without offset or deduction (except as specifically permitted in this Lease), on or before the day on which it is due. Rent for any period during the term hereof which is for less than one (1) full calendar month shall be prorated based upon the actual number of days of said month. Payment of Rent shall be made to Lessor at its address stated herein or to such other persons or place as Lessor may from time to time designate in writing. Acceptance of a payment which is less than the amount then due shall not be a waiver of Lessor's rights to the balance of such Rent, regardless of Lessor's endorsement of any check so stating. 5. SECURITY DEPOSIT. Lessee shall deposit with Lessor upon execution hereof the Security Deposit as security for Lessee's faithful performance of its obligations under this Lease. If Lessee fails to pay Rent, or otherwise Defaults under this Lease, Lessor may use, apply or retain all or any portion of said Security Deposit for the payment of any amount due Lessor or to reimburse or compensate Lessor for any liability, expense, loss or damage which Lessor may suffer or incur by reason thereof. If Lessor uses or applies all or any portion of said Security Deposit, Lessee shall within ten (10) days after written request therefor deposit monies with Lessor sufficient to restore said Security Deposit to the full amount required by this Lease. If the Base Rent increases during the term of this Lease, Lessee shall, upon written request from Lessor, deposit additional monies with Lessor so that the total amount of the Security Deposit shall at all times bear the same proportion to the increased Base Rent as the initial Security Deposit bore to the initial Base Rent. Should the Agreed Use be amended to accommodate a material change in the business of Lessee or to accommodate a sublessee or assignee, Lessor shall have the right to increase the Security Deposit to the extent necessary, in Lessor's reasonable judgment, to account for any increased wear and tear that the Premises may suffer as a result thereof. If a change in control of Lessee occurs during this Lease and following such change the financial condition of Lessee is, in Lessor's reasonable judgment, significantly reduced, Lessee shall deposit such additional monies with Lessor as shall be sufficient to cause the Security Deposit to be at a commercially reasonable level based on said change in financial condition. Lessor shall not be required to keep the Security Deposit separate from its general accounts. Within fourteen (14) days after the expiration or termination of this Lease, if Lessor elects to apply the Security Deposit only to unpaid Rent, and otherwise within thirty (30) days after the Premises have been vacated pursuant to Paragraph 7.4(c) below, Lessor shall return that portion of the Security Deposit not used or applied by Lessor. No part of the Security Deposit shall be considered to be held in trust, to bear interest or to be prepayment for any monies to be paid by Lessee under this Lease. PAGE 2 6. USE. 6.1 USE. Lessee shall use and occupy the Premises only for the Agreed Use, or any other legal use which is reasonably comparable thereto, and for no other purpose. Lessee shall not use or permit the use of the Premises in a manner that is unlawful, creates damage, waste or a nuisance, or that disturbs owners and/or occupants of, or causes damage to neighboring properties. Lessor shall not unreasonably withhold or delay its consent to any written request for a modification of the Agreed Use, so long as the same will not impair the structural integrity of the improvements on the Premises or the mechanical or electrical systems therein, is not significantly more burdensome to the Premises. If Lessor elects to withhold consent, Lessor shall within five (5) business days after such request give written notification of same, which notice shall include an explanation of Lessor's objections to the change in use. 6.2 HAZARDOUS SUBSTANCES. (a) REPORTABLE USES REQUIRE CONSENT. The term "HAZARDOUS SUBSTANCE" as used in this Lease shall mean any product, substance, or waste whose presence, use, manufacture, disposal, transportation, or release, either by itself or in combination with other materials expected to be on the Premises, is either: (i) potentially injurious to the public health, safety or welfare, the environment or the Premises, (ii) regulated or monitored by any governmental authority, or (iii) a basis for potential liability of Lessor to any governmental agency or third party under any applicable statute or common law theory. Hazardous Substances shall include, but not be limited to, hydrocarbons, petroleum, gasoline, and/or crude oil or any products, by-products or fractions thereof. Lessee shall not engage in any activity in or on the Premises which constitutes a Reportable Use of Hazardous Substances without the express prior written consent of Lessor and timely compliance (at Lessee's expense) with all Applicable Requirements. "REPORTABLE USE" shall mean (i) the installation or use of any above or below ground storage tank, (ii) the generation, possession, storage, use, transportation, or disposal of a Hazardous Substance that requires a permit from, or with respect to which a report, notice, registration or business plan is required to be filed with, any governmental authority, and/or (iii) the presence at the Premises of a Hazardous Substance with respect to which any Applicable Requirements requires that a notice be given to persons entering or occupying the Premises or neighboring properties. Notwithstanding the foregoing, Lessee may use any ordinary and customary materials reasonably required to be used in the normal course of the Agreed Use, so long as such use is in compliance with all Applicable Requirements, is not a Reportable Use, and does not expose the Premises or neighboring property to any meaningful risk of contamination or damage or expose Lessor to any liability therefor. In addition, Lessor may condition its consent to any Reportable Use upon receiving such additional assurances as Lessor reasonably deems necessary to protect itself, the public, the Premises and/or the environment against damage, contamination, injury and/or liability, including, but not limited to, the installation (and removal on or before Lease expiration or termination) of protective modifications (such as concrete encasements) and/or increasing the Security Deposit. (b) DUTY TO INFORM LESSOR. If Lessee knows, or has reasonable cause to believe, that a Hazardous Substance has come to be located in, on, under or about the Premises, other than as previously consented to by Lessor, Lessee shall immediately give written notice of such fact to Lessor, and provide Lessor with a copy of any report, notice, claim or other documentation which it has concerning the presence of such Hazardous Substance. (c) LESSEE REMEDIATION. Lessee shall not cause or permit any Hazardous Substance to be spilled or released in, on, under, or about the Premises (including through the plumbing or sanitary sewer system) and shall promptly, at Lessee's expense, take all investigatory and/or remedial action reasonably recommended, whether or not formally ordered or required, for the cleanup of any contamination of, and for the maintenance, security and/or monitoring of the Premises or neighboring properties, that was caused or materially contributed to by Lessee, or pertaining to or involving any Hazardous Substance brought onto the Premises during the term of this Lease, by or for Lessee, or any third party. (d) LESSEE INDEMNIFICATION. Lessee shall indemnify, defend and hold Lessor, its agents, employees, lenders and ground lessor, if any, harmless from and against any and all loss of rents and/or damages, liabilities, judgments, claims, expenses, penalties, and attorneys' and consultants' fees arising out of or involving any Hazardous Substance brought onto the Premises by or for Lessee, or any third party (provided, however, that Lessee shall have no liability under this Lease with respect to underground migration of any Hazardous Substance under the Premises from adjacent properties). Lessee's obligations shall include, but not be limited to, the effects of any contamination or injury to person, property or the environment created or suffered by Lessee, and the cost of investigation, removal, remediation, restoration and/or abatement, and shall survive the expiration or termination of this Lease. NO TERMINATION, CANCELLATION OR RELEASE AGREEMENT ENTERED INTO BY LESSOR AND LESSEE SHALL RELEASE LESSEE FROM ITS OBLIGATIONS UNDER THIS LEASE WITH RESPECT TO HAZARDOUS SUBSTANCES, UNLESS SPECIFICALLY SO AGREED BY LESSOR IN WRITING AT THE TIME OF SUCH AGREEMENT. (e) LESSOR INDEMNIFICATION. Lessor and its successors and assigns shall indemnify, defend, reimburse and hold Lessee, its employees and lenders, harmless from and against any and all environmental damages, including the cost of remediation, which existed as a result of Hazardous Substances on the Premises prior to the Start Date or which are caused by the gross negligence or willful misconduct of Lessor, its agents or employees. Lessor's obligations, as and when required by the Applicable Requirements, shall include, but not be limited to, the cost of investigation, removal, remediation, restoration and/or abatement, and shall survive the expiration or termination of this Lease. (f) INVESTIGATIONS AND REMEDIATIONS. Lessor shall retain the responsibility and pay for any investigations or remediation measures required by governmental entities having jurisdiction with respect to the existence of Hazardous Substances on the Premises prior to the Start Date, unless such remediation measure is required as a result of Lessee's use (including "Alterations", as defined in Paragraph 7.3(a) below) of the Premises, in which event Lessee shall be responsible for such payment. Lessee shall cooperate fully in any such activities at the request of Lessor, including allowing Lessor and Lessor's agents to have reasonable access to the Premises at reasonable times in order to carry out Lessor's investigative and remedial responsibilities. (g) LESSOR TERMINATION OPTION. If a Hazardous Substance Condition occurs during the term of this Lease, unless Lessee is legally responsible therefor (in which case Lessee shall make the investigation and remediation thereof required by the Applicable Requirements and this Lease shall continue in full force and effect, but subject to Lessor's rights under Paragraph 6.2(d) and Paragraph 13), Lessor may, at Lessor's option, either (i) investigate and remediate such Hazardous Substance Condition, if required, as soon as reasonably possible at Lessor's expense, in which event this Lease shall continue in full force and effect, or (ii) if the estimated cost to remediate such condition exceeds twelve (12) times the then monthly Base Rent or $100,000, whichever is greater, give written notice to Lessee, within thirty (30) days after receipt by Lessor of knowledge of the occurrence of such Hazardous Substance Condition, of Lessor's desire to terminate this Lease as of the date sixty (60) days following the date of such notice. In the event Lessor elects to give a termination notice, Lessee may, within ten (10) days thereafter, give written notice to Lessor of Lessee's commitment to pay the amount by which the cost of the remediation of such Hazardous Substance Condition exceeds an amount equal to twelve (12) times the then monthly Base Rent or $100,000, whichever is greater. Lessee shall provide Lessor with said funds or satisfactory assurance thereof within thirty (30) days following such commitment. In such event, this Lease shall continue in full force and effect, and Lessor shall proceed to make such remediation as soon as reasonably possible after the required funds are available. If Lessee does not give such notice and provide the required funds or assurance thereof within the time provided, this Lease shall terminate as of the date specified in Lessor's notice of termination. 6.3 LESSEE'S COMPLIANCE WITH APPLICABLE REQUIREMENTS. Except as otherwise provided in this Lease, Lessee shall, at Lessee's sole expense, fully, diligently and in a timely manner, materially comply with all Applicable Requirements, the requirements of any applicable fire insurance underwriter or rating bureau, and the recommendations of Lessor's engineers and/or consultants which relate in any manner to the Premises, without regard to whether said requirements are now in effect or become effective after the Start Date. Lessee shall, within ten (10) days after receipt of Lessor's written request, provide Lessor with copies of all permits and other documents, and other information evidencing Lessee's compliance with any Applicable Requirements specified by Lessor, and shall immediately upon receipt, notify Lessor in writing (with copies of any documents involved) of any threatened or actual claim, notice, citation, warning, complaint or report pertaining to or involving the failure of Lessee or the Premises to comply with any Applicable Requirements. 6.4 INSPECTION; COMPLIANCE. Lessor and Lessor's "Lender" (as defined in Paragraph 30 below) and consultants shall have the right to enter into Premises at any time, in the case of an emergency, and otherwise at reasonable times, for the purpose of inspecting the condition of the Premises and for verifying compliance by Lessee with this Lease. The cost of any such inspections shall be paid by Lessor, unless a violation of Applicable Requirements, or a contamination is found to exist or be imminent, or the inspection is requested or ordered by a governmental authority. In such case, Lessee shall upon request reimburse Lessor for the cost of such inspections, so long as such inspection is reasonably related to the violation or contamination. PAGE 3 7. MAINTENANCE; REPAIRS, UTILITY INSTALLATIONS; TRADE FIXTURES AND ALTERATIONS. 7.1 LESSEE'S OBLIGATIONS. (a) IN GENERAL. Subject to the provisions of Paragraph 2.2 (Condition), 2.3 (Compliance), 6.3 (Lessee's Compliance with Applicable Requirements), 7.2 (Lessor's Obligations), 9 (Damage or Destruction), and 14 (Condemnation), Lessee shall, at Lessee's sole expense, keep the Premises, Utility Installations, and Alterations in good order, condition and repair (whether or not the portion of the Premises requiring repairs, or the means of repairing the same, are reasonably or readily accessible to Lessee, and whether or not the need for such repairs occurs as a result of Lessee's use, any prior use, the elements or the age of such portion of the Premises), including, but not limited to, all equipment or facilities, such as plumbing, heating, ventilating, air-conditioning, electrical, lighting facilities, boilers, pressure vessels, fire protection system, fixtures, walls (interior and exterior), foundations, ceilings, roofs, floors, windows, doors, plate glass, skylights, landscaping, driveways, parking lots, fences, retaining walls, signs, sidewalks and parkways located in, on, or adjacent to the Premises. Lessee, in keeping the Premises in good order, condition and repair, shall exercise and perform good maintenance practices, specifically including the procurement and maintenance of the service contracts required by Paragraph 7.1(b) below. Lessee's obligations shall include restorations, replacements or renewals when necessary to keep the Premises and all improvements thereon or a part thereof in good order, condition and state of repair. Lessee shall, during the term of this Lease, keep the exterior appearance of the Building in a first-class condition consistent with the exterior appearance of other similar facilities of comparable age and size in the vicinity, including, when necessary, the exterior repainting of the Building. (b) SERVICE CONTRACTS. Lessee shall, at Lessee's sole expense, procure and maintain contracts, with copies to Lessor, in customary form and substance for, and with contractors specializing and experienced in the maintenance of the following equipment and improvements, if any, if and when installed on the Premises: (i) HVAC equipment, (ii) boiler, and pressure vessels, (iii) fire extinguishing systems, including fire alarm and/or smoke detection, (iv) landscaping and irrigation systems, (v) roof covering and drains, (vi) driveways and parking lots, (vii) clarifiers (viii) basic utility feed to the perimeter of the Building, and (ix) any other equipment, if reasonably required by Lessor. (c) REPLACEMENT. Subject to Lessee's indemnification of Lessor as set forth in Paragraph 8.7 below, and without relieving Lessee of liability resulting from Lessee's failure to exercise and perform good maintenance practices, if the Basic Elements described in Paragraph 7.1(b) cannot be repaired other than at a cost which is in excess of 50% of the cost of replacing such Basic Elements, then such Basic Elements shall be replaced by Lessor, and the cost thereof shall be prorated between the Parties and Lessee shall only be obligated to pay, each month during the remainder of the term of this Lease, on the date on which Base Rent is due, an amount equal to the product of multiplying the cost of such replacement by a fraction, the numerator of which is one, and the denominator of which is the number of months of the useful life of such replacement as such useful life is specified pursuant to Federal income tax regulations or guidelines for depreciation thereof (including interest on the unamortized balance as is then commercially reasonable in the judgment of Lessor's accountants), with Lessee reserving the right to prepay its obligation at any time. 7.2 LESSOR'S OBLIGATIONS. Subject to the provisions of Paragraphs 2.2 (Condition), 2.3 (Compliance), 9 (Damage or Destruction) and 14 (Condemnation), it is intended by the Parties hereto that Lessor have no obligation, in any manner whatsoever, to repair and maintain the Premises, or the equipment therein, all of which obligations are intended to be that of the Lessee. It is the intention of the Parties that the terms of this Lease govern the respective obligations of the Parties as to maintenance and repair of the Premises, and they expressly waive the benefit of any statute now or hereafter in effect to the extent it is inconsistent with the terms of this Lease. 7.3 UTILITY INSTALLATIONS; TRADE FIXTURES; ALTERATIONS. (a) DEFINITIONS; CONSENT REQUIRED. The term "UTILITY INSTALLATIONS" refers to all floor and window coverings, air lines, power panels, electrical distribution, security and fire protection systems, communication systems, lighting fixtures, HVAC equipment, plumbing, and fencing in or on the Premises. The term "TRADE FIXTURES" shall mean Lessee's machinery and equipment that can be removed without doing material damage to the Premises. The term "ALTERATIONS" shall mean any modification of the improvements, other than Utility Installations or Trade Fixtures, whether by addition or deletion. "LESSEE OWNED ALTERATIONS AND/OR UTILITY INSTALLATIONS" are defined as Alterations and/or Utility Installations made by Lessee that are not yet owned by Lessor pursuant to Paragraph 7.4(a). Lessee shall not make any Alterations or Utility Installations to the Premises without Lessor's prior written consent. Lessee may, however, make non-structural Utility Installations to the interior of the Premises (excluding the roof) without such consent but upon notice to Lessor, as long as they are not visible from the outside, do not involve puncturing, relocating or removing the roof or any existing walls, and the cumulative cost thereof during this Lease as extended does not exceed $50,000 in the aggregate or $10,000 in any one year. (b) CONSENT. Any Alterations or Utility Installations that Lessee shall desire to make and which require the consent of the Lessor shall be presented to Lessor in written form with detailed plans. Consent shall be deemed conditioned upon Lessee's: (i) acquiring all applicable governmental permits, (ii) furnishing Lessor with copies of both the permits and the plans and specifications prior to commencement of the work, and (iii) compliance with all conditions of said permits and other Applicable Requirements in a prompt and expeditious manner. Any Alterations or Utility Installations shall be performed in a workmanlike manner with good and sufficient materials. Lessee shall promptly upon completion furnish Lessor with as-built plans and specifications. For work which costs an amount equal to the greater of one month's Base Rent, or $10,000, Lessor may condition its consent upon Lessee providing a lien and completion bond in an amount equal to one and one-half times the estimated cost of such Alteration or Utility Installation and/or upon Lessee's posting an additional Security Deposit with Lessor. (c) INDEMNIFICATION. Lessee shall pay, when due, all claims for labor or materials furnished or alleged to have been furnished to or for Lessee at or for use on the Premises, which claims are or may be secured by any mechanic's or materialmen's lien against the Premises or any interest therein. Lessee shall give Lessor not less than ten (10) days' notice prior to the commencement of any work in, on or about the Premises, and Lessor shall have the right to post notices of non-responsibility. If Lessee shall contest the validity of any such lien, claim or demand, then Lessee shall, at its sole expense defend and protect itself, Lessor and the Premises against the same and shall pay and satisfy any such adverse judgment that may be rendered thereon before the enforcement thereof. If Lessor shall require, Lessee shall furnish a surety bond in an amount equal to one and one-half times the amount of such contested lien, claim or demand, indemnifying Lessor against liability for the same. If Lessor elects to participate in any such action, Lessee shall pay Lessor's attorneys' fees and costs. 7.4 OWNERSHIP; REMOVAL; SURRENDER; AND RESTORATION. (a) OWNERSHIP. Subject to Lessor's right to require removal or elect ownership as hereinafter provided, all Alterations and Utility Installations made by Lessee shall be the property of Lessee, but considered a part of the Premises. Lessor may, at any time, elect in writing to be the owner of all or any specified part of the Lessee Owned Alterations and Utility Installations. Unless otherwise instructed per Paragraph 7.4(b) hereof, all Lessee Owned Alterations and Utility Installations shall, at the expiration or termination of this Lease, become the property of Lessor and be surrendered by Lessee with the Premises. (b) REMOVAL. By delivery to Lessee of written notice from Lessor not earlier than ninety (90) and not later than thirty (30) days prior to the end of the term of this Lease, Lessor may require that any or all Lessee Owned Alterations or Utility Installations be removed by the expiration or termination of this Lease. Lessor may require the removal at any time of all or any part of any Lessee Owned Alterations or Utility Installations made without the required consent. (c) SURRENDER/RESTORATION. Lessee shall surrender the Premises by the Expiration Date or any earlier termination date, with all of the improvements, parts and surfaces thereof broom clean and free of debris, and in good operating order, condition and state of repair, ordinary wear and tear excepted. "Ordinary wear and tear" shall not include any damage or deterioration that would have been prevented by good maintenance practice. Lessee shall repair any damage occasioned by the installation, maintenance or removal of Trade Fixtures, Lessee Owned Alterations and/or Utility Installations, furnishings, and equipment as well as the removal of any storage tank installed by or for Lessee, and the removal, replacement, or remediation of any soil, material or groundwater contaminated by Lessee. Trade Fixtures shall remain the property of Lessee and shall be removed by Lessee. The failure by Lessee to timely vacate the Premises pursuant to this Paragraph 7.4(c) without the express written consent of Lessor shall constitute a holdover under the provisions of Paragraph 26 below. PAGE 4 8. INSURANCE; INDEMNITY. 8.1 PAYMENT FOR INSURANCE. Lessee shall pay for all insurance required under Paragraph 8 except to the extent of the cost attributable to liability insurance carried by Lessor under Paragraph 8.2(b) in excess of $2,000,000 per occurrence. Premiums for policy periods commencing prior to or extending beyond the Lease term shall be prorated to correspond to the Lease term. Payment shall be made by Lessee to Lessor within ten (10) days following receipt of an invoice. 8.2 LIABILITY INSURANCE. (a) CARRIED BY LESSEE. Lessee shall obtain and keep in force a Commercial General Liability Policy of Insurance protecting Lessee and Lessor against claims for bodily injury, personal injury and property damage based upon or arising out of the ownership, use, occupancy or maintenance of the Premises and all areas appurtenant thereto. Such insurance shall be on an occurrence basis providing single limit coverage in an amount not less than $2,000,000 per occurrence with an "ADDITIONAL INSURED -- MANAGERS OR LESSORS OF PREMISES ENDORSEMENT" and contain the "AMENDMENT OF THE POLLUTION EXCLUSION ENDORSEMENT" for damage caused by heat, smoke or fumes from a hostile fire. The Policy shall not contain any intra-insured exclusions as between insured persons or organizations, but shall include coverage for liability assumed under this Lease as an "insured contract" for the performance of Lessee's indemnity obligations under this Lease. The limits of said insurance shall not, however, limit the liability of Lessee nor relieve Lessee of any obligation hereunder. All insurance carried by Lessee shall be primary to and not contributory with any similar insurance carried by Lessor, whose insurance shall be considered excess insurance only. (b) CARRIED BY LESSOR. Lessor shall maintain liability insurance as described in Paragraph 8.2(a), in addition to, and not in lieu of, the insurance required to be maintained by Lessee. Lessee shall not be named as an additional insured therein. 8.3 PROPERTY INSURANCE -- BUILDING, IMPROVEMENTS AND RENTAL VALUE. (a) BUILDING AND IMPROVEMENTS. The Insuring Party shall obtain and keep in force a policy or policies in the name of Lessor, with loss payable to Lessor, any ground lessor, and to any Lender(s) insuring loss or damage to the Premises. The amount of such insurance shall be equal to the full replacement cost of the Premises, as the same shall exist from time to time, or the amount required by any Lenders, but in no event more than the commercially reasonable and available insurable value thereof. If Lessor is the Insuring Party, however, Lessee Owned Alterations and Utility Installations, Trade Fixtures, and Lessee's personal property shall be insured by Lessee under Paragraph 8.4 rather than by Lessor. If the coverage is available and commercially appropriate, such policy or policies shall insure against all risks of direct physical loss or damage (except the perils of flood and/or earthquake unless required by a Lender), including coverage for debris removal and the enforcement of any Applicable Requirements requiring the upgrading, demolition, reconstruction or replacement of any portion of the Premises as the result of a covered loss. Said policy or policies shall also contain an agreed valuation provision in lieu of any coinsurance clause, waiver of subrogation, and inflation guard protection causing an increase in the annual property insurance coverage amount by a factor of not less than the adjusted U.S. Department of Labor Consumer Price Index for All Urban Consumers for the city nearest to where the Premises are located. If such insurance coverage has a deductible clause, the deductible amount shall not exceed $1,000 per occurrence, and Lessee shall be liable for such deductible amount in the event of an Insured Loss. (b) RENTAL VALUE. The Insuring Party shall obtain and keep in force a policy or policies in the name of Lessor, with loss payable to Lessor and any Lender, insuring the loss of the full Rent for one (1) year. Said insurance shall provide that in the event the Lease is terminated by reason of an insured loss, the period of indemnity for such coverage shall be extended beyond the date of the completion of repairs or replacement of the Premises, to provide for one full year's loss of Rent from the date of any such loss. Said insurance shall contain an agreed valuation provision in lieu of any coinsurance clause, and the amount of coverage shall be adjusted annually to reflect the projected Rent otherwise payable by Lessee, for the next twelve (12) month period. Lessee shall be liable for any deductible amount in the event of such loss. (c) ADJACENT PREMISES. If the Premises are part of a larger building, or of a group of buildings owned by Lessor which are adjacent to the Premises, the Lessee shall pay for any increase in the premiums for the property insurance of such building or buildings if said increase is caused by Lessee's acts, omissions, use or occupancy of the Premises. 8.4 LESSEE'S PROPERTY/BUSINESS INTERRUPTION INSURANCE. (a) PROPERTY DAMAGE. Lessee shall obtain and maintain insurance coverage on all of Lessee's personal property, Trade Fixtures, and Lessee Owned Alterations and Utility Installations. Such insurance shall be full replacement cost coverage with a deductible of not to exceed $1,000 per occurrence. The proceeds from any such insurance shall be used by Lessee for the replacement of personal property, Trade Fixtures and Lessee Owned Alterations and Utility Installations. Lessee shall provide Lessor with written evidence that such insurance is in force. (b) BUSINESS INTERRUPTION. Lessee shall obtain and maintain loss of income and extra expense insurance in amounts as will reimburse Lessee for direct or indirect loss of earnings attributable to all perils commonly insured against by prudent lessees in the business of Lessee or attributable to prevention of access to the Premises as a result of such perils. (c) NO REPRESENTATION OF ADEQUATE COVERAGE. Lessor makes no representation that the limits or forms of coverage of insurance specified herein are adequate to cover Lessee's property, business operations or obligations under this Lease. 8.5 INSURANCE POLICIES. Insurance required herein shall be by companies duly licensed or admitted to transact business in the state where the Premises are located, and maintaining during the policy term a "General Policyholders Rating" of at least B+, V, as set forth in the most current issue of "Best's Insurance Guide", or such other rating as may be required by a Lender. Lessee shall not do or permit to be done anything which invalidates the required insurance policies. Lessee shall, prior to the Start Date, deliver to Lessor certified copies of policies of such insurance or certificates evidencing the existence and amounts of the required insurance. No such policy shall be cancelable or subject to modification except after thirty (30) days prior written notice to Lessor. Lessee shall, at least thirty (30) days prior to the expiration of such policies, furnish Lessor with evidence of renewals or "insurance binders" evidencing renewal thereof, or Lessor may order such insurance and charge the cost thereof to Lessee, which amount shall be payable by Lessee to Lessor upon demand. Such policies shall be for a term of at least one year, or the length of the remaining term of this Lease, whichever is less. If either Party shall fail to procure and maintain the insurance required to be carried by it, the other Party may, but shall not be required to, procure and maintain the same. 8.6 WAIVER OF SUBROGATION. Without affecting any other rights or remedies, Lessee and Lessor each hereby release and relieve the other, and waive their entire right to recover damages against the other, for loss of or damage to its property arising out of or incident to the perils required to be insured against herein. The effect of such releases and waivers is not limited by the amount of insurance carried or required, or by any deductibles applicable hereto. The Parties agree to have their respective property damage insurance carriers waive any right to subrogation that such companies may have against Lessor or Lessee, as the case may be, so long as the insurance is not invalidated thereby. 8.7 INDEMNITY. Except for Lessor's gross negligence or willful misconduct, Lessee shall indemnify, protect, defend and hold harmless the Premises, Lessor and its agents, Lessor's master or ground lessor, partners and Lenders, from and against any and all claims, loss of rents and/or damages, liens, judgments, penalties, attorneys' and consultants' fees, expenses and/or liabilities arising out of, involving, or in connection with, the use and/or occupancy of the Premises by Lessee. If any action or proceeding is brought against Lessor by reason of any of the foregoing matters, Lessee shall upon notice defend the same at Lessee's expense by counsel reasonably satisfactory to Lessor and Lessor shall cooperate with Lessee in such defense. Lessor need not have first paid any such claim in order to be defended or indemnified. 8.8 EXEMPTION OF LESSOR FROM LIABILITY. Lessor shall not be liable for injury or damage to the person or goods, wares, merchandise or other property of Lessee, Lessee's employees, contractors, invitees, customers, or any other person in or about the Premises, whether such damage or injury is caused by or results from fire, steam, electricity, gas, water or rain, or from the breakage, leakage, obstruction or other defects of pipes, fire sprinklers, wires, appliances, plumbing, HVAC or lighting fixtures, or from any other cause, whether the said injury or damage results from conditions arising upon the Premises or upon other portions of the Building of which the Premises are a part, or from other sources or places. Lessor shall not be liable for any damages arising from any act or neglect of any other tenant of Lessor. Notwithstanding Lessor's negligence or breach of this Lease, Lessor shall under no circumstances be liable for injury to Lessee's business or for any loss of income or profit therefrom. 9. DAMAGE OR DESTRUCTION. 9.1 DEFINITIONS. (a) "PREMISES PARTIAL DAMAGE" shall mean damage or destruction to the improvements on the Premises, other than Lessee Owned Alterations and Utility Installations, which can reasonably be repaired in six (6) months or less from the date of the damage or destruction. PAGE 5 Lessor shall notify Lessee in writing within thirty (30) days from the date of the damage or destruction as to whether or not the damage is Partial or Total. (b) "PREMISES TOTAL DESTRUCTION" shall mean damage or destruction to the Premises, other than Lessee Owned Alterations and Utility Installations and Trade Fixtures, which cannot reasonably be repaired in six (6) months or less from the date of the damage or destruction. Lessor shall notify Lessee in writing within thirty (30) days from the date of the damage or destruction as to whether or not the damage is Partial or Total. (c) "INSURED LOSS" shall mean damage or destruction to improvements on the Premises, other than Lessee Owned Alterations and Utility Installations and Trade Fixtures, which was caused by an event required to be covered by the insurance described in Paragraph 8.3(a), irrespective of any deductible amounts or coverage limits involved. (d) "REPLACEMENT COST" shall mean the cost to repair or rebuild the improvements owned by Lessor at the time of the occurrence to their condition existing immediately prior thereto, including demolition, debris removal and upgrading required by the operation of Applicable Requirements, and without deduction for depreciation. (e) "HAZARDOUS SUBSTANCE CONDITION" shall mean the occurrence or discovery of a condition involving the presence of, or a contamination by, a Hazardous Substance as defined in Paragraph 6.2(a), in, on, or under the Premises. 9.2 PARTIAL DAMAGE -- INSURED LOSS. If a Premises Partial Damage that is an Insured Loss occurs, then Lessor shall, at Lessor's expense, repair such damage (but not Lessee's Trade Fixtures or Lessee Owned Alterations and Utility Installations) as soon as reasonably possible and this Lease shall continue in full force and effect; provided, however, that Lessee shall, at Lessor's election, make the repair of any damage or destruction the total cost to repair of which is $10,000 or less, and, in such event, Lessor shall make any applicable insurance proceeds available to Lessee on a reasonable basis for that purpose. Notwithstanding the foregoing, if the required insurance was not in force or the insurance proceeds are not sufficient to effect such repair, the Insuring Party shall promptly contribute the shortage in proceeds (except as to the deductible which is Lessee's responsibility) as and when required to complete said repairs. In the event, however, such shortage was due to the fact that, by reason of the unique nature of the improvements, full replacement cost insurance coverage was not commercially reasonable and available, Lessor shall have no obligation to pay for the shortage in insurance proceeds or to fully restore the unique aspects of the Premises unless Lessee provides Lessor with the funds to cover same, or adequate assurance thereof, within ten (10) days following receipt of written notice of such shortage and request therefor. If Lessor receives said funds or adequate assurance thereof within said ten (10) day period, the party responsible for making the repairs shall complete them as soon as reasonably possible and this Lease shall remain in full force and effect. If such funds or assurance are not received, Lessor may nevertheless elect by written notice to Lessee within ten (10) days thereafter to: (i) make such restoration and repair as is commercially reasonable with Lessor paying any shortage in proceeds, in which case this Lease shall remain in full force and effect, or have this Lease terminate thirty (30) days thereafter. Lessee shall not be entitled to reimbursement of any funds contributed by Lessee to repair any such damage or destruction. Premises Partial Damage due to flood or earthquake shall be subject to Paragraph 9.3, notwithstanding that there may be some insurance coverage, but the net proceeds of any such insurance shall be made available for the repairs if made by either Party. 9.3 PARTIAL DAMAGE -- UNINSURED LOSS. If a Premises Partial Damage that is not an Insured Loss occurs, unless caused by a negligent or willful act of Lessee (in which event Lessee shall make the repairs at Lessee's expense), Lessor may either: (i) repair such damage as soon as reasonably possible at Lessor's expense, in which event this Lease shall continue in full force and effect, or (ii) terminate this Lease by giving written notice to Lessee within thirty (30) days after receipt by Lessor of knowledge of the occurrence of such damage. Such termination shall be effective sixty (60) days following the date of such notice. In the event Lessor elects to terminate this Lease, Lessee shall have the right within ten (10) days after receipt of the termination notice to give written notice to Lessor of Lessee's commitment to pay for the repair of such damage without reimbursement from Lessor. Lessee shall provide Lessor with said funds or satisfactory assurance thereof within thirty (30) days after making such commitment. In such event this Lease shall continue in full force and effect, and Lessor shall proceed to make such repairs as soon as reasonably possible after the required funds are available. If Lessee does not make the required commitment, this Lease shall terminate as of the date specified in the termination notice. 9.4 TOTAL DESTRUCTION. Notwithstanding any other provision hereof, if a Premises Total Destruction occurs, this Lease shall terminate sixty (60) days following such Destruction. If the damage or destruction was caused by the gross negligence or willful misconduct of Lessee, Lessor shall have the right to recover Lessor's damages from Lessee, except as provided in Paragraph 8.6. 9.5 DAMAGE NEAR END OF TERM. If at any time during the last six (6) months of this Lease there is damage for which the cost to repair exceeds one (1) month's Base Rent, whether or not an Insured Loss, Lessor may terminate this Lease effective sixty (60) days following the date of occurrence of such damage by giving a written termination notice to Lessee within thirty (30) days after the date of occurrence of such damage. Notwithstanding the foregoing, if Lessee at that time has an exercisable option to extend this Lease or to purchase the Premises, then Lessee may preserve this Lease by, (a) exercising such option and (b) providing Lessor with any shortage in insurance proceeds (or adequate assurance thereof) needed to make the repairs on or before the earlier of (i) the date which is ten days after Lessee's receipt of Lessor's written notice purporting to terminate this Lease, or (ii) the day prior to the date upon which such option expires. If Lessee duly exercises such option during such period and provides Lessor with funds (or adequate assurance thereof) to cover any shortage in insurance proceeds, Lessor shall, at Lessor's commercially reasonable expense, repair such damage as soon as reasonably possible and this Lease shall continue in full force and effect. If Lessee fails to exercise such option and provide such funds or assurance during such period, then this Lease shall terminate on the date specified in the termination notice and Lessee's option shall be extinguished. 9.6 ABATEMENT OF RENT; LESSEE'S REMEDIES. (a) ABATEMENT. In the event of Premises Partial Damage or Premises Total Destruction or a Hazardous Substance Condition for which Lessee is not responsible under this Lease, the Rent payable by Lessee for the period required for the repair, remediation or restoration of such damage shall be abated in proportion to the degree to which Lessee's use of the Premises is impaired, but not to exceed the proceeds received from the Rental Value insurance. All other obligations of Lessee hereunder shall be performed by Lessee, and Lessor shall have no liability for any such damage, destruction, remediation, repair or restoration except as provided herein. (b) REMEDIES. If Lessor shall be obligated to repair or restore the Premises and does not commence, in a substantial and meaningful way, such repair or restoration within ninety (90) days after such obligation shall accrue, Lessee may, at any time prior to the commencement of such repair or restoration, give written notice to Lessor and to any Lenders of which Lessee has actual notice, of Lessee's election to terminate this Lease on a date not less than sixty (60) days following the giving of such notice. If Lessee gives such notice and such repair or restoration is not commenced within thirty (30) days thereafter, this Lease shall terminate as of the date specified in said notice. If the repair or restoration is commenced within said thirty (30) days, this Lease shall continue in full force and effect. "COMMENCE" shall mean either the unconditional authorization of the preparation of the required plans, or the beginning of the actual work on the Premises, whichever first occurs. 9.7 TERMINATION -- ADVANCE PAYMENTS. Upon termination of this Lease pursuant to Paragraph 6.2(g) or Paragraph 9, an equitable adjustment shall be made concerning advance Base Rent and any other advance payments made by Lessee to Lessor. Lessor shall, in addition, return to Lessee so much of Lessee's Security Deposit as has not been, or is not then required to be, used by Lessor. 9.8 WAIVE STATUTES. Lessor and Lessee agree that the terms of this Lease shall govern the effect of any damage to or destruction of the Premises with respect to the termination of this Lease and hereby waive the provisions of any present or future statute to the extent inconsistent herewith. 10. REAL PROPERTY TAXES. 10.1 DEFINITION OF "REAL PROPERTY TAXES." As used herein, the term "REAL PROPERTY TAXES" shall include any form of assessment; real estate, general, special, ordinary or extraordinary, or rental levy or tax (other than inheritance, personal income or estate taxes); improvement bond; and/or license fee imposed upon or levied against any legal or equitable interest of Lessor in the Premises, Lessor's right to other income therefrom, and/or Lessor's business of leasing, by any authority having the direct or indirect power to tax and where the PAGE 6 funds are generated with reference to the Building address and where the proceeds so generated are to be applied by the city, county or other local taxing authority of a jurisdiction within which the Premises are located. The term "REAL PROPERTY TAXES" shall also include any tax, fee, levy, assessment or charge, or any increase therein, imposed by reason of events occurring during the term of this Lease, including but not limited to, a change in the ownership of the Premises. 10.2 (a) PAYMENT OF TAXES. Lessee shall pay the Real Property Taxes applicable to the Premises during the term of this Lease. Subject to Paragraph 10.2(b), all such payments shall be made at least ten (10) days prior to any delinquency date. Lessee shall promptly furnish Lessor with satisfactory evidence that such taxes have been paid. If any such taxes shall cover any period of time prior to or after the expiration or termination of this Lease, Lessee's share of such taxes shall be prorated to cover only that portion of the tax bill applicable to the period that this Lease is in effect, and Lessor shall reimburse Lessee for any overpayment. If Lessee shall fail to pay any required Real Property Taxes, Lessor shall have the right to pay the same, and Lessee shall reimburse Lessor therefor upon demand. (b) ADVANCE PAYMENT. In the event Lessee incurs a late charge on any Rent payment, Lessor may, at Lessor's option, estimate the current Real Property Taxes, and require that such taxes be paid in advance to Lessor by Lessee, either: (i) in a lump sum amount equal to the installment due, at least twenty (20) days prior to the applicable delinquency date, or (ii) monthly in advance with the payment of the Base Rent. If Lessor elects to require payment monthly in advance, the monthly payment shall be an amount equal to the amount of the estimated installment of taxes divided by the number of months remaining before the month in which said installment becomes delinquent. When the actual amount of the applicable tax bill is known, the amount of such equal monthly advance payments shall be adjusted as required to provide the funds needed to pay the applicable taxes. If the amount collected by Lessor is insufficient to pay such Real Property Taxes when due, Lessee shall pay Lessor, upon demand, such additional sums as are necessary to pay such obligations. All monies paid to Lessor under this Paragraph may be intermingled with other monies of Lessor and shall not bear interest. In the event of a Breach by Lessee in the performance of its obligations under this Lease, then any balance of funds paid to Lessor under the provisions of this Paragraph may, at the option of Lessor, be treated as an additional Security Deposit. 10.3 JOINT ASSESSMENT. If the Premises are not separately assessed, Lessee's liability shall be an equitable proportion of the Real Property Taxes for all of the land and improvements included within the tax parcel assessed, such proportion to be conclusively determined by Lessor from the respective valuations assigned in the assessor's work sheets or such other information as may be reasonably available. 10.4 PERSONAL PROPERTY TAXES. Lessee shall pay, prior to delinquency, all taxes assessed against and levied upon Lessee Owned Alterations, Utility Installations, Trade Fixtures, furnishings, equipment and all personal property of Lessee. When possible, Lessee shall cause such property to be assessed and billed separately from the real property of Lessor. If any of Lessee's said personal property shall be assessed with Lessor's real property, Lessee shall pay Lessor the taxes attributable to Lessee's property within ten (10) days after receipt of a written statement. 11. UTILITIES. Lessee shall pay for all water, gas, heat, light, power, telephone, trash disposal and other utilities and services supplied to the Premises, together with any taxes thereon. If any such services are not separately metered to Lessee, Lessee shall pay a reasonable proportion, to be determined by Lessor, of all charges jointly metered. 12. ASSIGNMENT AND SUBLETTING. 12.1 LESSOR'S CONSENT REQUIRED. (a) Lessee shall not voluntarily or by operation of law assign, transfer, mortgage or encumber (collectively, "ASSIGN OR ASSIGNMENT") or sublet all or any part of Lessee's interest in this Lease or in the Premises without Lessor's prior written consent. (b) A change in the control of Lessee shall constitute an assignment requiring consent. See Paragraph 62. (d) An assignment or subletting without consent shall, at Lessor's option, be a Default curable after notice per Paragraph 13.1(c), or a noncurable Breach without the necessity of any notice and grace period. If Lessor elects to treat such unapproved assignment or subletting as a noncurable Breach, Lessor may either: (i) terminate this Lease, or (ii) upon thirty (30) days written notice, increase the monthly Base Rent to one hundred ten percent (110%) of the Base Rent then in effect. Further, in the event of such Breach and rental adjustment, (i) the purchase price of any option to purchase the Premises held by Lessee shall be subject to similar adjustment to one hundred ten percent (110%) of the price previously in effect, and (ii) all fixed and non-fixed rental adjustments scheduled during the remainder of the Lease term shall be increased to One Hundred Ten Percent (110%) of the scheduled adjusted rent. (e) Lessee's remedy for any breach of Paragraph 12.1 by Lessor shall be limited to compensatory damages and/or injunctive relief. 12.2 TERMS AND CONDITIONS APPLICABLE TO ASSIGNMENT AND SUBLETTING. (a) Regardless of Lessor's consent, any assignment or subletting shall not: (i) be effective without the express written assumption by such assignee or sublessee of the obligations of Lessee under this Lease; (ii) release Lessee of any obligations hereunder; or (iii) alter the primary liability of Lessee for the payment of Rent or for the performance of any other obligations to be performed by Lessee. (b) Lessor may accept Rent or performance of Lessee's obligations from any person other than Lessee pending approval or disapproval of an assignment. Neither a delay in the approval or disapproval of such assignment nor the acceptance of Rent or performance shall constitute a waiver or estoppel of Lessor's right to exercise its remedies for Lessee's Default or Breach. (c) Lessor's consent to any assignment or subletting shall not constitute a consent to any subsequent assignment or subletting. (d) In the event of any Default or Breach by Lessee, Lessor may proceed directly against Lessee, any Guarantors or anyone else responsible for the performance of Lessee's obligations under this Lease, including any assignee or sublessee, without first exhausting Lessor's remedies against any other person or entity responsible therefore to Lessor, or any security held by Lessor. (e) Each request for consent to an assignment or subletting shall be in writing, accompanied by information relevant to Lessor's determination as to the financial and operational responsibility and appropriateness of the proposed assignee or sublessee, including but not limited to the intended use and/or required modification of the Premises, if any. Lessee agrees to provide Lessor with such other or additional information and/or documentation as may be reasonably requested. (f) Any assignee of, or sublessee under, this Lease shall, by reason of accepting such assignment or entering into such sublease, be deemed to have assumed and agreed to conform and comply with each and every term, covenant, condition and obligation herein to be observed or performed by Lessee during the term of said assignment or sublease, other than such obligations as are contrary to or inconsistent with provisions of an assignment or sublease to which Lessor has specifically consented to in writing. 12.3 ADDITIONAL TERMS AND CONDITIONS APPLICABLE TO SUBLETTING. The following terms and conditions shall apply to any subletting by Lessee of all or any part of the Premises and shall be deemed included in all subleases under this Lease whether or not expressly incorporated therein: (a) Lessee hereby assigns and transfers to Lessor all of Lessee's interest in all Rent payable on any sublease, and Lessor may collect such Rent and apply same toward Lessee's obligations under this Lease; provided, however, that until a Breach shall occur in the performance of Lessee's obligations, Lessee may collect said Rent. Lessor shall not, by reason of the foregoing or any assignment of such sublease, nor by reason of the collection of Rent, be deemed liable to the sublessee for any failure of Lessee to perform and comply with any of Lessee's obligations to such sublessee. Lessee hereby irrevocably authorizes and directs any such sublessee, upon receipt of a written PAGE 7 notice from Lessor stating that a Breach exists in the performance of Lessee's obligations under this Lease, to pay to Lessor all Rent due and to become due under the sublease. Sublessee shall rely upon any such notice from Lessor and shall pay all Rents to Lessor without any obligation or right to inquire as to whether such Breach exists, notwithstanding any claim from Lessee to the contrary. (b) In the event of a Breach by Lessee, Lessor may, at its option, require sublessee to attorn to Lessor, in which event Lessor shall undertake the obligations of the sublessor under such sublease from the time of the exercise of said option to the expiration of such sublease; provided, however, Lessor shall not be liable for any prepaid rents or security deposit paid by such sublessee to such sublessor or for any prior Defaults or Breaches of such sublessor. (c) Any matter requiring the consent of the sublessor under a sublease shall also require the consent of Lessor. (d) No sublessee shall further assign or sublet all or any part of the Premises without Lessor's prior written consent. (e) Lessor shall deliver a copy of any notice of Default or Breach by Lessee to the sublessee, who shall have the right to cure the Default of Lessee within the grace period, if any, specified in such notice. The sublessee shall have a right of reimbursement and offset from and against Lessee for any such Defaults cured by the sublessee. 13. DEFAULT; BREACH; REMEDIES. 13.1 DEFAULT; BREACH. A "DEFAULT" is defined as a failure by the Lessee to comply with or perform any of the terms, covenants, conditions or rules under this Lease. A "BREACH" is defined as the occurrence of one or more of the following Defaults, and the failure of Lessee to cure such Default within any applicable grace period: (a) The abandonment of the Premises; or the vacating of the Premises without providing a commercially reasonable level of security, or where the coverage of the property insurance described in Paragraph 8.3 is jeopardized as a result thereof, or without providing reasonable assurances to minimize potential vandalism. (b) The failure of Lessee to make any payment of Rent or any Security Deposit required to be made by Lessee hereunder, whether to Lessor or to a third party, when due, to provide reasonable evidence of insurance or surety bond, or to fulfill any obligation under this Lease which endangers or threatens life or property, where such failure continues for a period of three (3) business days following written notice to Lessee. (c) The failure by Lessee to provide (i) reasonable written evidence of compliance with Applicable Requirements, (ii) the service contracts, (iii) the rescission of an unauthorized assignment or subletting, (iv) a Tenancy Statement, (v) a requested subordination, (vi) evidence concerning any guaranty and/or Guarantor, (vii) any document requested under Paragraph 42 (easements), or (viii) any other documentation or information which Lessor may reasonably require of Lessee under the terms of this Lease, where any such failure continues for a period of ten (10) days following written notice to Lessee. (d) A Default by Lessee as to the terms, covenants, conditions or provisions of this Lease, or of the rules adopted under Paragraph 40 hereof, other than those described in subparagraphs 13.1(a), (b) or (c), above, where such Default continues for a period of thirty (30) days after written notice; provided, however, that if the nature of Lessee's Default is such that more than thirty (30) days are reasonably required for its cure, then it shall not be deemed to be a Breach if Lessee commences such cure within said thirty (30) day period and thereafter diligently prosecutes such cure to completion. (e) The occurrence of any of the following events: (i) the making of any general arrangement or assignment for the benefit of creditors; (ii) becoming a "DEBTOR" as defined in 11 U.S.C. Section 101 or any successor statute thereto (unless, in the case of a petition filed against Lessee, the same is dismissed within sixty (60) days); (iii) the appointment of a trustee or receiver to take possession of substantially all of Lessee's assets located at the Premises or of Lessee's interest in this Lease, where possession is not restored to Lessee within thirty (30) days; or (iv) the attachment, execution or other judicial seizure of substantially all of Lessee's assets located at the Premises or of Lessee's interest in this Lease, where such seizure is not discharged within thirty (30) days; provided, however, in the event that any provision of this subparagraph 13.1 (e) is contrary to any applicable law, such provision shall be of no force or effect, and not affect the validity of the remaining provisions. (f) The discovery that any financial statement of Lessee or of any Guarantor given to Lessor was materially false. (g) If the performance of Lessee's obligations under this Lease is guaranteed: (i) the death of a Guarantor; (ii) the termination of a Guarantor's liability with respect to this Lease other than in accordance with the terms of such guaranty; (iii) a Guarantor's becoming insolvent or the subject of a bankruptcy filing; (iv) a Guarantor's refusal to honor the guaranty; or (v) a Guarantor's breach of its guaranty obligation on an anticipatory basis, and Lessee's failure, within sixty (60) days following written notice of any such event, to provide written alternative assurance or security, which, when coupled with the then existing resources of Lessee, equals or exceeds the combined financial resources of Lessee and the Guarantors that existed at the time of execution of this Lease. 13.2 REMEDIES. If Lessee fails to perform any of its affirmative duties or obligations, within ten (10) days after written notice (or in case of an emergency, without notice), Lessor may, at its option, perform such duty or obligation on Lessee's behalf, including but not limited to the obtaining of reasonably required bonds, insurance policies, or governmental licenses, permits or approvals. The costs and expenses of any such performance by Lessor shall be due and payable by Lessee upon receipt of invoice therefor. If any check given to Lessor by Lessee shall not be honored by the bank upon which it is drawn, Lessor, at its option, may require all future payments to be made by Lessee to be by cashier's check. In the event of a Breach, Lessor may, with or without further notice or demand, and without limiting Lessor in the exercise of any right or remedy which Lessor may have by reason of such Breach: (a) Terminate Lessee's right to possession of the Premises by any lawful means, in which case this Lease shall terminate and Lessee shall immediately surrender possession to Lessor. In such event Lessor shall be entitled to recover from Lessee: (i) the unpaid Rent which had been earned at the time of termination; (ii) the worth at the time of award of the amount by which the unpaid rent which would have been earned after termination until the time of award exceeds the amount of such rental loss that the Lessee proves could have been reasonably avoided; (iii) the worth at the time of award of the amount by which the unpaid rent for the balance of the term after the time of award exceeds the amount of such rental loss that the Lessee proves could be reasonably avoided; and (iv) any other amount necessary to compensate Lessor for all the detriment proximately caused by the Lessee's failure to perform its obligations under this Lease or which in the ordinary course of things would be likely to result therefrom, including but not limited to the cost of recovering possession of the Premises, expenses of reletting, including necessary renovation and alteration of the Premises, reasonable attorneys' fees, and that portion of any leasing commission paid by Lessor in connection with this Lease applicable to the unexpired term of this Lease. The worth at the time of award of the amount referred to in provision (iii) of the immediately preceding sentence shall be computed by discounting such amount at the discount rate of the Federal Reserve Bank of the District within which the Premises are located at the time of award plus one percent (1%). Efforts by Lessor to mitigate damages caused by Lessee's Breach of this Lease shall not waive Lessor's right to recover damages under Paragraph 12. If termination of this Lease is obtained through the provisional remedy of unlawful detainer, Lessor shall have the right to recover in such proceeding any unpaid Rent and damages as are recoverable therein, or Lessor may reserve the right to recover all or any part thereof in a separate suit. If a notice and grace period required under Paragraph 13.1 was not previously given, a notice to pay rent or quit, or to perform or quit given to Lessee under the unlawful detainer statute shall also constitute the notice required by Paragraph 13.1. In such case, the applicable grace period required by Paragraph 13.1 and the unlawful detainer statute shall run concurrently, and the failure of Lessee to cure the Default within the greater of the two such grace periods shall constitute both an unlawful detainer and a Breach of this Lease entitling Lessor to the remedies provided for in this Lease and/or by said statute. (b) Continue the Lease and Lessee's right to possession and recover the Rent as it becomes due, in which event Lessee may sublet or assign, subject only to reasonable limitations. Acts of maintenance, efforts to relet, and/or the appointment of a receiver to protect the Lessor's interests, shall not constitute a termination of the Lessee's right to possession. (c) Pursue any other remedy now or hereafter available under the laws or judicial decisions of the state wherein the Premises are located. The expiration or termination of this Lease and/or the termination of Lessee's right to possession shall not relieve Lessee from liability under any indemnity provisions of this Lease as to matters occurring or accruing during the term hereof or by reason of PAGE 8 Lessee's occupancy of the Premises. 13.3 INDUCEMENT RECAPTURE. Any agreement for free or abated rent or other charges, or for the giving or paying by Lessor to or for Lessee of any cash or other bonus, inducement or consideration for Lessee's entering into this Lease, all of which concessions are hereinafter referred to as "INDUCEMENT PROVISIONS," shall be deemed conditioned upon Lessee's full and faithful performance of all of the terms, covenants and conditions of this Lease. Upon Breach of this Lease by Lessee, any such Inducement Provision shall automatically be deemed deleted from this Lease and of no further force or effect, and any rent, other charge, bonus, inducement or consideration theretofore abated, given or paid by Lessor under such an Inducement Provision shall be immediately due and payable by Lessee to Lessor, notwithstanding any subsequent cure of said Breach by Lessee. The acceptance by Lessor of Rent or the cure of the Breach which initiated the operation of this paragraph shall not be deemed a waiver by Lessor of the provisions of this paragraph unless specifically so stated in writing by Lessor at the time of such acceptance. 13.4 LATE CHARGES. Lessee hereby acknowledges that late payment by Lessee of Rent will cause Lessor to incur costs not contemplated by this Lease, the exact amount of which will be extremely difficult to ascertain. Such costs include, but are not limited to, processing and accounting charges, and late charges which may be imposed upon Lessor by any Lender. Accordingly, if any Rent shall not be received by Lessor within five (5) days after such amount shall be due, then, without any requirement for notice to Lessee, Lessee shall pay to Lessor a one-time late charge equal to ten percent (10%) of each such overdue amount. The Parties hereby agree that such late charge represents a fair and reasonable estimate of the costs Lessor will incur by reason of such late payment. Acceptance of such late charge by Lessor shall in no event constitute a waiver of Lessee's Default or Breach with respect to such overdue amount, nor prevent the exercise of any of the other rights and remedies granted hereunder. In the event that a late charge is payable hereunder, whether or not collected, for three (3) consecutive installments of Base Rent, then notwithstanding any provision of this Lease to the contrary, Base Rent shall, at Lessor's option, become due and payable quarterly in advance. 13.5 INTEREST. Any monetary payment due Lessor hereunder, other than late charges, not received by Lessor, when due as to scheduled payments (such as Base Rent) or within thirty (30) days following the date on which it was due for non-scheduled payment, shall bear interest from the date when due, as to scheduled payments, or the thirty-first (31st) day after it was due as to non-scheduled payments. The interest ("Interest") charged shall be equal to the prime rate reported in the Wall Street Journal as published closest prior to the date when due plus four percent (4%), but shall not exceed the maximum rate allowed by law. Interest is payable in addition to the potential late charge provided for in Paragraph 13.4. 13.6 BREACH BY LESSOR. (a) NOTICE OF BREACH. Lessor shall not be deemed in breach of this Lease unless Lessor fails within a reasonable time to perform an obligation required to be performed by Lessor. For purposes of this Paragraph, a reasonable time shall in no event be less than thirty (30) days after receipt by Lessor, and any Lender whose name and address shall have been furnished Lessee in writing for such purpose, of written notice specifying wherein such obligation of Lessor has not been performed; provided, however, that if the nature of Lessor's obligation is such that more than thirty (30) days are reasonably required for its performance, then Lessor shall not be in breach if performance is commenced within such thirty (30) day period and thereafter diligently pursued to completion. (b) PERFORMANCE BY LESSEE ON BEHALF OF LESSOR. In the event that neither Lessor nor Lender cures said breach within thirty (30) days after receipt of said notice, or if having commenced said cure they do not diligently pursue it to completion, then Lessee may elect to cure said breach at Lessee's expense and offset from Rent an amount equal to the greater of one month's Base Rent or the Security Deposit, and to pay an excess of such expense under protest, reserving Lessee's right to reimbursement from Lessor. Lessee shall document the cost of said cure and supply said documentation to Lessor. 14. CONDEMNATION. If the Premises or any portion thereof are taken under the power of eminent domain or sold under the threat of the exercise of said power (collectively "CONDEMNATION"), this Lease shall terminate as to the part taken as of the date the condemning authority takes title or possession, whichever first occurs. If more than ten percent (10%) of any building portion of the Premises, or more than twenty-five percent (25%) of the land area portion of the Premises not occupied by any building, is taken by Condemnation, Lessee may, at Lessee's option, to be exercised in writing within ten (10) days after Lessor shall have given Lessee written notice of such taking (or in the absence of such notice, within ten (10) days after the condemning authority shall have taken possession) terminate this Lease as of the date the condemning authority takes such possession. If Lessee does not terminate this Lease in accordance with the foregoing, this Lease shall remain in full force and effect as to the portion of the Premises remaining, except that the Base Rent shall be reduced in proportion to the reduction in utility of the Premises caused by such Condemnation. Condemnation awards and/or payments shall be the property of Lessor, whether such award shall be made as compensation for diminution in value of the leasehold, the value of the part taken, or for severance damages; provided, however, that Lessee shall be entitled to any compensation for Lessee's relocation expenses, loss of business goodwill and/or Trade Fixtures, without regard to whether or not this Lease is terminated pursuant to the provisions of this Paragraph. All Alterations and Utility Installations made to the Premises by Lessee, for purposes of Condemnation only, shall be considered the property of the Lessee and Lessee shall be entitled to any and all compensation which is payable therefor. In the event that this Lease is not terminated by reason of the Condemnation, Lessor shall repair any damage to the Premises caused by such Condemnation. 15. BROKERS' FEE. 16. ESTOPPEL CERTIFICATES. (a) Each Party (as "RESPONDING PARTY") shall within ten (10) days after written notice from the other Party (the "REQUESTING PARTY") execute, acknowledge and deliver to the Requesting Party a statement in writing in form similar to the then most current "ESTOPPEL CERTIFICATE" form published by the American Industrial Real Estate Association, plus such additional information, confirmation and/or statements as may be reasonably requested by the Requesting Party. (b) If the Responding Party shall fail to execute or deliver the Estoppel Certificate within such ten day period, the Requesting Party may execute an Estoppel Certificate stating that: (i) the Lease is in full force and effect without modification except as may be represented by the Requesting Party, (ii) there are no uncured defaults in the Requesting Party's performance, and (iii) if Lessor is the Requesting Party, not more than one month's Rent has been paid in advance. Prospective purchasers and encumbrancers may rely upon the Requesting Party's Estoppel Certificate, and the Responding Party shall be estopped from denying the truth of the facts contained in said Certificate. PAGE 9 (c) If Lessor desires to finance, refinance, or sell the Premises, or any part thereof, Lessee and all Guarantors shall deliver to any potential lender or purchaser designated by Lessor such financial statements as may be reasonably required by such lender or purchaser, including but not limited to Lessee's financial statements for the past three (3) years. All such financial statements shall be received by Lessor and such lender or purchaser in confidence and shall be used only for the purposes herein set forth. 17. DEFINITION OF LESSOR. The term "LESSOR" as used herein shall mean the owner or owners at the time in question of the fee title to the Premises, or, if this is a sublease, of the Lessee's interest in the prior lease. In the event of a transfer of Lessor's title or interest in the Premises or this Lease, Lessor shall deliver to the transferee or assignee (in cash or by credit) any unused Security Deposit held by Lessor. Except as provided in Paragraph 15, upon such transfer or assignment and delivery of the Security Deposit, as aforesaid, the prior Lessor shall be relieved of all liability with respect to the obligations and/or covenants under this Lease thereafter to be performed by the Lessor. Subject to the foregoing, the obligations and/or covenants in this Lease to be performed by the Lessor shall be binding only upon the Lessor as hereinabove defined. Notwithstanding the above, and subject to the provisions of Paragraph 20 below, the original Lessor under this Lease, and all subsequent holders of the Lessor's interest in this Lease shall remain liable and responsible with regard to the potential duties and liabilities of Lessor pertaining to Hazardous Substances as outlined in Paragraph 6 above. 18. SEVERABILITY. The invalidity of any provision of this Lease, as determined by a court of competent jurisdiction, shall in no way affect the validity of any other provision hereof. 19. DAYS. Unless otherwise specifically indicated to the contrary, the word "days" as used in this Lease shall mean and refer to calendar days. 20. LIMITATION ON LIABILITY. Subject to the provisions of Paragraph 17 above, the obligations of Lessor under this Lease shall not constitute personal obligations of Lessor, the individual partners of Lessor or its or their individual partners, directors, officers or shareholders, and Lessee shall look to the Premises, and to no other assets of Lessor, for the satisfaction of any liability of Lessor with respect to this Lease, and shall not seek recourse against the individual partners of Lessor, or its or their individual partners, directors, officers or shareholders, or any of their personal assets for such satisfaction. 21. TIME OF ESSENCE. Time is of the essence with respect to the performance of all obligations to be performed or observed by the Parties under this Lease. 22. NO PRIOR OR OTHER AGREEMENTS; BROKER DISCLAIMER. This Lease contains all agreements between the Parties with respect to any matter mentioned herein, and no other prior or contemporaneous agreement or understanding shall be effective. Lessor and Lessee each represents and warrants to the Brokers that it has made, and is relying solely upon, its own investigation as to the nature, quality, character and financial responsibility of the other Party to this Lease and as to the nature, quality and character of the Premises. Brokers have no responsibility with respect thereto or with respect to any default or breach hereof by either Party. The liability (including court costs and Attorneys' fees), of any Broker with respect to negotiation, execution, delivery or performance by either Lessor or Lessee under this Lease or any amendment or modification hereto shall be limited to an amount up to the fee received by such Broker pursuant to this Lease; provided, however, that the foregoing limitation on each Broker's liability shall not be applicable to any gross negligence or willful misconduct of such Broker. 23. NOTICES. 23.1 NOTICE REQUIREMENTS. All notices required or permitted by this Lease shall be in writing and may be delivered in person (by hand or by courier) or may be sent by regular, certified or registered mail or U.S. Postal Service Express Mail, with postage prepaid, or by facsimile transmission, and shall be deemed sufficiently given if served in a manner specified in this Paragraph 23. The addresses noted adjacent to a Party's signature on this Lease shall be that Party's address for delivery or mailing of notices. Either Party may by written notice to the other specify a different address for notice, except that upon Lessee's taking possession of the Premises, the Premises shall constitute Lessee's address for notice. A copy of all notices to Lessor shall be concurrently transmitted to such party or parties at such addresses as Lessor may from time to time hereafter designate in writing. 23.2 DATE OF NOTICE. Any notice sent by registered or certified mail, return receipt requested, shall be deemed given on the date of delivery shown on the receipt card, or if no delivery date is shown, the postmark thereon. If sent by regular mail the notice shall be deemed given forty-eight (48) hours after the same is addressed as required herein and mailed with postage prepaid. Notices delivered by United States Express Mail or overnight courier that guarantee next day delivery shall be deemed given twenty-four (24) hours after delivery of the same to the Postal Service or courier. Notices transmitted by facsimile transmission or similar means shall be deemed delivered upon telephone confirmation of receipt, provided a copy is also delivered via delivery or mail. If notice is received on a Saturday, Sunday or legal holiday, it shall be deemed received on the next business day. 24. WAIVERS. No waiver by Lessor of the Default or Breach of any term, covenant or condition hereof by Lessee, shall be deemed a waiver of any other term, covenant or condition hereof, or of any subsequent Default or Breach by Lessee of the same or of any other term, covenant or condition hereof. Lessor's consent to, or approval of, any act shall not be deemed to render unnecessary the obtaining of Lessor's consent to, or approval of, any subsequent or similar act by Lessee, or be construed as the basis of an estoppel to enforce the provision or provisions of this Lease requiring such consent. The acceptance of Rent by Lessor shall not be a waiver of any Default or Breach by Lessee. Any payment by Lessee may be accepted by Lessor on account of monies or damages due Lessor, notwithstanding any qualifying statements or conditions made by Lessee in connection therewith, which such statements and/or conditions shall be of no force or effect whatsoever unless specifically agreed to in writing by Lessor at or before the time of deposit of such payment. 25. RECORDING. Either Lessor or Lessee shall, upon request of the other, execute, acknowledge and deliver to the other a short form memorandum of this Lease for recording purposes. The Party requesting recordation shall be responsible for payment of any fees applicable thereto. 26. NO RIGHT TO HOLDOVER. Lessee has no right to retain possession of the Premises or any part thereof beyond the expiration or termination of this Lease. In the event that Lessee holds over, then the Base Rent shall be increased to one hundred fifty percent (150%) of the Base Rent applicable during the month immediately preceding the expiration or termination. Nothing contained herein shall be construed as consent by Lessor to any holding over by Lessee. 27. CUMULATIVE REMEDIES. No remedy or election hereunder shall be deemed exclusive but shall, wherever possible, be cumulative with all other remedies at law or in equity. 28. COVENANTS AND CONDITIONS; CONSTRUCTION OF AGREEMENT. All provisions of this Lease to be observed or performed by Lessee are both covenants and conditions. In construing this Lease, all headings and titles are for the convenience of the parties only and shall not be considered a part of this Lease. Whenever required by the context, the singular shall include the plural and vice versa. This Lease shall not be construed as if prepared by one of the Parties, but rather according to its fair meaning as a whole, as if both parties had prepared it. 29. BINDING EFFECT; CHOICE OF LAW. This Lease shall be binding upon the parties, their personal representatives, successors and assigns and be governed by the laws of the State in which the Premises are located. Any litigation between the Parties hereto concerning this Lease shall be initiated in the county in which the Premises are located. 30. SUBORDINATION; ATTORNMENT; NON-DISTURBANCE. 30.1 SUBORDINATION. This Lease and any Option granted hereby shall be subject and subordinate to any ground lease, mortgage, deed of trust, or other hypothecation or security device (collectively, "SECURITY DEVICE"), now or hereafter placed upon the Premises, to any and all advances made on the security thereof, and to all renewals, modifications, and extensions thereof. Lessee agrees that the holders of any such Security Devices (in this Lease together referred to as "Lessor's Lender") shall have no liability or obligation to perform any of the obligations of Lessor under this Lease. Any Lender may elect to have this Lease and/or any Option granted hereby superior to the lien of its Security Device by giving written notice thereof to Lessee, whereupon this Lease and such Options shall be deemed prior to such Security Device, notwithstanding the relative dates of the documentation or recordation thereof. 30.2 ATTORNMENT. Subject to the non-disturbance provisions of Paragraph 30.3, Lessee agrees to attorn to a Lender or any other party who acquires ownership of the Premises by reason of a foreclosure of a Security Device, and that in the event of such foreclosure, PAGE 10 such new owner shall not: (i) be liable for any act or omission of any prior lessor or with respect to events occurring prior to acquisition of ownership; (ii) be subject to any offsets or defenses which Lessee might have against any prior lessor; or (iii) be bound by prepayment of more than one (1) month's rent. 30.3 NON-DISTURBANCE. With respect to Security Devices entered into by Lessor after the execution of this Lease, Lessee's subordination of this Lease shall be subject to receiving a commercially reasonable non-disturbance agreement (a "NON-DISTURBANCE AGREEMENT") from the Lender which Non-Disturbance Agreement provides that Lessee's possession of the Premises, and this Lease, including any options to extend the term hereof, will not be disturbed so long as Lessee is not in Breach hereof and attorns to the record owner of the Premises. Further, within sixty (60) days after the execution of this Lease, Lessor shall use its commercially reasonable efforts to obtain a Non-Disturbance Agreement from the holder of any pre-existing Security Device which is secured by the Premises. In the event that Lessor is unable to provide the Non-Disturbance Agreement within said sixty (60) days, then Lessee may, at Lessee's option, directly contact Lessor's lender and attempt to negotiate for the execution and delivery of a Non-Disturbance Agreement. 30.4 SELF-EXECUTING. The agreements contained in this Paragraph 30 shall be effective without the execution of any further documents; provided, however, that, upon written request from Lessor or a Lender in connection with a sale, financing or refinancing of the Premises, Lessee and Lessor shall execute such further writings as may be reasonably required to separately document any subordination, attornment and/or Non-Disturbance Agreement provided for herein. 31. ATTORNEYS' FEES. If any Party or Broker brings an action or proceeding involving the Premises to enforce the terms hereof or to declare rights hereunder, the Prevailing Party (as hereafter defined) in any such proceeding, action, or appeal thereon, shall be entitled to reasonable attorneys' fees. Such fees may be awarded in the same suit or recovered in a separate suit, whether or not such action or proceeding is pursued to decision or judgment. The term, "PREVAILING PARTY" shall include, without limitation, a Party or Broker who substantially obtains or defeats the relief sought, as the case may be, whether by compromise, settlement, judgment, or the abandonment by the other Party or Broker of its claim or defense. The attorneys' fees award shall not be computed in accordance with any court fee schedule, but shall be such as to fully reimburse all attorneys' fees reasonably incurred. In addition, Lessor shall be entitled to attorneys' fees, costs and expenses incurred in the preparation and service of notices of Default and consultations in connection therewith, whether or not a legal action is subsequently commenced in connection with such Default or resulting Breach. 32. LESSOR'S ACCESS; SHOWING PREMISES; REPAIRS. Lessor and Lessor's agents shall have the right to enter the Premises at any time, in the case of an emergency, and otherwise at reasonable times for the purpose of showing the same to prospective purchasers, lenders, or lessees, and making such alterations, repairs, improvements or additions to the Premises as Lessor may deem necessary. All such activities shall be without abatement of rent or liability to Lessee. Lessor may at any time place on the Premises any ordinary "FOR SALE" signs and Lessor may during the last six (6) months of the term hereof place on the Premises any ordinary "FOR LEASE" signs. Lessee may at any time place on or about the Premises any ordinary "FOR SUBLEASE" sign. 33. AUCTIONS. Lessee shall not conduct, nor permit to be conducted, any auction upon the Premises without Lessor's prior written consent. Lessor shall not be obligated to exercise any standard of reasonableness in determining whether to permit an auction. 34. SIGNS. Except for ordinary "For Sublease" signs, Lessee shall not place any sign upon the Premises without Lessor's prior written consent. All signs must comply with all Applicable Requirements. 35. TERMINATION; MERGER. Unless specifically stated otherwise in writing by Lessor, the voluntary or other surrender of this Lease by Lessee, the mutual termination or cancellation hereof, or a termination hereof by Lessor for Breach by Lessee, shall automatically terminate any sublease or lesser estate in the Premises; provided, however, that Lessor may elect to continue any one or all existing subtenancies. Lessor's failure within ten (10) days following any such event to elect to the contrary by written notice to the holder of any such lesser interest, shall constitute Lessor's election to have such event constitute the termination of such interest. 36. CONSENTS. Except as otherwise provided herein, wherever in this Lease the consent of a Party is required to an act by or for the other Party, such consent shall not be unreasonably withheld or delayed. Lessor's actual reasonable costs and expenses (including, but not limited to, architects', attorneys', engineers' and other consultants' fees) incurred in the consideration of, or response to, a request by Lessee for any Lessor consent, including, but not limited to, consents to an assignment, a subletting or the presence or use of a Hazardous Substance, shall be paid by Lessee upon receipt of an invoice and supporting documentation therefor. Lessor's consent to any act, assignment or subletting shall not constitute an acknowledgment that no Default or Breach by Lessee of this Lease exists, nor shall such consent be deemed a waiver of any then existing Default or Breach, except as may be otherwise specifically stated in writing by Lessor at the time of such consent. The failure to specify herein any particular condition to Lessor's consent shall not preclude the imposition by Lessor at the time of consent of such further or other conditions as are then reasonable with reference to the particular matter for which consent is being given. In the event that either Party disagrees with any determination made by the other hereunder and reasonably requests the reasons for such determination, the determining party shall furnish its reasons in writing and in reasonable detail within ten (10) business days following such request. 37. GUARANTOR. 37.1 EXECUTION. The Guarantors, if any, shall each execute a guaranty in the form most recently published by the American Industrial Real Estate Association, and each such Guarantor shall have the same obligations as Lessee under this Lease. 37.2 DEFAULT. It shall constitute a Default of the Lessee if any Guarantor fails or refuses, upon request to provide: (a) evidence of the execution of the guaranty, including the authority of the party signing on Guarantor's behalf to obligate Guarantor, and in the case of a corporate Guarantor, a certified copy of a resolution of its board of directors authorizing the making of such guaranty, (b) current financial statements, (c) a Tenancy Statement, or (d) written confirmation that the guaranty is still in effect. 38. QUIET POSSESSION. Subject to payment by Lessee of the Rent and performance of all of the covenants, conditions and provisions on Lessee's part to be observed and performed under this Lease, Lessee shall have quiet possession and quiet enjoyment of the Premises during the term hereof. 39. OPTIONS. 39.1 DEFINITION. "OPTION" shall mean: (a) the right to extend the term of or renew this Lease or to extend or renew any lease that Lessee has on other property of Lessor; (b) the right of first refusal or first offer to lease either the Premises or other property of Lessor; (c) the right to purchase or the right of first refusal to purchase the Premises or other property of Lessor. 39.2 OPTIONS PERSONAL TO ORIGINAL LESSEE. Each Option granted to Lessee in this Lease is personal to the original Lessee, and cannot be assigned or exercised by anyone other than said original Lessee and only while the original Lessee is in full possession of the Premises and, if requested by Lessor, with Lessee certifying that Lessee has no intention of thereafter assigning or subletting. 39.3 MULTIPLE OPTIONS. In the event that Lessee has any multiple Options to extend or renew this Lease, a later Option cannot be exercised unless the prior Options have been validly exercised. 39.4 EFFECT OF DEFAULT ON OPTIONS. (a) Lessee shall have no right to exercise an Option: (i) during the period commencing with the giving of any notice of Default and continuing until said Default is cured, (ii) during the period of time any Rent is unpaid (without regard to whether notice thereof is given Lessee), (iii) during the time Lessee is in Breach of this Lease, or (iv) in the event that Lessee has been given three (3) or more notices of separate Default, whether or not the Defaults are cured, during the twelve (12) month period immediately preceding the exercise of the Option. (b) The period of time within which an Option may be exercised shall not be extended or enlarged by reason of Lessee's inability to exercise an Option because of the provisions of Paragraph 39.4(a). (c) An Option shall terminate and be of no further force or effect, notwithstanding Lessee's due and timely exercise of the Option, if, after such exercise and prior to the commencement of the extended term, (i) Lessee fails to pay Rent for a period of thirty (30) days after such Rent becomes due (without any necessity of Lessor to give notice thereof), (ii) Lessor gives to Lessee three (3) or more notices of separate Default during any twelve (12) month period, whether or not the Defaults are cured, or (iii) if Lessee commits a Breach of this Lease. 40. MULTIPLE BUILDINGS. If the Premises are a part of a group of buildings controlled by Lessor, Lessee agrees that it will observe all reasonable rules and regulations which Lessor may make from time to time for the management, safety, and care of said properties, including PAGE 11 the care and cleanliness of the grounds and including the parking, loading and unloading of vehicles, and that Lessee will pay its fair share of common expenses incurred in connection therewith. 41. SECURITY MEASURES. Lessee hereby acknowledges that the rental payable to Lessor hereunder does not include the cost of guard service or other security measures, and that Lessor shall have no obligation whatsoever to provide same. Lessee assumes all responsibility for the protection of the Premises, Lessee, its agents and invitees and their property from the acts of third parties. 42. RESERVATIONS. Lessor reserves to itself the right, from time to time, to grant, without the consent or joinder of Lessee, such easements, rights and dedications that Lessor deems necessary, and to cause the recordation of parcel maps and restrictions, so long as such easements, rights, dedications, maps and restrictions do not unreasonably interfere with the use of the Premises by Lessee. Lessee agrees to sign any documents reasonably requested by Lessor to effectuate any such easement rights, dedication, map or restrictions. 43. PERFORMANCE UNDER PROTEST. If at any time a dispute shall arise as to any amount or sum of money to be paid by one Party to the other under the provisions hereof, the Party against whom the obligation to pay the money is asserted shall have the right to make payment "under protest" and such payment shall not be regarded as a voluntary payment and there shall survive the right on the part of said Party to institute suit for recovery of such sum. If it shall be adjudged that there was no legal obligation on the part of said Party to pay such sum or any part thereof, said Party shall be entitled to recover such sum or so much thereof as it was not legally required to pay. 44. AUTHORITY. If either Party hereto is a corporation, trust, limited liability company, partnership, or similar entity, each individual executing this Lease on behalf of such entity represents and warrants that he or she is duly authorized to execute and deliver this Lease on its behalf. Each Party shall, within thirty (30) days after request, deliver to the other Party satisfactory evidence of such authority. 45. CONFLICT. Any conflict between the printed provisions of this Lease and the typewritten or handwritten provisions shall be controlled by the typewritten or handwritten provisions. 46. OFFER. Preparation of this Lease by either Party or their agent and submission of same to the other Party shall not be deemed an offer to lease to the other Party. This Lease is not intended to be binding until executed and delivered by all Parties hereto. 47. AMENDMENTS. This Lease may be modified only in writing, signed by the Parties in interest at the time of the modification. As long as they do not materially change Lessee's obligations hereunder, Lessee agrees to make such reasonable non-monetary modifications to this Lease as may be reasonably required by a Lender in connection with the obtaining of normal financing or refinancing of the Premises. 48. MULTIPLE PARTIES. If more than one person or entity is named herein as either Lessor or Lessee, such multiple Parties shall have joint and several responsibility to comply with the terms of this Lease. 49. MEDIATION AND ARBITRATION OF DISPUTES. An Addendum requiring the Mediation and/or the Arbitration of all disputes between the Parties and/or Brokers arising out of this Lease [ ] IS [X] IS NOT attached to this Lease. LESSOR AND LESSEE HAVE CAREFULLY READ AND REVIEWED THIS LEASE AND EACH TERM AND PROVISION CONTAINED HEREIN, AND BY THE EXECUTION OF THIS LEASE SHOW THEIR INFORMED AND VOLUNTARY CONSENT THERETO. THE PARTIES HEREBY AGREE THAT, AT THE TIME THIS LEASE IS EXECUTED, THE TERMS OF THIS LEASE ARE COMMERCIALLY REASONABLE AND EFFECTUATE THE INTENT AND PURPOSE OF LESSOR AND LESSEE WITH RESPECT TO THE PREMISES. ________________________________________________________________________________ ATTENTION: NO REPRESENTATION OR RECOMMENDATION IS MADE BY THE AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION OR BY ANY BROKER AS TO THE LEGAL SUFFICIENCY, LEGAL EFFECT, OR TAX CONSEQUENCES OF THIS LEASE OR THE TRANSACTION TO WHICH IT RELATES. THE PARTIES ARE URGED TO: 1. SEEK ADVICE OF COUNSEL AS TO THE LEGAL AND TAX CONSEQUENCES OF THIS LEASE. 2. RETAIN APPROPRIATE CONSULTANTS TO REVIEW AND INVESTIGATE THE CONDITION OF THE PREMISES. SAID INVESTIGATION SHOULD INCLUDE BUT NOT BE LIMITED TO: THE POSSIBLE PRESENCE OF HAZARDOUS SUBSTANCES, THE ZONING OF THE PREMISES, THE STRUCTURAL INTEGRITY, THE CONDITION OF THE ROOF AND OPERATING SYSTEMS, AND THE SUITABILITY OF THE PREMISES FOR LESSEE'S INTENDED USE. WARNING: IF THE PREMISES IS LOCATED IN A STATE OTHER THAN CALIFORNIA, CERTAIN PROVISIONS OF THE LEASE MAY NEED TO BE REVISED TO COMPLY WITH THE LAWS OF THE STATE IN WHICH THE PREMISES IS LOCATED. ________________________________________________________________________________ The parties hereto have executed this Lease at the place and on the dates specified above their respective signatures. Executed at: BEVERLY HILLS, CALIFORNIA Executed at: CHATSWORTH, CALIFORNIA -------------------------- --------------------------- on: December 27, 2001 on: December , 2001 ----------------------------------- ------------------------------------ By LESSOR: By LESSEE: INTERNATIONAL REMOTE NORTHPARK INDUSTRIAL IMAGING SYSTEMS, INC. - -------------------------------------- --------------------------------------- - -------------------------------------- --------------------------------------- By: /s/ Gary Siegel By: /s/ J.Y. Caloz ----------------------------------- ------------------------------------ Name Printed: GARY SIEGEL Name Printed: J.Y. CALOZ ------------------------- -------------------------- Title: PARTNER Title: CFO -------------------------------- --------------------------------- By: /s/ Thomas L. Horner By: /s/ Achille M. Bigliardi ----------------------------------- ------------------------------------ Name Printed: THOMAS L. HORNER Name Printed: ACHILLE M. BIGLIARDI ------------------------- -------------------------- West America Construction Corp. Title: Vice-President Title: President, Iris Diagnostics -------------------------------- --------------------------------- Address: 8929 Wilshire Blvd., #400 Address: 9162 Eton Avenue ------------------------------ ------------------------------- Beverly Hills, CA 90211 Chatsworth, CA 91311 ------------------------------ ------------------------------- Telephone: (310) 652-8288 Telephone: (818) 709-1244 ---------------------------- ----------------------------- Facsimile: (310) 652-4972 Facsimile: (818) ---------------------------- ----------------------------- Federal ID No. 95-3146812 Federal ID No. ------------------------ ------------------------- NOTE: These forms are often modified to meet changing requirements of law and industry needs. Always write or call to make sure you are utilizing the most current form: AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION, 700 So. Flower Street, Suite 600, Los Angeles, California 90017. (213) 687-8777. Fax No. (213) 687-8616 PAGE 12 STANDARD ADDENDUM TO LEASE - NET Lease dated: November 28, 2001 ---------------------------------------------------------- Lessor: NORTHPARK INDUSTRIAL ---------------------------------------------------------------- Lessee: INTERNATIONAL REMOTE IMAGING SYSTEMS. INC. ---------------------------------------------------------------- IN THE EVENT OF ANY CONFLICT BETWEEN THE PRINTED PROVISIONS OF THE LEASE AND THIS ADDENDUM, THE PROVISIONS OF THIS ADDENDUM SHALL CONTROL 50) BASE RENT (PARAGRAPH 1.5, CONTINUED): In addition to the base rent that Lessee is obligated to pay under Paragraphs 1.5 and 4, Lessee will also be obligated to pay Lessor the sum of $1,275.00 per month as Lessor's monthly estimate for Lessee's share of Real Property Taxes, insurance, landscaping and irrigation system maintenance. The current average monthly costs for Real Property Taxes, insurance, landscaping and irrigation for the subject Premises are $925.00, $150.00, and $200.00, respectively. Every year of this Lease, during the month of July, and during the month immediately following the termination of this Lease, Lessor will prepare an accounting of all actual Real Property Taxes, insurance, landscaping and irrigation system maintenance for the just concluded twelve-month period. Any differences between the actual expenses and Lessor's estimates shall be either immediately refunded to Lessee or immediately due by the Lessee, whichever the case may be. Lessee or its authorized agent shall have the right, upon five (5) days prior written notice to Lessor, to inspect, at Lessor's main accounting offices, Lessor's unaudited books and records regarding these expenses. The monthly base rent shall be increased annually and paid in accordance with the following rent schedule: The rent payable for the period of January 1, 2002 through December 31, 2002 shall be $11,999.00 per month. The rent payable for the period of January 1, 2003 through December 31, 2003 shall be $12,359.00 per month. The rent payable for the period of January 1, 2004 through December 31, 2004 shall be $12,730.00 per month. The rent payable for the period of January 1, 2005 through December 31, 2005 shall be $13,112.00 per month. The rent payable for the period of January 1, 2006 through December 31, 2006 shall be $13,505.00 per month. 51) VEHICLE PARKING (PARAGRAPH 2.6, CONTINUED): Lessee shall be entitled to forty (40) parking spaces designated by Lessor as parking spaces for the leased Premises. Lessee or Lessee's employees, visitors, customers, or guests shall not park in driveways, alleyways, easement ways or other areas not specifically marked as parking spaces. No automotive repair, car washing, waxing and detailing, or covered parking is permitted at any time. Prohibited vehicles are not permitted; examples of prohibited vehicles shall include, but shall not be limited to, trailers, campers, recreational vehicles, boats, "dead automobiles" or automobiles parked longer than 48 hours. If Lessee permits or allows parking other than in designated parking spaces or permits or allows any of the aforedescribed prohibited vehicles to park on any portion of the parking areas or anywhere else within the Premises, then Lessor shall have the right, without notice, in addition to other rights and remedies it may have, to remove or tow away the vehicle involved and charge the cost to Lessee, which cost shall be immediately payable by Lessee upon demand by Lessor. In addition to, and not in limitation of any of Lessor's rights under this Lease, Lessor shall have the right, at any time and from time to time, to relocate, modify, adjust, redesign and otherwise change the common areas available for parking within the Premises, provided the total number of parking spaces is not reduced, notwithstanding that some of Lessee's parking space(s) may be used as location for its trash containers, and establish, modify, amend and enforce rules, regulations and restrictions with respect thereto, including, but not limited to, time limits, for example, such as temporary loading zones or areas, redesigning parking spaces from diagonal or vertical, or vice versa, and changing the traffic patterns within the Premises. 52) SECURITY DEPOSIT (PARAGRAPH 5, CONTINUED) The security deposit shall be used and may be refunded only in accordance with Paragraph 5 and in connection with this paragraph. Lessee may not use any portion of the security deposit to satisfy any of Lessee's rental obligations hereunder including the last month's rental payment. Any failure of Lessee to pay any of Lessee's rental obligations when due constitutes a material breach of this Lease for which Lessor may re-enter and take possession of the Premises in accordance with law, notwithstanding the fact that Lessor may have possession of a security deposit. 53) USE (PARAGRAPH 6.1, CONTINUED) Lessee understands that there are no restrictions contained in this Lease as to the type of business which may be conducted by any other present or future tenant of any building located near or adjacent to the building in which the Premises are located, and that Lessor may lease space to other tenants whose business is the same or competitive with that of Lessee. Lessor Lessee /s/ GS /s/ [ILLEGIBLE] --------------- --------------- Initial Here Initial Here STANDARD ADDENDUM TO LEASE - NET PAGE 2 OF 4 NO OUTSIDE STORAGE. Under no circumstances shall Lessee be permitted to use the exterior areas of the Premises, including driveways, alleyways or easement ways or anywhere else outside the building, for the temporary or permanent storage of any property, including but not limited to inventory, parts, work in process, pallets, or the installation of any type of equipment, including but not limited to air compressors or any other equipment. In the event that any unauthorized storage or installation of equipment or property shall occur, then Lessor shall have the right, without notice, in addition to such other rights and remedies that it may have, to remove the property and/or equipment at Lessee's expense, which shall be paid by Lessee upon demand by Lessor. No unauthorized seating areas, lunch areas or compressor sheds are permitted anywhere in the driveways, alleyways or easement ways, alleys or anywhere else outside the building. INGRESS AND EGRESS; LOADING AND UNLOADING. It is understood and agreed that the exterior portion of the premises and property are to be used by Lessee solely for ingress and egress and for the parking of vehicles as authorized by Lessor. The exterior portions of the premises at no time will be used by Lessee for loading or unloading, except at the loading dock. It is the parties' intention that Lessee will neither cause nor permit anything which will detract from keeping the exterior of the building and premises in a clean, orderly, and uncluttered condition fully in keeping with the highest standards and reflecting an image of the highest quality and standards. EXTERIOR WATER USE LIMITATIONS. Except for irrigation purposes, Lessee shall not use any water either from exterior sources or from sources within the building, on or about the exterior area of the Premises for any purpose whatsoever without Lessor's prior written consent. Any of Lessee's procedures, processes or other work which require the use of water shall be done solely within the confines of the building, and no water shall be allowed to drain onto the exterior area of the Premises. 54) MAINTENANCE; REPAIRS, UTILITY INSTALLATIONS; TRADE FIXTURES AND ALTERATIONS (PARAGRAPH 7, CONTINUED) Notwithstanding anything to the contrary in Paragraph 7.1(b), in order to maintain a cohesive landscaping appearance throughout the business park, Lessor shall maintain all landscaping and irrigation system contracts, and Lessee shall reimburse Lessor for those costs pursuant to Paragraph 50. ROOF. Lessee shall inform Lessor of any work anticipated on the roof, in conjunction with its operation and obtain permission to do same prior to commencement of same. Lessee shall not make any alterations, improvements or additions to the Premises, without Lessor's prior written consent. Should Lessee make any alterations, etc. without the prior written consent of Lessor, Lessor may, at any time during the term of this Lease or upon its termination, require that Lessee, at its expense, remove any or all of the same and that Lessee pay to Lessor the amount of any damage to the roof caused by Lessee, or Lessor may remove same at Lessee's expense. UNAUTHORIZED ALTERATIONS. Lessee shall obtain Lessor's prior written approval for the installation of any interior or exterior window coverings, including but not limited to drapes, blinds, sunshades, sunscreens, holiday or other decorations or any type of film window treatment. No exterior painting is permitted. In the event that any such unauthorized installations or alterations occur, then Lessor shall have the right, without notice, in addition to such other rights and remedies that it may have, to remove all of the same at Lessee's expense, which shall be paid by Lessee upon demand by Lessor. SECURITY. Security bars or other security measures installed by Lessee require prior written consent of Lessor. Such installations, except for electronic security systems, shall remain as part of the Premises upon termination of the Lease unless Lessor requests removal of such installations and restoration of the Premises in accordance with Paragraph 7.4. 55) OWNERSHIP; REMOVAL; SURRENDER; AND RESTORATION (PARAGRAPH 7.4, CONTINUED) Lessor's right under Paragraph 7.4(b) to require that any or all Lessee Owned Alterations or Utility Installations be removed by Lessee by the expiration or earlier termination of this Lease applies to all tenant improvements, including but not limited to improvements which were made to the Premises by Lessor at the request of Lessee and improvements the cost of which was amortized over the Lease term or a portion thereof in the form of additional rent. If Lessee desires to install wallpaper in the Premises, Lessor may require the removal and restoration of the walls upon Lessee's vacancy of the Premises, which shall be done at Lessee's sole cost and expense. 56) REPLACEMENT COST (PARAGRAPH 8.3(a), CONTINUED) With reference to the property insurance required by Paragraph 8.3(a), Lessor and Lessee agree that the full replacement cost of the Premises will be not less than $1,016,900.00 as of the Commencement Date of the term of this Lease. 57) ASSIGNMENT AND SUBLETTING (PARAGRAPH 12, CONTINUED) Subject to the provisions of Paragraph 12, Lessee may sublease the Premises upon Lessor's written consent. Within five (5) days of Lessee entering into a sublease of the Premises, Lessee shall deliver to Lessor a copy of any written sublease. Except as provided in Paragraph 12.2(e) in the case of Lessor's consent to an assignment or subletting and notwithstanding anything to the contrary contained in Paragraph 12, in the event that Lessee requests Lessor's signature or consent to any action or on any document, including but not limited to loan or security documents relating to loan transactions in which Lessee is taking part, Lessor may require Lessee to pay to Lessor an initial minimum fee of $350.00 to cover Lessor's legal and other fees and costs in reviewing and responding to each such request, and Lessee agrees to pay additional legal fees as are actually incurred by Lessor in reviewing and responding thereto. Lessor Lessee /s/ [ILLEGIBLE] /s/ [ILLEGIBLE] --------------- --------------- Initial Here Initial Here STANDARD ADDENDUM TO LEASE - NET PAGE 3 OF 4 58) HOLDOVER (PARAGRAPH 26, CONTINUED) If Lessee remains in possession of the Premises after the expiration of the Lease term, without Lessor's written consent, then Lessee's occupancy of the Premises shall be deemed to be a holdover tenancy upon all of the provisions of this Lease pertaining to obligations of Lessee, but not including any options or rights of first refusal, if any, granted to Lessee under this Lease. If Lessee's hold-over tenancy exceeds ten (10) days, Lessee may terminate the tenancy only by giving sixty (60) days written notice of termination to Lessor, whereas Lessor may terminate the tenancy or change the terms of the Lease upon giving to Lessee sixty (60) days written notice thereof. The termination date shall be the last day of the month in which the notice requirement has been met. Notwithstanding anything to the contrary contained in Paragraphs 1.3, 1.5, 3.1, 4 or elsewhere in this Lease, Lessee's obligation to pay rent shall continue until (i) Lessee has removed all of its property from the Premises, (ii) Lessee has made any repairs required under Paragraph 7.4(c), (iii) Lessee has removed all Alterations, improvements, additions and Utility Installations which Lessor requires Lessee to remove pursuant to Paragraph 7.4(b), and (iv) Lessee has notified Lessor in writing that all of the items (i) through (iii) of this paragraph, to the extent applicable, have been accomplished. 59) DECLARATION OF COVENANTS, CONDITIONS AND RESTRICTIONS FOR NORTHPARK INDUSTRIAL CENTER. Lessee acknowledges receipt of a copy of the Declaration of Covenants, Conditions and Restrictions for Northpark Industrial Center recorded with the County of Los Angeles as document numbers 79-760182 and 85-1324915. Lessee has reviewed and approved said documents and agrees to be bound by all the terms and conditions therein. Lessee further agrees that said Covenants, Conditions and Restrictions shall be binding upon Lessee and any sublessee, successor and assigns which they may have. 60) TENANT IMPROVEMENTS (LESSOR'S COST): Lessor shall, at Lessor's cost, cut one (1) opening in the south wall of the office area (and shall cut one opening in the northern wall of the office area in the premises located at 9162 Eton Avenue) to connect the premises located at 9172 Eton Avenue with the premises located at 9162 Eton Avenue . Said openings shall be a 3'0 x 6'8" cased opening. Upon Lessee's vacancy of either (or both) buildings, Lessee shall, at Lessee's cost, close said openings, which shall be done so as to create a similar condition to that prior to the cut-outs. Lessor shall credit Lessee with $750.00 for ceiling tile replacement and filling the interior atriums with concrete. Lessee may, at Lessee's cost, build a shed for the air compressor outside at the north end of the building on an existing concrete pad and build an enclosure at the sound end landing for a de-ionized water system. 61) PARAGRAPH 12.1 B (CONTINUED): For purposes of this Lease, a "change in the control of Lessee" means the happening of any of the following events: (i) When any "person" as such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934 (the "Exchange Act") becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Lessee fifty percent (50%) or more of the combined voting power of the Lessee's then outstanding securities entitled to vote generally in the election of directors; or (ii) The stockholders of the Lessee approve a merger, consolidation or sale of substantially all the assets of the Lessee with or to any other corporation, other than a merger, consolidation or sale of substantially all the assets which would result in the voting securities of the Lessee outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) more than fifty percent (50%) of the total voting power represented by the voting securities of the Lessee or such surviving entity outstanding immediately after such merger, consolidation or sale of substantially all the assets of the Lessee; or (iii) A change in the composition of the Board of Directors of the Lessee, as a result of which fewer than a majority of the directors are Incumbent Directors. "Incumbent Directors" shall mean directors who either (a) are directors of the Lessee as of the date of the commencement of this Lease or any applicable extension or renewal, or (b) are elected, or nominated for election to the Board of Directors of the Lessee with the affirmative votes of at least a majority of the Incumbent Directors at the time of such election or nomination (but shall not include an individual whose election or nomination is in connection with an actual or threatened proxy contest relation to the election of directors to the Lessee) 62) PARAGRAPH 12.1 C (CONTINUED): The involvement of Lessee or its assets in any merger, bulk sale or leveraged buy-out, whether in a single transaction or series of related transactions and whether or not a formal assignment or hypothecation of this Lease or Lessee's assets occurs, which results or will result in a reduction of the Net Worth of Lessee by an amount greater than 25% of such Net Worth as it was represented at the time of the execution of this Lease or at the time of the most recent assignment to which Lessor has consented, or as it exists immediately prior to said transaction or transactions constituting such reduction, whichever was or is greater, shall be considered an assignment of this Lease requiring Lessor's consent which shall be unreasonably withheld. "Net Worth of Lessee" shall mean the net worth of Lessee (excluding any guarantors) established under generally accepted accounting principles as currently in effect on the date hereof. Lessor Lessee /s/ [ILLEGIBLE] /s/ [ILLEGIBLE] --------------- --------------- Initial Here Initial Here STANDARD ADDENDUM TO LEASE - NET PAGE 4 OF 4 63) OPTION TO EXTEND A. Lessor hereby grants to Lessee the option to extend the term of this Lease for a Five (5) year period commencing when the prior term expires upon each and all of the following terms and conditions: (i) Lessee gives to Lessor and Lessor receives written notice of the exercise of the option to extend this Lease for said additional term no earlier than nine months and no later than six months prior to the time that the option period would commence if the option were exercised, time being of the essence. If said notification of the exercise of said option is not so given and received, this option shall automatically expire; (ii) The provisions of paragraph 39, including the provision relating to default of Lessee set forth in paragraph 39.4 of this Lease are conditions of this Option; (iii) All of the terms and conditions of this Lease except where specifically modified by this option shall apply; (iv) On January 1, 2007 , the monthly rent payable under paragraph 1.5 and 4 of the attached Lease shall be adjusted by the increase, if any, from the date this Lease commenced in the C.P.I. As used herein, the term "C.P.I. shall mean the Consumer Price Index of the Bureau of Labor Statistics of the U.S. Department of Labor for All Urban Consumers, Los Angeles-Anaheim-Riverside, California (1982/84=100), "All Items", herein referred to as "C.P.I." a. The monthly rent payable in accordance with paragraph A(iv) of this Addendum shall be calculated as follows: the rent payable for the first month of the term of this Lease, as set forth in paragraph 4 of the attached Lease, shall be multiplied by a fraction the numerator of which shall be the C.P.I. of the calendar month immediately preceding the effective date of the subject rent escalation, and the denominator of which shall be the C.P.I. for the calendar month in which the original Lease term commenced. The sum so calculated shall constitute the new monthly rent hereunder, but, in no event, shall such new monthly rent be less than 103% of the rent payable for the month immediately preceding the date for rent adjustment. b. In the event the compilation and/or publication of the C.P.I. shall be discontinued, then the index most nearly the same as the C.P.I. shall be used to make such calculation. In the event that Lessor and Lessee cannot agree on such alternative index, then the matter shall be submitted for decision to the American Arbitration Association in accordance with the rules of said association and the decision of the arbitrators shall be binding upon the parties. The cost of said Arbitrators shall be paid equally be Lessor and Lessee. c. Lessor shall notify Lessee of any rental increases pursuant to this paragraph as soon as practicable after the relevant C.P.I. figures have been released. Until such notification, Lessee shall continue to pay the rent in effect during the prior rental period. After notification of a rental increase, Lessee shall commence making rental payments in the increased amount and shall, within ten (10) days after such notification, pay to Lessor the amount of any rental increases due for previous months. B. If this option to extend is exercised, the option term shall commence on January 1, 2007 and shall end on December 31, 2011 C. On January 1 2008, January 1, 2009, January 1, 2010 and again on January 1, 2011 , the monthly rent payable shall be adjusted upward by 3% over the rent payable for the month immediately preceding each rental adjustment. LESSOR: LESSEE: NORTHPARK INDUSTRIAL INTERNATIONAL REMOTE IMAGING SYSTEMS INC. By: /s/ [ILLEGIBLE] By: /s/ [ILLEGIBLE] ----------------------------- ------------------------------- By: /s/ [ILLEGIBLE] By: /s/ [ILLEGIBLE] ----------------------------- ------------------------------- PARKING AGREEMENT This Parking Agreement, dated November 29, 2001 , for reference purposes only, is made by and between NORTHPARK INDUSTRIAL (herein called "Lessor") and INTERNATIONAL REMOTE IMAGING SYSTEMS, INC. (herein called "Lessee"). Lessor leases to Lessee under a separate written Lease the Premises known as 9162 Eton Avenue, Chatsworth, California, and the Agreements of the parties in this Parking Agreement are in addition to the agreements of the parties in said Lease. 1. Subject to the terms and conditions contained in this Agreement, Lessor hereby agrees that Lessee and persons designated by Lessee may use 21 parking spaces in the Parking Garage located at 9151 Eton Ave., Chatsworth, California (hereinafter the "Garage"). The parking spaces hereunder shall be provided on an unreserved "first come, first served" basis. 2. The term of this Agreement shall be concurrent with the term of this Lease Agreement ("Lease"). 3. Lessee shall at all times comply with all applicable ordinances, rules, regulations, codes, laws, statutes and requirements of all federal, state, county and municipal governmental bodies or their subdivisions respecting the use of the Garage. Lessee shall extend all of its insurance policies required under the Lease to include vehicles to be parked in the Garage hereunder and personal property located therein or thereon. Upon request, Lessee shall provide Lessor with certificates or other satisfactory evidence of such insurance. Lessor reserves the right to adopt, modify, and enforce reasonable Rules governing the use of the Garage from time to time, including any card-key, sticker or other identification or entrance system, and hours of operation. The Rules set forth hereinafter are currently in effect. Lessor may refuse to permit any person who violates such Rules to park in the Garage, and any violation of the Rules shall subject the car to removal from the Garage. 4. Lessee acknowledges receipt of one card-key for each parking space provided. Lessee shall be responsible for the return of said card-key upon its vacancy of the Garage. A replacement fee of $25.00 will be charged for any lost or damaged card-key. 5. Except for intentional acts of gross negligence by Lessor, Lessor shall have no liability whatsoever for any damage to property or any other items located in the Garage, nor for any personal injuries or death arising out of any incident or matter relating to the Garage. In all events, Lessee agrees to look first to its insurance carrier for payment of any losses sustained in connection with Lessee's use of the Garage. Lessee hereby waives on behalf of its insurance carriers all rights of subrogation against Lessor. Lessor reserves the right to assign specific spaces and to reserve spaces for visitors, small cars, handicapped persons and for other lessees, and Lessee and persons designated by Lessee shall not park in any such assigned or reserved spaces. Lessor also reserves the right to close all or any portion of the Garage in order to make repairs or perform maintenance services, or to alter, modify, re-stripe the Garage, or if required by casualty, strike, condemnation, act of God, governmental law or other reason beyond Lessor's reasonable control. In such event, Lessor shall refund any prepaid parking rent hereunder, pro-rated on a per diem basis. 6. Prior to furnishing any card-keys to any person, Lessee shall provide Lessor with a list including all names, type of automobile, year of manufacture, drivers license number and automobile license number for all persons using the Garage at any time. 7. If Lessee shall default under this Agreement, Lessor shall have the right to cancel this Agreement on ten (10) days written notice, unless within such ten (10) day period Lessee cures such default. If Lessee shall default under this Agreement a second time after receiving prior written notice for the same offense, Lessor shall have the right to cancel this Agreement on ten (10) days written notice. Lessor shall have the right to remove from the Garage any vehicles hereunder which are in breach of this Agreement or Rules contained herein, without any liability whatsoever. Accordingly, Lessor may then deactivate the respective card-key(s) with ten (10) days notice as stated above. 8. LESSEE ACKNOWLEDGES RECEIPT OF A COPY OF THE DECLARATION OF COVENANTS, CONDITIONS AND RESTRICTIONS FOR NORTHPARK INDUSTRIAL CENTER RECORDED WITH THE COUNTY OF LOS ANGELES AS DOCUMENT NUMBERS 79-760182 AND 85-1324915. LESSEE HAS REVIEWED AND APPROVED SAID DOCUMENTS AND AGREES TO BE BOUND BY ALL THE TERMS AND CONDITIONS THEREIN. LESSEE FURTHER AGREES THAT SAID COVENANTS, CONDITIONS AND RESTRICTIONS SHALL BE BINDING UPON LESSEE AND ANY SUBLESSEE, SUCCESSOR AND ASSIGNS WHICH THEY MAY HAVE. RULES a. Lessee agrees to acquaint all persons to whom Lessee assigns parking space of these Rules. b. Garage hours: Twenty-four (24) hours, seven (7) days a week. c. Cars must be parked entirely within the stall lines painted on the floor, and only small cars may be parked in areas reserved for compacts. All cars must be parked head-in only. d. All directional signs and arrows must be observed. e. Speed limit shall be 5 miles per hour. f. Parking is prohibited in all areas not expressly designated for parking, including without limitation: 1. Aisles. 2. Loading zones. 3. Areas not striped for parking. 4. Areas where "No Parking" signs are posted. 5. Ramps, right side up - left side down. g. Spaces reserved for handicapped parking must be used only by vehicles properly designated. Lessor Initial Here Lessee Initial Here [GS] [ILLEGIBLE] [ILLEGIBLE] [ILLEGIBLE] PARKING AGREEMENT (continued) h. Parking stickers, card-key or any other devices or forms of identification or entry supplied by Lessor shall remain the property of Lessor. Such devices must be displayed as requested and may not be mutilated in any manner. The serial number of the parking identification device may not be obliterated. Devices are not transferable and any device in the possession of any unauthorized holder will be void. i. Monthly fees shall be payable in advance prior to the first day of each month. Failure to do so will automatically cancel parking privileges and the card-keys used by Lessee will be voided on the fifth (5th) day of the month. No deductions or allowances from the monthly rate will be made for days on which the Garage is not used by Lessee or its designees. j. Garage managers or personnel are not authorized to make or allow any exceptions to these Rules. k. Each driver of a vehicle is required to drive and park safely, and lock and secure their own vehicle. l. Loss or theft of parking identification, card-keys or other such devices must be reported to Lessor immediately. Any parking devices reported lost or stolen found on any unauthorized car will be confiscated and the illegal holder will be fined at the then prevailing written rate. Lost or stolen devices found by Lessee or its employees must be returned to Lessor. m. Washing, waxing, cleaning or servicing of any vehicle by Lessee or its employees or agents is prohibited. Parking spaces may only be used for parking automobiles. n. Parking spaces shall be used only for parking by vehicles no larger than full size passenger automobiles or pick-up trucks. Prohibited vehicles are not permitted; examples of prohibited vehicles shall include, but shall not be limited to, vehicles exceeding 6' 6" in height, trucks or trucking equipment, trailers, campers, recreational vehicles, boats, "dead automobiles" or automobiles parked longer than 24 hours. No automotive repair or work is permitted. If Lessee permits or allows any of the aforedescribed prohibited vehicles to park on any portion of the parking areas, then Lessor shall have the right, without notice, in addition to other rights and remedies it may have, to remove or tow away the vehicle involved and charge the cost to Lessee which cost shall be immediately payable by Lessee upon demand by Lessor. o. Other prohibitions include but are not limited to: eating in Garage, loitering, throwing trash, leaky vehicles, damage to gates, arms, card-key readers, entry or exit equipment, other vehicles, real or personal property, fences, rails or walls. p. Lessor may prohibit violators of Rules from using parking spaces provided to Lessee hereunder. In such case, Lessor shall void the violator's card-key and notify Lessee in writing. Said individual(s) would be prohibited from using Garage, but Lessee would continue leasing same until a fine of $75.00 is paid or until Lessor agrees to reinstate the violator, at Lessor's option. LESSOR: LESSEE: NORTHPARK INDUSTRIAL INTERNATIONAL REMOTE IMAGING SYSTEMS INC. By: /s/ [SIGNATURE ILLEGIBLE] By: /s/ [SIGNATURE ILLEGIBLE] ----------------------------- ------------------------------- By: /s/ [SIGNATURE ILLEGIBLE] By: /s/ [SIGNATURE ILLEGIBLE] ----------------------------- ------------------------------- EX-11.1(A) 5 v80280ex11-1a.txt EXHIBIT 11.1(A) EXHIBIT 11.1(a) BUSINESS LOAN AGREEMENT (ASSET BASED)

- ---------------------------------------------------------------------------------------------------------------------- PRINCIPAL LOAN DATE MATURITY LOAN NO CALL/COLL ACCOUNT OFFICER INITIALS $6,500,000.00 02-07-2002 06-30-2004 932900001-1 932900001-1 22163 [INITIALS ILLEGIBLE] - ---------------------------------------------------------------------------------------------------------------------- References in the shaded area are for Lender's use only and do not limit the applicability of this document to any particular loan or item. Any item above containing "***" has been omitted due to text length limitations. - ----------------------------------------------------------------------------------------------------------------------

BORROWER: INTERNATIONAL REMOTE LENDER: CALIFORNIA BANK & TRUST IMAGING SYSTEMS, INC. COMMERCIAL LOAN CENTER 9162 ETON AVENUE 550 SOUTH HOPE STREET, SUITE 300 CHATSWORTH, CA 91311 LOS ANGELES, CA 90071 ================================================================================ THIS BUSINESS LOAN AGREEMENT (ASSET BASED) DATED FEBRUARY 7, 2002, IS MADE AND EXECUTED BETWEEN INTERNATIONAL REMOTE IMAGING SYSTEMS, INC. ("BORROWER") AND CALIFORNIA BANK & TRUST ("LENDER") ON THE FOLLOWING TERMS AND CONDITIONS. BORROWER HAS RECEIVED PRIOR COMMERCIAL LOANS FROM LENDER OR HAS APPLIED TO LENDER FOR A COMMERCIAL LOAN OR LOANS OR OTHER FINANCIAL ACCOMMODATIONS, INCLUDING THOSE WHICH MAY BE DESCRIBED ON ANY EXHIBIT OR SCHEDULE ATTACHED TO THIS AGREEMENT ("LOAN"). BORROWER UNDERSTANDS AND AGREES THAT: (A) IN GRANTING, RENEWING, OR EXTENDING ANY LOAN, LENDER IS RELYING UPON BORROWER'S REPRESENTATIONS, WARRANTIES, AND AGREEMENTS AS SET FORTH IN THIS AGREEMENT; (B) THE GRANTING, RENEWING, OR EXTENDING OF ANY LOAN BY LENDER AT ALL TIMES SHALL BE SUBJECT TO LENDER'S SOLE JUDGMENT AND DISCRETION; AND (C) ALL SUCH LOANS SHALL BE AND REMAIN SUBJECT TO THE TERMS AND CONDITIONS OF THIS AGREEMENT. TERM. This Agreement shall be effective as of February 7, 2002, and shall continue in full force and effect until such time as all of Borrower's Loans in favor of Lender have been paid in full, including principal, interest, costs, expenses, attorneys' fees, and other fees and charges, or until such time as the parties may agree in writing to terminate this Agreement. ADVANCE AUTHORITY. The following persons currently are authorized to request advances and authorize payments under the line of credit until Lender receives from Borrower, at Lender's address shown above, written notice of revocation of their authority: DR. JOHN A. O'MALLEY, CEO/CHAIRMAN OF INTERNATIONAL REMOTE IMAGING SYSTEMS, INC.; JOHN CALOZ, CFO/SECRETARY OF INTERNATIONAL REMOTE IMAGING SYSTEMS, INC.; AND DONALD HORACEK, CONTROLLER. LINE OF CREDIT. Lender agrees to make Advances to Borrower from time to time from the date of this Agreement to the Expiration Date, provided the aggregate amount of such Advances outstanding at any time does not exceed the Borrowing Base. Within the foregoing limits, Borrower may borrow, partially or wholly prepay, and reborrow under this Agreement as follows: CONDITIONS PRECEDENT TO EACH ADVANCE. Lender's obligation to make any Advance to or for the account of Borrower under this Agreement is subject to the following conditions precedent, with all documents, instruments, opinions, reports, and other items required under this Agreement to be in form and substance satisfactory to Lender: (1) Lender shall have received evidence that this Agreement and all Related Documents have been duly authorized, executed, and delivered by Borrower to Lender. (2) Lender shall have received such opinions of counsel, supplemental opinions, and documents as Lender may request. (3) The security interests in the Collateral shall have been duly authorized, created, and perfected with first lien priority and shall be in full force and effect. (4) All guaranties required by Lender for the credit facility(ies) shall have been executed by each Guarantor, delivered to Lender, and be in full force and effect. (5) Lender, at its option and for its sole benefit, shall have conducted an audit of Borrower's Accounts, Inventory, books, records, and operations, and Lender shall be satisfied as to their condition. (6) Borrower shall have paid to Lender all fees, costs, and expenses specified in this Agreement and the Related Documents as are then due and payable. (7) There shall not exist at the time of any Advance a condition which would constitute an Event of Default under this Agreement, and Borrower shall have delivered to Lender the compliance certificate called for in the paragraph below titled "Compliance Certificate." MAKING LOAN ADVANCES. Advances under this credit facility, as well as directions for payment from Borrower's accounts, may be requested orally or in writing by authorized persons. Lender may, but need not, require that all oral requests be confirmed in writing. Each Advance shall be conclusively deemed to have been made at the request of and for the benefit of Borrower (1) when credited to any deposit account of Borrower maintained with Lender or (2) when advanced in accordance with the instructions of an authorized person. Lender, at its option, may set a cutoff time, after which all requests for Advances will be treated as having been requested on the next succeeding Business Day. MANDATORY LOAN REPAYMENTS. If at any time the aggregate principal amount of the outstanding Advances shall exceed the applicable Borrowing Base, Borrower, immediately upon written or oral notice from Lender, shall pay to Lender an amount equal to the difference between the outstanding principal balance of the Advances and the Borrowing Base. On the Expiration Date, Borrower shall pay to Lender in full the aggregate unpaid principal amount of all Advances then outstanding and all accrued unpaid interest, together with all other applicable fees, costs and charges, if any, not yet paid. LOAN ACCOUNT. Lender shall maintain on its books a record of account in which Lender shall make entries for each Advance and such other debits and credits as shall be appropriate in connection with the credit facility. Lender shall provide Borrower with periodic statements of Borrower's account, which statements shall be considered to be correct and conclusively binding on Borrower unless Borrower notifies Lender to the contrary within thirty (30) days after Borrower's receipt of any such statement which Borrower deems to be incorrect. COLLATERAL. To secure payment of the Primary Credit Facility and performance of all other Loan, obligations and duties owed by. Borrower to Lender, Borrower (and others, if required) shall grant to Lender Security Interests in such property and assets as Lender may require. Lender's Security Interests in the Collateral shall be continuing liens and shall include the proceeds and products of the Collateral, including without limitation the proceeds of any insurance. With respect to the Collateral, Borrower agrees and represents and warrants to Lender: PERFECTION OF SECURITY INTERESTS. Borrower agrees to execute financing statements and all documents perfecting Lender's Security Interest and to take whatever other actions are requested by Lender to perfect and continue Lender's Security Interests in the Collateral. Upon request of Lender, Borrower will deliver to Lender any and all of the documents evidencing or constituting the Collateral, and Borrower will note Lender's interest upon any and all chattel paper and instruments if not delivered to Lender for possession by Lender. Contemporaneous with the execution of this Agreement, Borrower will execute one or more UCC financing statements and any similar statements as may be required by applicable law, and Lender will file such financing statements and all such similar statements in the appropriate location or locations. Borrower hereby appoints Lender as its irrevocable attorney-in-fact for the purpose of executing any documents necessary to perfect or to continue any Security Interest. Lender may at any time, and without further authorization from Borrower, file a carbon, photograph, facsimile, or other reproduction of any BUSINESS LOAN AGREEMENT (ASSET BASED) LOAN NO: 932900001-1 (CONTINUED) PAGE 2 ================================================================================ financing statement for use as a financing statement. Borrower will reimburse Lender for all expenses for the perfection, termination, and the continuation of the perfection of Lender's security interest in the Collateral. Borrower promptly will notify Lender before any change in Borrower's name including any change to the assumed business names of Borrower. Borrower also promptly will notify Lender before any change in Borrower's Social Security Number or Employer Identification Number. Borrower further agrees to notify Lender in writing prior to any change in address or location of Borrower's principal governance office or should Borrower merge or consolidate with any other entity. COLLATERAL RECORDS. Borrower does now, and at all times hereafter shall, keep correct and accurate records of the Collateral, all of which records shall be available to Lender or Lender's representative upon demand for inspection and copying at any reasonable time. With respect to the Accounts, Borrower agrees to keep and maintain such records as Lender may require, including without limitation information concerning Eligible Accounts and Account balances and agings. Records related to Accounts (Receivables) are or will be located at *. With respect to the Inventory, Borrower agrees to keep and maintain such records as Lender may require, including without limitation information concerning Eligible Inventory and records itemizing and describing the kind, type, quality, and quantity of Inventory, Borrower's Inventory costs and selling prices, and the daily withdrawals and additions to Inventory. Records related to Inventory are or will be located at *. The above is an accurate and complete list of all locations at which Borrower keeps or maintains business records concerning Borrower's collateral. *Borrower and its subsidiaries. COLLATERAL SCHEDULES. Concurrently with the execution and delivery of this Agreement, Borrower shall execute and deliver to Lender schedules of Accounts and Inventory and schedules of Eligible Accounts and Eligible Inventory in form and substance satisfactory to the Lender. Thereafter supplemental schedules shall be delivered according to the following schedule: REPRESENTATIONS AND WARRANTIES CONCERNING ACCOUNTS. With respect to the Accounts, Borrower represents and warrants to Lender: (1) Each Account represented by Borrower to be an Eligible Account for purposes of this Agreement conforms to the requirements of the definition of an Eligible Account; (2) All Account information listed on schedules delivered to Lender will be true and correct, subject to immaterial variance; and (3) Lender, its assigns, or agents shall have the right at any time and at Borrower's expense to inspect, examine, and audit Borrower's records and to confirm with Account Debtors the accuracy of such Accounts. REPRESENTATIONS AND WARRANTIES CONCERNING INVENTORY. With respect to the Inventory, Borrower represents and warrants to Lender: (1) All Inventory represented by Borrower to be Eligible Inventory for purposes of this Agreement conforms to the requirements of the definition of Eligible Inventory; (2) All Inventory values listed on schedules delivered to Lender will be true and correct, subject to immaterial variance; (3) The value of the Inventory will be determined on a consistent accounting basis; (4) Except as agreed to the contrary by Lender in writing, all Eligible Inventory is now and at all times hereafter will be in Borrower's physical possession and shall not be held by others on consignment, sale on approval, or sale or return; (5) Except as reflected in the Inventory schedules delivered to Lender, all Eligible Inventory is now and at all times hereafter will be of good and merchantable quality, free from defects; (6) Eligible Inventory is not now and will not at any time hereafter be stored with a bailee, warehouseman, or similar party without Lender's prior written consent, and, in such event, Borrower will concurrently at the time of bailment cause any such bailee, warehouseman, or similar party to issue and deliver to Lender, in form acceptable to Lender, warehouse receipts in Lender name evidencing the storage of Inventory; and (7) Lender, its assigns, or agents shall have the right at any time and at Borrower's expense to inspect and examine the Inventory and to check and test the same as to quality, quantity, value, and condition. CONDITIONS PRECEDENT TO EACH ADVANCE. Lender's obligation to make the initial Advance and each subsequent Advance under this Agreement shall be subject to the fulfillment to Lender's satisfaction of all of the conditions set forth in this Agreement and in the Related Documents. LOAN DOCUMENTS. Borrower shall provide to Lender the following documents for the Loan: (1) the Note; (2) Security Agreements granting to Lender security interests in the Collateral; (3) financing statements and all other documents perfecting Lender's Security Interests; (4) evidence of insurance as required below; (5) guaranties; (6) subordinations; (7) together with all such Related Documents as Lender may require for the Loan; all in form and substance satisfactory to Lender and Lender's counsel. BORROWER'S AUTHORIZATION. Borrower shall have provided in form and substance satisfactory to Lender properly certified resolutions, duly authorizing the execution and delivery of this Agreement, the Note and the Related Documents. In addition, Borrower shall have provided such other resolutions, authorizations, documents and instruments as Lender or its counsel, may require. FEES AND EXPENSES UNDER THIS AGREEMENT. Borrower shall have paid to Lender all fees, costs, and expenses specified in this Agreement and the Related Documents as are then due and payable. REPRESENTATIONS AND WARRANTIES. The representations and warranties set forth in this Agreement, in the Related Documents, and in any document or certificate delivered to Lender under this Agreement are true and correct. NO EVENT OF DEFAULT. There shall not exist at the time of any Advance a condition which would constitute an Event of Default under this Agreement or under any Related Document. REPRESENTATIONS AND WARRANTIES. Borrower represents and warrants to Lender, as of the date of this Agreement, as of the date of each disbursement of loan proceeds, as of the date of any renewal, extension or modification of any Loan, and at all times any Indebtedness exists: ORGANIZATION. Borrower is a corporation for profit which is, and at all times shall be, duly organized, validly existing, and in good standing under and by virtue of the laws of the State of Delaware. Borrower is duly authorized to transact business in the State of California and all other states in which Borrower is doing business, having obtained all necessary filings, governmental licenses and approvals for each state in which Borrower is doing business. Specifically, Borrower is, and at all times shall be, duly qualified as a foreign corporation in all states in which the failure to so qualify would have a material adverse effect on its business or financial condition. Borrower has the full power and authority to own its properties and to transact the business in which it is presently engaged or presently proposes to engage. Borrower maintains an office at 9162 Eton Avenue, Chatsworth, CA 91311. Unless Borrower has designated otherwise in writing, the principal office is the office at which Borrower keeps its books and records including its records concerning the Collateral. Borrower will notify Lender prior to any change in the location of Borrower's state of organization or any change in Borrower's name. Borrower shall do all things necessary to preserve and to keep in full force and effect its existence, rights and privileges, and shall comply with all regulations, rules, ordinances, statutes, orders and decrees of any governmental or quasi-governmental authority or court applicable to Borrower and Borrower's business activities. ASSUMED BUSINESS NAMES. Borrower has filed or recorded all documents or filings required by law relating to all assumed business names used by Borrower. Excluding the name of Borrower, the following is a complete list of all assumed business names under which Borrower does business: IRIS and IRIS Diagnostics. AUTHORIZATION. Borrower's execution, delivery, and performance of the agreement and all the Related Documents have been duly authorized by all necessary action by Borrower and do not conflict with, result in a violation of, or constitute a default under (1) any provision of Borrower's articles of incorporation or organization, or bylaws, or any agreement other instrument binding upon Borrower or (2) any law, governmental regulation, court decree, or order applicable to Borrower or to Borrower's properties. FINANCIAL INFORMATION. Each of Borrower's financial statements supplied to Lender truly and completely disclosed Borrower's financial condition as of the date of the statement, and there has been no material adverse change in Borrower's financial condition subsequent to the date of the most recent financial statement supplied to Lender. Borrower has no material contingent obligations except as disclosed in such financial statements. BUSINESS LOAN AGREEMENT (ASSET BASED) LOAN NO: 932900001-1 (CONTINUED) PAGE 3 ================================================================================ LEGAL EFFECT. This Agreement constitutes, and any instrument or agreement Borrower is required to give under this Agreement when delivered will constitute legal, valid, and binding obligations of Borrower enforceable against Borrower in accordance with their respective terms. PROPERTIES. Except as contemplated by this Agreement or as previously disclosed in Borrower's financial statements or in writing to Lender and as accepted by Lender, and except for property tax liens for taxes not presently due and payable, Borrower owns and has good title to all of Borrower's properties free and clear of all Security Interests, and has not executed any security documents or financing statements relating to such properties. All of Borrower's properties are titled in Borrower's legal name, and Borrower has not used or filed a financing statement under any other name for at least the last five (5) years. HAZARDOUS SUBSTANCES. Except as disclosed to and acknowledged by Lender in writing, Borrower represents and warrants that: (1) During the period of Borrower's ownership of Borrower's Collateral, there has been no use, generation, manufacture, storage, treatment, disposal, release or threatened release of any Hazardous Substance by any person on, under, about or from any of the Collateral. (2) Borrower has no knowledge of, or reason to believe that there has been (a) any breach or violation of any Environmental Laws; (b) any use, generation, manufacture, storage, treatment, disposal, release or threatened release of any Hazardous Substance on, under, about or from the Collateral by any prior owners or occupants of any of the Collateral; or (c) any actual or threatened litigation or claims of any kind by any person relating to such matters. (3) Neither Borrower nor any tenant, contractor, agent or other authorized user of any of the Collateral shall use, generate, manufacture, store, treat, dispose of or release any Hazardous Substance on, under, about or from any of the Collateral; and any such activity shall be conducted in compliance with all applicable federal, state, and local laws, regulations, and ordinances, including without limitation all Environmental Laws. Borrower authorizes Lender and its agents to enter upon the Collateral to make such inspections and tests as Lender may deem appropriate to determine compliance of the Collateral with this section of the Agreement. Any inspections or tests made by Lender shall be at Borrower's expense and for Lender's purposes only and shall not be construed to create any responsibility or liability on the part of Lender to Borrower or to any other person. The representations and warranties contained herein are based on Borrower's due diligence in investigating the Collateral for hazardous waste and Hazardous Substances. Borrower hereby (1) releases and waives any future claims against Lender for indemnity or contribution in the event Borrower becomes liable for cleanup or other costs under any such laws, and (2) agrees to indemnify and hold harmless Lender against any and all claims, losses, liabilities, damages, penalties, and expenses which Lender may directly or indirectly sustain or suffer resulting from a breach of this section of the Agreement or as a consequence of any use, generation, manufacture, storage, disposal, release or threatened release of a hazardous waste or substance on the Collateral. The provisions of this section of the Agreement, including the obligation to indemnify, shall survive the payment of the Indebtedness and the termination, expiration or satisfaction of this Agreement and shall not be affected by Lender's acquisition of any interest in any of the Collateral, whether by foreclosure or otherwise. LITIGATION AND CLAIMS. No litigation, claim, investigation, administrative proceeding or similar action (including those for unpaid taxes) against Borrower is pending or threatened, and no other event has occurred which may materially adversely affect Borrower's financial condition or properties, other than litigation, claims, or other events, if any, that have been disclosed to and acknowledged by Lender in writing. TAXES. To the best of Borrower's knowledge, all of Borrower's tax returns and reports that are or were required to be filed, have been filed, and all taxes, assessments and other governmental charges have been paid in full, except those presently being or to be contested by Borrower in good faith in the ordinary course of business and for which adequate reserves have been provided. LIEN PRIORITY. Unless otherwise previously disclosed to Lender in writing, Borrower has not entered into or granted any Security Agreements, or permitted the filing or attachment of any Security Interests on or affecting any of the Collateral directly or indirectly securing repayment of Borrower's Loan and Note, that would be prior or that may in any way be superior to Lender's Security Interests and rights in and to such Collateral. BINDING EFFECT. This Agreement, the Note, all Security Agreements (if any), and all Related Documents are binding upon the signers thereof, as well as upon their successors, representatives and assigns, and are legally enforceable in accordance with their respective terms. AFFIRMATIVE COVENANTS. Borrower covenants and agrees with Lender that, so long as this Agreement remains in effect, Borrower will: NOTICES OF CLAIMS AND LITIGATION. Promptly inform Lender in writing of (1) all material adverse changes in Borrower's financial condition, and (2) all existing and all threatened litigation, claims, investigations, administrative proceedings or similar actions affecting Borrower or any Guarantor which could materially affect the financial condition of Borrower or the financial condition of any Guarantor. FINANCIAL RECORDS. Maintain its books and records in accordance with GAAP, applied on a consistent basis, and permit Lender to examine and audit Borrower's books and records at all reasonable times. FINANCIAL STATEMENTS. Furnish Lender with the following: ANNUAL STATEMENTS. As soon as available, but in no event later than one-hundred-twenty (120) days after the end of each fiscal year, Borrower's balance sheet and income statement for the year ended, audited by a certified public accountant satisfactory to Lender. INTERIM STATEMENTS. As soon as available, but in no event later than sixty (60) days after the end of each fiscal quarter, Borrower's balance sheet and profit and loss statement for the period ended, prepared by Borrower. TAX RETURNS. As soon as available, but in no event later than thirty (30) days after the applicable filing date for the tax reporting period ended, Federal and other governmental tax returns, prepared by Borrower. All financial reports required to be provided under this Agreement shall be prepared in accordance with GAAP, applied on a consistent basis, and certified by Borrower as being true and correct. ADDITIONAL INFORMATION. Furnish such additional information and statements, as Lender may request from time to time. INSURANCE. Maintain fire and other risk insurance, public liability insurance, and such other insurance as Lender may require with respect to Borrower's properties and operations, in form, amounts, coverages and with insurance companies acceptable to Lender. Borrower, upon request of Lender, will deliver to Lender from time to time the policies or certificates of insurance in form satisfactory to Lender, including stipulations that coverages will not be cancelled or diminished without at least ten (10) days prior written notice to Lender. Each insurance policy also shall include an endorsement providing that coverage in favor of Lender will not be impaired in any way by any act, omission or default of Borrower or any other person. In connection with all policies covering assets in which Lender holds or is offered a security interest for the Loans, Borrower will provide Lender with such lender's loss payable or other endorsements as Lender may require. INSURANCE REPORTS. Furnish to Lender, upon request of Lender, reports on each existing insurance policy showing such information as Lender may reasonably request, including without limitation the following: (1) the name of the insurer; (2) the risks insured; (3) the amount of the policy; (4) the properties insured; (5) the then current property values on the basis of which insurance has been obtained, and the manner of determining those values; and (6) the expiration date of the policy. In addition, upon request of Lender (however not more often than annually), Borrower will have an independent appraiser satisfactory to Lender determine, as applicable, the actual cash value or replacement cost of any Collateral. The cost of such appraisal shall be paid by Borrower. GUARANTIES. Prior to disbursement of any Loan proceeds, furnish executed guaranties of the Loans in favor of Lender, executed by the guarantors BUSINESS LOAN AGREEMENT (ASSET BASED) LOAN NO: 932900001-1 (CONTINUED) PAGE 4 ================================================================================ named below, on Lender's forms, and in the amounts and under the conditions set forth in those guaranties.

NAMES OF GUARANTORS AMOUNTS ------------------- ------- ADVANCED DIGITAL IMAGING RESEARCH, LLC $8,000,000.00 STATSPIN, INC. $8,000,000.00

SUBORDINATION. Prior to disbursement of any Loan proceeds, deliver to Lender a subordination agreement on Lender's forms, executed by Borrower's creditor named below, subordinating all of Borrower's indebtedness to such creditor, or such lesser amount as may be agreed to by Lender in writing, and any security interests in collateral securing that indebtedness to the Loans and security interests of Lender.

NAME OF CREDITOR TOTAL AMOUNT OF DEBT ---------------- -------------------- DIGITAL IMAGING TECHNOLOGIES, INC. $7,000,000.00

OTHER AGREEMENTS. Comply with all terms and conditions of all other agreements, whether now or a hereafter existing, between Borrower and any other party and notify Lender immediately in writing of any default in connection with any other such agreements. LOAN PROCEEDS. Use all Loan proceeds solely for Borrower's and subsidiaries' business operations, unless specifically consented to the contrary by Lender in writing. TAXES, CHARGES AND LIENS. Pay and discharge when due all of its indebtedness and obligations, including without limitation all assessments, taxes, governmental charges, levies and liens, of every kind and nature, imposed upon Borrower or it properties, income, or profits, prior to the date on which penalties would attach, and all lawful claims that, if unpaid, might become a lien or charge upon any of Borrower's properties, income, or profits. PERFORMANCE. Perform and comply, in a timely manner, with all terms, conditions, and provisions set forth in this Agreement, in the Related Documents, and in all other instruments and agreements between Borrower and Lender. Borrower shall notify Lender immediately in writing of any default in connection with any agreement. OPERATIONS. Maintain executive and management personnel with substantially the same qualifications and experience as the present executive and management personnel; provide written notice to Lender of any change in executive and management personnel; conduct its business affairs in a reasonable and prudent manner. ENVIRONMENTAL STUDIES. Promptly conduct and complete, at Borrower's expense, all such investigations, studies, samplings and testings as may be requested by Lender or any governmental authority relative to any substance, or any waste or by-product of any substance defined as toxic or a hazardous substance under applicable federal, state, or local law, rule, regulation, order or directive, at or affecting any property or any facility owned, leased or used by Borrower. COMPLIANCE WITH GOVERNMENTAL REQUIREMENTS. Comply with all laws, ordinances, and regulations, now or hereafter in effect, of all governmental authorities applicable to the conduct of Borrower's properties, businesses and operations, and to the use or occupancy of the Collateral, including without limitation, the Americans With Disabilities Act. Borrower may contest in good faith any such law, ordinance, or regulation and withhold compliance during any proceeding, including appropriate appeals, so long as Borrower has notified Lender in writing prior to doing so and so long as, in Lender's sole opinion, Lender's interests in the Collateral are not jeopardized. Lender may require Borrower to post adequate security or a surety bond, reasonably satisfactory to Lender, to protect Lender's interest. INSPECTION. Permit employees or agents of Lender at any reasonable time to inspect any and all Collateral for the Loan or Loans and Borrower's other properties and to examine or audit Borrower's books, accounts, and records and to make copies and memoranda of Borrower's books, accounts, and records. If Borrower now or at any time hereafter maintains any records (including without limitation computer generated records and computer software programs for the generation of such records) in the possession of a third party, Borrower, upon request of Lender, shall notify such party to permit Lender free access to such records at all reasonable times and to provide Lender with copies of any records it may request, all at Borrower's expense. COMPLIANCE CERTIFICATES. Unless waived in writing by Lender, provide Lender at least annually, with a certificate executed by Borrower's chief financial officer, or other officer or person acceptable to Lender, certifying that the representations and warranties set forth in this Agreement are true and correct as of the date of the certificate and further certifying that, as of the date of the certificate, no Event of Default exists under this Agreement. ENVIRONMENTAL COMPLIANCE AND REPORTS. Borrower shall comply in all respects with any and all Environmental Laws; not cause or permit to exist, as a result of an intentional or unintentional action or omission on Borrower's part or on the part of any third party, on property owned and/or occupied by Borrower, any environmental activity where damage may result to the environment, unless such environmental activity is pursuant to and in compliance with the conditions of a permit issued by the appropriate federal, state or local governmental authorities; shall furnish to Lender promptly and in any event within thirty (30) days after receipt thereof a copy of any notice, summons, lien, citation, directive, letter or other communication from any governmental agency or instrumentality concerning any intentional or unintentional action or omission on Borrower's part in connection with any environmental activity whether or not there is damage to the environment and/or other natural resources. ADDITIONAL ASSURANCES. Make, execute and deliver to Lender such promissory notes, mortgages, deeds of trust, security agreements, assignments, financing statements, instruments, documents and other agreements as Lender or its attorneys may reasonably request to evidence and secure the Loans and to perfect all Security Interests. LENDER'S EXPENDITURES. If any action or proceeding is commenced that would materially affect Lender's interest in the Collateral or if Borrower fails to comply with any provision of this Agreement or any Related Documents, including but not limited to Borrower's failure to discharge or pay when due any amounts Borrower is required to discharge or pay under this Agreement or any Related Documents, Lender on Borrower's behalf may (but shall not be obligated to) take any action that Lender deems appropriate, including but not limited to discharging or paying all taxes, liens, security interests, encumbrances and other claims, at any time levied or placed on any Collateral and paying all costs for insuring, maintaining and preserving any Collateral. All such expenditures incurred or paid by Lender for such purposes will then bear interest at the rate charged under the Note from the date incurred or paid by Lender to the date of repayment by Borrower. All such expenses will become a part of the Indebtedness and, at Lender's option, will (A) be payable on demand; (B) be added to the balance of the Note and be apportioned among and be payable with any installment payments to become due during either (1) the term of any applicable insurance policy; or (2) the remaining term of the Note; or (C) be treated as a balloon payment which will be due and payable at the Note's maturity. NEGATIVE COVENANTS. Borrower covenants and agrees with Lender that while this Agreement is in effect, Borrower shall not, without the prior written consent of Lender: INDEBTEDNESS AND LIENS. (1) Except for trade debt incurred in the normal course of business and indebtedness to Lender contemplated by this Agreement, create, incur or assume indebtedness for borrowed money, including capital leases, (2) sell, transfer, mortgage, assign, pledge, lease, grant a security interest in, or encumber any of Borrower's assets (except as allowed as Permitted Liens), or (3) sell with recourse any of Borrower's accounts, except to Lender. BUSINESS LOAN AGREEMENT (ASSET BASED) LOAN NO:932900001-1 (CONTINUED) Page 5 =============================================================================== CONTINUITY OF OPERATIONS. (1) Engage in any business activities substantially different than those in which Borrow is presently engaged, (2) cease operations, liquidate, merge, transfer or consolidate with any other entity, change its name, dissolve or transfer or sell Collateral out of the ordinary course of business, or (3) pay any dividends on Borrower's stock (other than dividends payable in its stock), provided, however that notwithstanding the foregoing, but only so long as no Event of Default has occurred and is continuing or would result from the payment of dividends, if Borrower is a "Subchapter S Corporation" (as defined in the Internal Revenue Code of 1986, as amended), Borrower may pay cash dividends on its stock to its shareholders from time to time in amounts necessary to enable the shareholders to pay income taxes and make estimated income tax payments to satisfy their liabilities under federal and state law which arise solely from their status as Shareholders of a Subchapter S Corporation because of their ownership of shares of Borrower's stock, or purchase or retire any of Borrower's outstanding shares or alter or amend Borrower's capital structure. LOANS, ACQUISITIONS AND GUARANTIES. CESSATION OF ADVANCES. If Lender has made any commitment to make any Loan to Borrower, whether under this Agreement or under any other agreement, Lender shall have no obligation to make Loan Advances or to disburse Loan proceeds if: (A) Borrower or any Guarantor is in default under the terms of this Agreement or any of the Related Documents or any other agreement that Borrower or any Guarantor has with Lender; (B) Borrower or any Guarantor dies, becomes incompetent or becomes insolvent, files a petition in bankruptcy or similar proceedings, or is adjudged a bankrupt; (C) there occurs a material adverse change in Borrower's financial condition, in the financial condition of any Guarantor, or in the value of any Collateral securing any Loan; or (D) any Guarantor seeks, claims or otherwise attempts to limit, modify or revoke such Guarantor's guaranty of the Loan or any other loan with Lender; or (E) Lender in good faith deems itself insecure, even though no Event of Default shall have occurred. DEFAULT. Each of the following shall constitute an Event of Default under this Agreement: PAYMENT DEFAULT. Borrower fails to make any payment when due under the Loan. OTHER DEFAULTS. Borrower fails to comply with or to perform any other term, obligation, covenant or condition contained in this Agreement or in any of the Related Documents or to comply with or to perform any term, obligation, covenant or condition contained in any other agreement between Lender and Borrower. DEFAULT IN FAVOR OF THIRD PARTIES. Borrower or any Grantor defaults under any loan, extension of credit, security agreement, purchase or sales agreement, or any other agreement, in favor of any other creditor or person that may materially affect any of Borrower's or any Grantor's property or Borrower's or any Grantor's ability to repay the Loans or perform their respective obligations under this Agreement or any of the Related Documents. FALSE STATEMENTS. Any warranty, representation or statement made or furnished to Lender by Borrower or on Borrower's behalf under this Agreement or the Related Documents is false or misleading in any material respect, either now or at the time made or furnished or becomes false or misleading at any time thereafter. INSOLVENCY. The dissolution or termination of Borrower's existence as a going business, the insolvency of Borrower, the appointment of a receiver for any part of Borrower's property, any assignment for the benefit of creditors, any type of creditor workout, or the commencement of any proceeding under any bankruptcy or insolvency laws by or against Borrower. DEFECTIVE COLLATERALIZATION. This Agreement or any of the Related Documents ceases to be in full force and effect (including failure of any collateral document to create a valid and perfected security interest or lien) at any time and for any reason. CREDITOR OF FORFEITURE PROCEEDINGS. Commencement of foreclosure or forfeiture proceedings, whether by judicial proceeding, self-help, repossession or any other method, by any creditor of Borrower or by any governmental agency against any collateral securing the Loan. This includes a garnishment of any of Borrower's accounts, including deposit accounts, with Lender. However, this Event of Default shall not apply if there is a good faith dispute by Borrower as to the validity or reasonableness of the claim which is the basis of the creditor or forfeiture proceeding and if Borrower gives Lender written notice of the creditor or forfeiture proceeding and deposits with Lender monies or a surety bond for the creditor or forfeiture proceeding, in an amount determined by Lender, in its sole discretion, as being an adequate reserve or bond for the dispute. EVENTS AFFECTING GUARANTOR. any of the preceding events occurs with respect to any Guarantor of any of the Indebtedness or any Guarantor dies or becomes incompetent, or revokes or disputes the validity of, or liability under, any Guaranty of the Indebtedness. In the event of a death, Lender, at its option, may, but shall not be required to, permit the Guarantor's estate to assume unconditionally the obligations arising under the guaranty in a manner satisfactory to Lender, and, in doing so, cure any Event of Default. CHANGE IN OWNERSHIP. ** ADVERSE CHANGE. A material adverse change occurs in Borrower's financial condition, or Lender believes the prospect of payment or performance of the Loan is impaired. INSECURITY. Lender in good faith believes itself insecure. RIGHT TO CURE. If any default, other than a default on Indebtedness, is curable and if Borrower or Grantor, as the case may be, has not been given a notice of a similar default within the preceding twelve (12) months, it may be cured (and no Event of Default will have occurred) if Borrower or grantor, as the case may be, after receiving written notice from Lender demanding cure of such default: (1) cure the default within fifteen (15) days; or (2) if the cure requires more than fifteen (15) days, immediately initiate steps which Lender deems in Lender's sole discretion to be sufficient to cure the default and thereafter continue and complete all reasonable and necessary steps sufficient to produce compliance as soon as reasonably practical. EFFECT OF AN EVENT OF DEFAULT. If any Event of Default shall occur, except where otherwise provided in this Agreement or the Related Documents, all commitments and obligations of Lender under this Agreement or the Related Documents or any other agreement immediately will terminate (including any obligation to make further Loan Advances or disbursements), and, at Lender's option, all Indebtedness immediately will become due and payable, all without notice of any kind to Borrower, except that in the case of an Event of Default of the type described in the "Insolvency" subsection above, such acceleration shall be automatic and not optional. In addition, Lender shall have all the rights and remedies provided in the Related Documents or available at law, in equity, or otherwise. Except as may be prohibited by applicable law, all of Lender's rights and remedies shall be cumulative and may be exercised singularly or concurrently. Election by Lender to pursue any remedy shall not exclude pursuit of any other remedy, and an election to make expenditures or to take action to perform an obligation of Borrower or of any Grantor shall not affect Lender's right to declare a default and to exercise its rights and remedies. DEPOSIT AGREEMENT SECURITY. Borrower hereby grants a security interest to Lender in any and all deposit accounts (checking, savings, money market or time) of Borrower at Lender, now existing or hereinafter opened, to secure the Indebtedness. This includes all deposit accounts Borrower holds jointly with someone else. BORROWING BASE CERTIFICATE. Unless waived in writing by Lender, provide Lender within 20 days of each month end and at the time of each disbursement of Loan proceeds with a certificate executed by Borrower's chief financial officer, or other officer or person acceptable to Lender. BUSINESS LOAN AGREEMENT (ASSET BASED) Loan No: 932900001-1 (Continued) PAGE 6 ================================================================================ certifying that the representations and warranties set forth in this Agreement are true and correct as of the date of the certificate and further certifying that, as of the date of the certificate, no Event of Default or Potential Event of Default exists under this Agreement. ADDITIONAL INFORMATION. Borrower covenants and agrees with Lender that, while this Agreement is in effect, Borrower will furnish such additional information and statements, list of assets and liabilities, agings of receivables and payables, inventory schedules, budgets, forecasts, tax returns, and other reports with respect to Borrower's financial condition and business operations as Lender may reasonably request from time to time, including without limitation: (a) detailed Accounts Receivable and Payable agings, as soon as available, but in no event later than twenty (20) days of each month end; (b) detailed Inventory Report, as soon as available, but in no event later than twenty (20) days of each month end. COLLATERAL EXAM. Borrower covenants and agrees with Lender that, while this Agreement is in effect, Borrower will permit employees or agents of Lender at any reasonable time, but at least annually, prior to renewal, to inspect any and all Collateral for the Loan or Loans, as well as Borrower's other properties and to examine or audit Borrower's books, accounts, and records and to make copies and memoranda of Borrower's books, accounts, and records as may be deemed necessary. Any such inspection or examination shall be at Borrower's expense. ADDITIONAL NEGATIVE COVENANT. For transactions in excess of $1,000,000.00, Borrower shall not, without prior written consent from Bank, loan, advance, invest, purchase or otherwise acquire the assets or business of any person or other entity; or merge, consolidate, or commence any proceedings thereof; or sell any assets except in the ordinary and normal course of its business as now conducted. FINANCIAL COVENANTS AND RATIOS. Borrower covenants and agrees with Lender that, while this Agreement is in effect, Borrower will comply with the following financial covenants and ratios: WORKING CAPITAL. Maintain Working Capital in excess of $6,250,000.00, effective for the quarter prior to California Bank & Trust funding and then changing to $4,500,000.00, effective for the immediate quarter subsequent to California Bank & Trust funding, to be monitored on a quarterly basis. TANGIBLE NET WORTH. Maintain a minimum Tangible Net Worth of not less than $10,750,000.00, to be monitored on a quarterly basis. DEBT/TANGIBLE NET WORTH RATIO. Maintain a ratio of Debt/Tangible Net Worth of not less than 1.25 to 1.00, to be monitored on a quarterly basis. EARNINGS BEFORE INTEREST, TAXES DEPRECIATION AND AMORTIZATION/(CURRENT PORTION OF LONG-TERM DEBT + INTEREST EXPENSE) RATIO. Maintain a ratio of Earnings before Interest, Taxes Depreciation and Amortization/(Current Portion of Long-Term Debt + Interest Expense) Ratio of not less than 1.25 to 1.00 effective for the fiscal year end December 31, 2001 and for every quarter through September 30, 2002 and then changing to 1.50 to 1.00 effective for the fiscal year end December 31, 2002 and for every quarter thereafter. Covenant to be reviewed quarterly with the Earnings before Interest, Taxes Depreciation and Amortization and interest expense based upon a cumulative rolling 12-month basis. ADDENDUM TO ELIGIBLE ACCOUNTS SECTION. Item number (12) in the "Eligible Accounts" section is hereby amended to include the following additional information: The concentration levels of Fisher Scientific International (CMS) and IDAXX Laba, Inc. shall be calculated on a combined basis of all the A/R (i.e. IDAXX/IRIS + Statspin). MISCELLANEOUS PROVISIONS. The following miscellaneous provisions are a part of this Agreement: AMENDMENTS. This Agreement, together with any Related Documents, constitutes the entire understanding and agreement of the parties as to the matters set forth in this Agreement. No alteration of or amendment to this Agreement shall be effective unless given in writing and signed by the party or parties sought to be charged or bound by the alteration or amendment. ATTORNEYS' FEES; EXPENSES. Borrower agrees to pay upon demand all of Lender's costs and expenses, including Lender's attorneys' fees and Lender's legal expenses, incurred in connection with the enforcement of this Agreement. Lender may hire or pay someone else to help enforce this Agreement, and Borrower shall pay the costs and expenses of such enforcement. Costs and expenses include Lender's attorneys' fees and legal expenses whether or not there is a lawsuit, including attorneys' fees and legal expenses for bankruptcy proceedings (including efforts to modify or vacate any automatic stay or injunction), appeals, and any anticipated post-judgment collection services. Borrower also shall pay all court costs and such additional fees as may be directed by the court. CAPTION HEADINGS. Caption headings in this Agreement are for convenience purposes only and are not to be used to interpret or define the provisions of this Agreement. CONSENT TO LOAN PARTICIPATION. Borrower agrees and consents to Lender's sale or transfer, whether now or later, of one or more participation interests in the Loan to one or more purchasers, whether related or unrelated to Lender. Lender may provide, without any limitation whatsoever, to any one or more purchasers, or potential purchasers, any information or knowledge Lender may have about Borrower or about any other matter relating to the Loan, and Borrower hereby waives any rights to privacy Borrower may have with respect to such matters. Borrower additionally waives any and all notices of sale of participation interests, as well as all notices of any repurchase of such participation interests. Borrower also agrees that the purchasers of any such participation interests will be considered as the absolute owners of such interests in the Loan and will have all the rights granted under the participation agreement or agreements governing the sale of such participation interests. Borrower further waives all rights of offset or counterclaim that it may have now or later against Lender or against any purchaser of such a participation interest and unconditionally agrees that either Lender or such purchaser may enforce Borrower's obligation under the Loan irrespective of the failure or insolvency of any holder of any interest in the Loan. Borrower further agrees that the purchaser of any such participation interests may enforce its interests irrespective of any personal claims or defenses that Borrower may have against Lender. GOVERNING LAW. THIS AGREEMENT WILL BE GOVERNED BY, CONSTRUED AND ENFORCED IN ACCORDANCE WITH FEDERAL LAW AND THE LAWS OF THE STATE OF CALIFORNIA. THIS AGREEMENT HAS BEEN ACCEPTED BY LENDER IN THE STATE OF CALIFORNIA. CHOICE OF VENUE. If there is a lawsuit, Borrower agrees upon Lender's request to submit to the jurisdiction of the courts of Los Angeles County, State of California. NO WAIVER BY LENDER. Lender shall not be deemed to have waived any rights under this Agreement unless such waiver is given in writing and signed by Lender. No delay or omission on the part of Lender in exercising any right shall operate as a waiver of such right or any other right. A waiver by Lender of a provision of this Agreement shall not prejudice or constitute a waiver of Lender's right otherwise to demand strict compliance with that provision or any other provision of this Agreement. No prior waiver by Lender, nor any course of dealing between Lender and Borrower, or between Lender and any Grantor, shall constitute a waiver of any of Lender's rights or of any of Borrower's or any Grantor's obligations as to any future transactions. Whenever the consent of Lender is required under this Agreement, the granting of such consent by Lender in any instance shall not constitute continuing consent to subsequent instances where such consent is required and in all cases such consent may be granted or withheld in the sole discretion of Lender. NOTICES. Any notice required to be given under this Agreement shall be given in writing, and shall be effective when actually delivered, when actually received by telefacsimile (unless otherwise required by law), when deposited with a nationally recognized overnight courier, or, if mailed, when deposited in the United States mail, as first class, certified or registered mail postage prepaid, directed to the addresses shown near the beginning of this Agreement. Any party may change its address for notices under this Agreement by giving formal written notice to the other parties, specifying that the purpose of the notice is to change the party's address. For notice purposes, Borrower agrees to keep Lender informed at all times of Borrower's current address. Unless otherwise provided or required by law, if there is more than one Borrower, any notice given by BUSINESS LOAN AGREEMENT (ASSET BASED) LOAN NO: 932900001-1 (CONTINUED) PAGE 7 ================================================================================ Lender to any Borrower is deemed to be notice given to all Borrowers. SEVERABILITY. If a court of competent jurisdiction finds any provision of this Agreement to be illegal, invalid, or unenforceable as to any circumstance, that finding shall not make the offending provision illegal, invalid, or unenforceable as to any other circumstance. If feasible, the offending provision shall be considered modified so that it becomes legal, valid and enforceable. If the offending provision cannot be so modified, it shall be considered deleted from this Agreement. Unless otherwise required by law, the illegality, invalidity, or unenforceability of any provision of this Agreement shall not affect the legality, validity or enforceability of any other provision of this Agreement. SUBSIDIARIES AND AFFILIATES OF BORROWER. To the extent the context of any provisions of this Agreement makes it appropriate, including without limitation any representation, warranty or covenant, the word "Borrower" as used in this Agreement shall include all of Borrower's subsidiaries and affiliates. Notwithstanding the foregoing however, under no circumstances shall this Agreement be construed to require Lender to make any Loan or other financial accommodation to any of Borrower's subsidiaries or affiliates. SUCCESSORS AND ASSIGNS. All covenants and agreements contained by or on behalf of Borrower shall bind Borrower's successors and assigns and shall inure to the benefit of Lender and its successors and assigns. Borrower shall not, however, have the right to assign Borrower's rights under this Agreement or any interest therein, without the prior written consent of Lender. SURVIVAL OF REPRESENTATIONS AND WARRANTIES. Borrower understands and agrees that in extending Loan Advances, Lender is relying on all representations, warranties, and covenants made by Borrower in this Agreement or in any certificate or other instrument delivered by Borrower to Lender under this Agreement or the Related Documents. Borrower further agrees that regardless of any investigation made by Lender, all such representations, warranties and covenants will survive the extension of Loan Advances and delivery to Lender of the Related Documents, shall be continuing in nature, shall be deemed made and redated by Borrower at the time each Loan Advance is made, and shall remain in full force and effect until such time as Borrower's Indebtedness shall be paid in full, or until this Agreement shall be terminated in the manner provided above, whichever is the last to occur. TIME IS OF THE ESSENCE. Time is of the essence in the performance of this Agreement. WAIVE JURY. ALL PARTIES TO THIS AGREEMENT HEREBY WAIVE THE RIGHT TO ANY JURY TRIAL IN ANY ACTION, PROCEEDING, OR COUNTERCLAIM BROUGHT BY ANY PARTY AGAINST ANY OTHER PARTY. DEFINITIONS. The following capitalized words and terms shall have the following meanings when used in this Agreement. Unless specifically stated to the contrary, all references to dollar amounts shall mean amounts in lawful money of the United States of America. Words and terms used in the singular shall include the plural, and the plural shall include the singular, as the context may require. Words and terms not otherwise defined in this Agreement shall have the meanings attributed to such terms in the Uniform Commercial Code. Accounting words and terms not otherwise defined in this Agreement shall have the meanings assigned to them in accordance with generally accepted accounting principles as in effect on the date of this Agreement: ACCOUNT. The word "Account" means a trade account, account receivable, other receivable, or other right to payment for goods sold or services rendered owing to Borrower (or to a third party grantor acceptable to Lender). ADVANCE. The word "Advance" means a disbursement of Loan funds made, or to be made, to Borrower or on Borrower's behalf under the terms and conditions of this Agreement. AGREEMENT. The word "Agreement" means this Business Loan Agreement (Asset Based), as this Business Loan Agreement (Asset Based) may be amended or modified from time to time, together with all exhibits and schedules attached to this Business Loan Agreement (Asset Based) from time to time. BORROWER. The word "Borrower" means international Remote Imaging Systems, Inc., and all other persons and entities signing the Note in whatever capacity. BORROWING BASE. The words "Borrowing Base" mean as determined by Lender from time to time, the lesser of (1) $6,500,000.00 or (2) the sum of (a) 80.000% of the aggregate amount of Eligible Accounts, 60 DAYS or less from the due date for domestic Accounts Receivable, and 90 DAYS or less from the due date for Foreign Accounts Receivable with sufficient Accounts Receivable insurance coverage or L/C support (not to exceed in corresponding Loan amount based on Eligible Accounts $6,500,000.00), plus (b) 30.000% of the aggregate amount of Eligible Raw Material Inventory and 30.000% of Eligible Finished Goods Inventory (not to exceed $1,500,000.00). *** BUSINESS DAY. The words "Business Day" mean a day on which commercial banks are open in the State of California. COLLATERAL. The word "Collateral" means all property and assets granted as collateral security for a loan, whether real or personal property, whether granted directly or indirectly, whether granted now or in the future, and whether granted in the form of a security interest, mortgage, collateral mortgage, deed of trust, assignment, pledge, crop pledge, chattel mortgage, collateral chattel mortgage, chattel trust, factor's lien, equipment trust, conditional sale, trust receipt, lien, charge, lien or title retention contract, lease or consignment intended as a security device, or any other security or lien interest whatsoever, whether created by law, contract, or otherwise. The word Collateral also includes without limitation all collateral described in the Collateral section of this Agreement. ELIGIBLE ACCOUNTS. The words "Eligible Accounts" mean at any time, all of Borrower's Accounts which contain selling terms and conditions acceptable to Lender. The net amount of any Eligible Account against which Borrower may borrow shall exclude all returns, discounts, credits, and offsets of any nature. Unless otherwise agreed to by Lender in writing, Eligible Accounts do not include: (1) Accounts with respect to which the Account Debtor is employee or agent of Borrower. (2) Accounts with respect to which the Account Debtor is a subsidiary of, or affiliated with Borrower or its shareholders, officers, or directors. (3) Accounts with respect to which goods are placed on consignment, guaranteed sale, or other terms by reason of which the payment by the Account Debtor may be conditional. (4) Accounts with respect to which the Account Debtor is not a resident of the United States, except to the extent such Accounts are supported by insurance, bonds or other assurances satisfactory to Lender. (5) Accounts with respect to which Borrower is or may become liable to the Account Debtor for goods sold or services rendered by the Account Debtor to Borrower. (6) Accounts which are subject to dispute, counterclaim, or setoff. (7) Accounts with respect to which the goods have not been shipped or delivered, or the services have not been rendered, to the Account Debtor. (8) Accounts with respect to which Lender, in its sole discretion, deems the creditworthiness or financial condition of the Account Debtor to be unsatisfactory. BUSINESS LOAN AGREEMENT (ASSET BASED) LOAN NO: 932900001-1 (CONTINUED) PAGE 8 ================================================================================ (9) Accounts of any Account Debtor who has filed or has had filed against it a petition in bankruptcy or an application for relief under any provision of any state or federal bankruptcy, insolvency, or debtor-in- relief acts; or who has had appointed trustee, custodian, or receiver for the assets of such Account Debtor; or who has made an assignment for the benefit of creditors or has become insolvent of fails generally to pay its debt (including its payrolls) as such debts become due. (10) Account with respect to which the Account Debtor is the United States government or any department or agency of the United States. (11) Accounts which have not been paid in full within 60 DAYS from the due date. The entire balance of any Account of any single Account Debtor will be in eligible whenever the portion of the Account which has not been paid within 60 DAYS from the due date is in excess of 25.000% of the total amount outstanding on the Account. (12) That portion of the Accounts of any single Account Debtor which exceeds 25.000% of all of Borrower's Accounts. ELIGIBLE INVENTORY. The words "Eligible Inventory" mean at any time, all of Borrower's Inventory as defined below except: (1) Inventory which is not owned by Borrower free and clear of all security interests, liens, encumbrances, and claims of third parties. (2) Inventory which Lender, in its sole discretion, deems to be obsolete, unsalable, damaged, defective, or unfit for further processing. (3) Work in progress (4) Items held in showroom and inventory located in a 3rd party warehouse. ENVIRONMENTAL LAWS. The word "Environmental Laws" mean any and all state, federal and local statutes, regulations and ordinances relating to the protection of human health of the environment, including without limitation the Comprehensive Environment Response, Compensation, and Liability Act of 1980, as amended, 42 U.S.C. Section 9601, et seq. ("CERCLA"), the Superfund Amendments and Reauthorization Act of 1986, Pub. L. No. 99-499 ("SARA"), the Hazardous Materials Transportation Act, 49 U.S.C. Section 1801, et seq., the Resource Conservation and Recovery Act, 42 U.S.C. Section 6901, et seq., Chapters 6.5 through 7.7 of Division 20 of the California Health and Safety Code, Section 25100, et seq., or other applicable state or federal laws, rules, or regulations adopted pursuant thereto. EVENT OF DEFAULT. The words "Event of Default" mean any of the events of default set forth in this Agreement if the default section of this Agreement. EXPIRATION DATE. The words "Expiration Date mean the date of termination of Lender's commitment to lend under this Agreement. GAAP. The word "GAAP" means generally accepted accounting principles. GRANTOR. The word "Grantor" means each and all to the persons or entities granting a Security Interest in an Collateral for the Loan, including without limitation all Borrowers granting such a Security Interest. GUARANTOR. The word "Guarantor" means any guarantor, surely, or accommodation party of any or all of the loan. GUARANTY. The work "Guaranty" means the guaranty from Guarantor to Lender, including without limitation a guaranty of all or part of the Note. HAZARDOUS SUBSTANCES. The word "Hazardous Substances' mean materials that, because of their quantity, concentration or physical, chemical or infectious characteristics, may cause or pose a present or potential hazard to human health of the environment when improperly used, treated, stored, disposed of, generated, manufactured, transported or otherwise handled. The words "Hazardous Substances" are used in their very broadest sense and include without limitation any and all hazardous or toxic substances, materials or waste as defined by or listed under the Environmental Laws. The term "Hazardous Substances" also includes, without limitation, petroleum and petroleum by-products or any fraction thereof and asbestos. INDEBTEDNESS. The word "Indebtedness" means the indebtedness evidenced by the Note or Related Documents, including all principal and interest together with all other indebtedness and costs and expenses for which Borrowers is responsible under this Agreement or under any of the Related Documents. INVENTORY. The word "Inventory means all of Borrower's raw materials, work in process, finished goods, merchandise, parts and supplies, of every kind and description, and goods held for sale or lease or furnished under contracts of service in which Borrower now has or hereafter acquires any right, whether held by Borrower or others, and all documents of title, warehouse receipts, bills of lading, and all other documents of every type covering all or any part of the foregoing. Inventory includes inventory temporarily out of Borrower's custody or possession and all returns on Accounts. LENDER. The word "Lender" means California Bank & Trust, its successors and assigns. LOAN. The word "Loan" means any and all loans and financial accommodations from Lender to Borrower whether now or hereafter existing, and however evidenced, including without limitation those loans and financial accommodations described herein or described on any exhibit or schedule attached to this Agreement from time to time. NOTE. The word "Note" means the Note executed by International Remote Imaging Systems, Inc. in the principal amount of $6,500,000.00 dated February 7, 2002, together with all renewals of, extensions of, modifications of, refinancings of, consolidations of, and substitutions for the note or credit agreement. PERMITTED LIENS. The words "Permitted Liens" mean (1) liens and security interests securing indebtedness owed by Borrower to Lender; (2) liens for taxes, assessments, or similar charges either not yet due or being contested in good faith; (3) liens of materialmen, mechanics, warehousemen, or carriers, or other like liens arising in the ordinary course of business and securing obligations which are not yet delinquent; (4) purchase money liens or purchase money security interests upon or in any property acquired or held by Borrower in the ordinary course of business to secure indebtedness outstanding on the date of this Agreement or permitted to be incurred under the paragraph of this Agreement titled "Indebtedness and Liens"; (5) liens and security interests which, as of the date of this Agreement, have been disclosed to and approved by the Lender in writing; and (6) those liens and security interests which in the aggregate constitute an immaterial and insignificant monetary amount with respect to the net value of Borrower's assets. PRIMARY CREDIT FACILITY. The words "Primary Credit Facility" mean the credit facility described in the Line of Credit section of this Agreement. RELATED DOCUMENTS. The words "Related Documents" mean all promissory notes, credit agreements, loan agreements, environmental agreements, guaranties, security agreements, mortgages, deeds of trust, security deeds, collateral mortgages, and all other instruments, agreements and documents, whether now or hereafter existing, executed in connection with the Loan. SECURITY AGREEMENT. The word "Security Agreement" mean and include without limitation any agreements, promises, covenants, arrangements, understandings or other agreements, whether created by law, contract, or otherwise, evidencing, governing, representing, or creating a Security Interest. SECURITY INTEREST. The words "Security Interest" mean, without limitation, any and all types of collateral security, present and future, whether in the BUSINESS LOAN AGREEMENT (ASSET BASED) LOAN NO: 932900001-1 (CONTINUED) PAGE 9 ================================================================================ form of a lien, charge, encumbrance, mortgage, deed of trust, security deed, assignment, pledge, crop pledge, chattel mortgage, collateral chattel mortgage, chattel trust, factor's lien, equipment trust, conditional sale, trust receipt, lien or title retention contract, lease or consignment intended as a security device, or any other security or lien interest whatsoever whether created by law, contract, or otherwise. BORROWER ACKNOWLEDGES HAVING READ ALL THE PROVISIONS OF THIS BUSINESS LOAN AGREEMENT (ASSET BASED) AND BORROWER AGREES TO ITS TERMS. THIS BUSINESS LOAN AGREEMENT (ASSET BASED) IS DATED FEBRUARY 7, 2002. BORROWER: BY: /s/ John A. O'Malley BY: /s/ John Caloz ----------------------------- ---------------------------- LENDER: DR. JOHN A. O'MALLEY JOHN CALOZ CEO OF INTERNATIONAL REMOTE CFO/SECRETARY OF INTERNATIONAL IMAGING SYSTEMS, INC. REMOTE IMAGING, INC. CALIFORNIA BANK & TRUST By: [SIGNATURE ILLEGIBLE] ------------------------------ AUTHORIZED SIGNER - -------------------------------------------------------------------------------- ** Any acquisition of Borrower's common stock by merger, new issuance, or otherwise, that results in one holder owning twenty-five (25%) percent or more of such common stock. *** For Purposes of calculating the Borrowing Base, the numbers and percentages described above shall use the combined figures of Borrower and its subsidiary Statspin, Inc. BUSINESS LOAN AGREEMENT

- --------------------------------------------------------------------------------------------------------------------- PRINCIPAL LOAN DATE MATURITY LOAN NO CALL/COLL ACCOUNT OFFICER INITIALS $500,000.00 02-07-2002 01-31-2007 932900001-3 932900001-3 22163 [INITIALS ILLEGIBLE] - --------------------------------------------------------------------------------------------------------------------- References in the shaded area are for Lender's use only and do not limit the applicability of this document to any particular loan or item. Any item above containing "***" has been omitted due to text length limitations. - ---------------------------------------------------------------------------------------------------------------------

BORROWER: INTERNATIONAL REMOTE LENDER: CALIFORNIA BANK & TRUST IMAGING SYSTEMS, INC. COMMERCIAL LOAN CENTER 9162 ETON AVENUE 550 SOUTH HOPE STREET, SUITE 300 CHATSWORTH, CA 91311 LOS ANGELES, CA 90071 ================================================================================ THIS BUSINESS LOAN AGREEMENT DATED FEBRUARY 7, 2002, IS MADE AND EXECUTED BETWEEN INTERNATIONAL REMOTE IMAGING SYSTEMS, INC. ("BORROWER") AND CALIFORNIA BANK & TRUST ("LENDER") ON THE FOLLOWING TERMS AND CONDITIONS. BORROWER HAS RECEIVED PRIOR COMMERCIAL LOANS FROM LENDER OR HAS APPLIED TO LENDER FOR A COMMERCIAL LOAN OR LOANS OR OTHER FINANCIAL ACCOMMODATIONS, INCLUDING THOSE WHICH MAY BE DESCRIBED ON ANY EXHIBIT OR SCHEDULE ATTACHED TO THIS AGREEMENT ("LOAN"). BORROWER UNDERSTANDS AND AGREES THAT: (A) IN GRANTING, RENEWING, OR EXTENDING ANY LOAN, LENDER IS RELYING UPON BORROWER'S REPRESENTATIONS, WARRANTIES, AND AGREEMENTS AS SET FORTH IN THIS AGREEMENT; (B) THE GRANTING, RENEWING, OR EXTENDING OF ANY LOAN BY LENDER AT ALL TIMES SHALL BE SUBJECT TO LENDER'S SOLE JUDGMENT AND DISCRETION; AND (C) ALL SUCH LOANS SHALL BE AND REMAIN SUBJECT TO THE TERMS AND CONDITIONS OF THIS AGREEMENT. TERM. This Agreement shall be effective as of February 7, 2002, and shall continue in full force and effect until such time as all of Borrower's Loans in favor of Lender have been paid in full, including principal, interest, costs, expenses, attorneys' fees, and other fees and charges, or until such time as the parties may agree in writing to terminate this Agreement. CONDITIONS PRECEDENT TO EACH ADVANCE. Lender's obligation to make the initial Advance and each subsequent Advance under this Agreement shall be subject to the fulfillment to Lender's satisfaction of all of the conditions set forth in this Agreement and in the Related Documents. LOAN DOCUMENTS. Borrower shall provide to Lender the following documents for the Loan: (1) the Note; (2) Security Agreements granting to Lender security interests in the Collateral; (3) financing statements and all other documents perfecting Lender's Security Interests; (4) evidence of insurance as required below; (5) guaranties; (6) together with all such Related Documents as Lender may require for the Loan; all in form and substance satisfactory to Lender and Lender's counsel. BORROWER'S AUTHORIZATION. Borrower shall have provided in form and substance satisfactory to Lender properly certified resolutions, duly authorizing the execution and delivery of this Agreement, the Note and the Related Documents. In addition, Borrower shall have provided such other resolutions, authorizations, documents and instruments as Lender or its counsel, may require. PAYMENT OF FEES AND EXPENSES. Borrower shall have paid to Lender all fees, charges, and other expenses which are then due and payable as specified in this Agreement or any Related Document. REPRESENTATIONS AND WARRANTIES. The representations and warranties set forth in this Agreement, in the Related Documents, and in any document or certificate delivered to Lender under this Agreement are true and correct. NO EVENT OF DEFAULT. There shall not exist at the time of any Advance a condition which would constitute an Event of Default under this Agreement or under any Related Document. REPRESENTATIONS AND WARRANTIES. Borrower represents and warrants to Lender as of the date of this Agreement, as of the date of each disbursement of loan proceeds, as of the date of any renewal, extension or modification of any Loan, and at all times any indebtedness exists: ORGANIZATION. Borrower is a corporation for profit which is, and at all times shall be, duly organized, validly existing, and in good standing under and by virtue of the laws of the State of Delaware. Borrower is duly authorized to transact business in the State of California and all other states in which Borrower is doing business, having obtained all necessary filings, governmental licenses and approvals for each state in which the failure to so qualify would have a material adverse effect on its business or financial condition. Borrower has the full power and authority to own its properties and to transact the business in which it is presently engaged or presently proposes to engage. Borrower maintains an office at 9162 Eton Avenue, Chatsworth, CA 91311. Unless Borrower has designated otherwise in writing, the principal office is the office at which Borrower keeps its books and records including its records concerning the Collateral. Borrower will notify Lender prior to any change in the location of Borrower's state of organization or any change in Borrower's name. Borrower shall do all things necessary to preserve and to keep in full force and effect its existence, rights and privileges, and shall comply with all regulations, rules, ordinances, statutes, orders and decrees of any governmental or quasi-governmental authority or court applicable to Borrower and Borrower's business activities. ASSUMED BUSINESS NAMES. Borrower has filed or recorded all documents or filings required by law relating to all assumed business names used by Borrower. Excluding the name of Borrower, the following is a complete list of all assumed business names under which Borrower does business: IRIS and IRIS Diagnostics. AUTHORIZATION. Borrower's execution, delivery, and performance of this Agreement and all the Related Documents have been duly authorized by all necessary action by Borrower and do not conflict with, result in a violation of, or constitute a default under (1) any provision of Borrower's articles of incorporation or organization, or bylaws, or any agreement or other instrument binding upon Borrower or (2) any law, governmental regulation, court decree or order applicable to Borrower or to Borrower's properties. FINANCIAL INFORMATION. Each of Borrower's financial statements supplied to Lender truly and completely disclosed Borrower's financial condition as of the date of the statement, and there has been no material adverse change in Borrower's financial condition subsequent to the date of the most recent financial statement supplied to Lender. Borrower has no material contingent obligations except as disclosed in such financial statements. LEGAL EFFECT. This Agreement constitutes, and any instrument or agreement Borrower is required to give under this Agreement when delivered will constitute legal, valid, and binding obligations of Borrower enforceable against Borrower in accordance with their respective terms. PROPERTIES. Except as contemplated by this Agreement or as previously disclosed in Borrower's financial statements or in writing to Lender and as accepted by Lender, and except for property tax liens for taxes not presently due and payable, Borrower owns and has good title to all of Borrower's properties free and clear of all Security Interests, and has not executed any security documents or financing statements relating to such properties. All of Borrower's properties are titled in Borrower's legal name, and Borrower has not used or filed a financing statement under any other name for at least the last five (5) years. HAZARDOUS SUBSTANCES. Except as disclosed to and acknowledged by Lender in writing, Borrower represents and warrants that: (1) During the period of Borrower's ownership of Borrower's Collateral, there has been no use, generation, manufacture, storage, treatment, disposal, release or threatened release of any Hazardous Substance by any person on, under, about or from any of the Collateral. (2) Borrower has no knowledge of, or reason to believe that there has been (a) any breach or violation of any Environmental Laws; (b) any use, generation, manufacture, storage, BUSINESS LOAN AGREEMENT Loan No: 932900001-3 (CONTINUED) PAGE 2 ================================================================================ treatment, disposal, release or threatened release of any Hazardous Substance on, under, about or from the Collateral by any prior owners or occupants of any of the Collateral; or (c) any actual or threatened litigation or claims of any kind by any person relating to such matters. (3) Neither Borrower nor any tenant, contractor, agent or other authorized user of any of the Collateral shall use, generate, manufacture, store, treat, dispose of or release any Hazardous Substance on, under, about or from any of the Collateral; and any such activity shall be conducted in compliance with all applicable federal, state, and local laws, regulations, and ordinances, including without limitation all Environmental Laws. Borrower authorizes Lender and its agents to enter upon the Collateral to make such inspections and tests as Lender may deem appropriate to determine compliance of the Collateral with this section of the Agreement. Any inspections or tests made by Lender shall be at Borrower's expense and for Lender's purposes only and shall not be construed to create any responsibility or liability on the part of Lender to Borrower or to any other person. The representations and warranties contained herein are based on Borrower's due diligence in investigating the Collateral for hazardous waste and Hazardous Substances. Borrower hereby (1) releases and waives any future claims against Lender for indemnity or contribution in the event Borrower becomes liable for cleanup or other costs under any such laws, and (2) agrees to indemnify and hold harmless Lender against any and all claims, losses, liabilities, damages, penalties, and expenses which Lender may directly or indirectly sustain or suffer resulting from a breach of this section of the Agreement or as a consequence of any use, generation, manufacture, storage, disposal, release or threatened release of a hazardous waste or substance on the Collateral. The provisions of this section of the Agreement, including the obligation to indemnify, shall survive the payment of the Indebtedness and the termination, expiration or satisfaction of this Agreement and shall not be affected by Lender's acquisition of any interest in any of the Collateral, whether by foreclosure or otherwise. LITIGATION AND CLAIMS. No litigation, claim, investigation, administrative proceeding or similar action (including those for unpaid taxes) against Borrower is pending or threatened, and no other event has occurred which may materially adversely affect Borrower's financial condition or properties, other than litigation, claims, or other events, if any, that have been disclosed to and acknowledged by Lender in writing. TAXES. To the best of Borrower's knowledge, all of Borrower's tax returns and reports that are or were required to be filed, have been filed, and all taxes, assessments and other governmental charges have been paid in full, except those presently being or to be contested by Borrower in good faith in the ordinary course of business and for which adequate reserves have been provided. LIEN PRIORITY. Unless otherwise previously disclosed to Lender in writing, Borrower has not entered into or granted any Security Agreements, or permitted the filing or attachment of any Security Interests on or affecting any of the Collateral directly or indirectly securing repayment of Borrower's Loan and Note, that would be prior or that may in any way be superior to Lender's Security Interests and rights in and to such Collateral. BINDING EFFECT. This Agreement, the Note, all Security Agreements (if any), and all Related Documents are binding upon the signers thereof, as well as upon their successors, representatives and assigns, and are legally enforceable in accordance with their respective terms. AFFIRMATIVE COVENANTS. Borrower covenants and agrees with Lender that, so long as this Agreement remains in effect, Borrower will: NOTICES OF CLAIMS AND LITIGATION. Promptly inform Lender in writing of (1) all material adverse changes in Borrower's financial condition, and (2) all existing and all threatened litigation, claims, investigations, administrative proceedings or similar actions affecting Borrower or any Guarantor which could materially affect the financial condition of Borrower or the financial condition of any Guarantor. FINANCIAL RECORDS. Maintain its books and records in accordance with GAAP, applied on a consistent basis, and permit Lender to examine and audit Borrower's books and records at all reasonable times. FINANCIAL STATEMENTS. Furnish Lender with the following: ANNUAL STATEMENTS. As soon as available, but in no event later than one-hundred-twenty (120) days after the end of each fiscal year, Borrower's balance sheet and income statement for the year ended, audited by a certified public accountant satisfactory to Lender. INTERIM STATEMENTS. As soon as available, but in no event later than sixty (60) days after the end of each fiscal quarter, Borrower's balance sheet and profit and loss statement for the period ended, prepared by Borrower. TAX RETURNS. As soon as available, but in no event later than thirty (30) days after the applicable filing date for the tax reporting period ended, Federal and other governmental tax returns, prepared by Borrower. All financial reports required to be provided under this Agreement shall be prepared in accordance with GAAP, applied on a consistent basis, and certified by Borrower as being true and correct. ADDITIONAL INFORMATION. Furnish such additional information and statements, as Lender may request from time to time. INSURANCE. Maintain fire and other risk insurance, public liability insurance, and such other insurance as Lender may require with respect to Borrower's properties and operations, in form, amounts, coverages and with insurance companies acceptable to Lender. Borrower, upon request of Lender, will deliver to Lender from time to time the policies or certificates of insurance in form satisfactory to Lender, including stipulations that coverages will not be cancelled or diminished without at least ten (10) days prior written notice to Lender. Each insurance policy also shall include an endorsement providing that coverage in favor of Lender will not be impaired in any way by any act, omission or default of Borrower or any other person. In connection with all policies covering assets in which Lender holds or is offered a security interest for the Loans, Borrower will provide Lender with such lender's loss payable or other endorsements as Lender may require. INSURANCE REPORTS. Furnish to Lender, upon request of Lender, reports on each existing insurance policy showing such information as Lender may reasonably request, including without limitation the following: (1) the name of the insurer; (2) the risks insured; (3) the amount of the policy; (4) the properties insured; (5) the then current property values on the basis of which insurance has been obtained, and the manner of determining those values; and (6) the expiration date of the policy. In addition, upon request of Lender (however not more often than annually), Borrower will have an independent appraiser satisfactory to Lender determine, as applicable, the actual cash value or replacement cost of any Collateral. The cost of such appraisal shall be paid by Borrower. GUARANTIES. Prior to disbursement of any Loan proceeds, furnish executed guaranties of the Loans in favor of Lender, executed by the guarantors named below, on Lender's forms, and in the amounts and under the conditions set forth in those guaranties. NAMES OF GUARANTORS AMOUNTS ------------------- ----------- ADVANCED DIGITAL IMAGING RESEARCH, LLC 8,000,000.00 STATSPIN, INC. $8,000,000.00 OTHER AGREEMENTS. Comply with all terms and conditions of all other agreements, whether now or hereafter existing, between Borrower and any other party and notify Lender immediately in writing of any default in connection with any other such agreements. LOAN PROCEEDS. Use all Loan proceeds solely for Borrower's and subsidiaries' business operations specifically consented to the contrary by Lender in writing. TAXES, CHARGES AND LIENS. Pay and discharge when due all of its indebtedness and obligations, including without limitation all assessments, taxes, governmental charges, levies and liens, of every kind and nature, imposed upon Borrower or its properties, income, or profits, prior to the BUSINESS LOAN AGREEMENT LOAN NO: 932900001-3 (CONTINUED) PAGE 3 ================================================================================ date on which penalties would attach, and all lawful claims that, if unpaid, might become a lien or charge upon any of Borrower's properties, income, or profits. PERFORMANCE. Perform and comply, in a timely manner, with all terms, conditions, and provisions set forth in this Agreement, in the Related Documents, and in all other instruments and agreements between Borrower and Lender. Borrower shall notify Lender immediately in writing of any default in connection with any agreement. OPERATIONS. Maintain executive and management personnel with substantially the same qualifications and experience as the present executive and management personnel; provide written notice to Lender of any change in executive and management personnel; conduct its business affairs in a reasonable and prudent manner. ENVIRONMENTAL STUDIES. Promptly conduct and complete, at Borrower's expense, all such investigations, studies, samplings and testings as may be requested by Lender or any governmental authority relative to any substance, or any waste or by-product of any substance defined as toxic or a hazardous substance under applicable federal, state, or local law, rule, regulation, order or directive, at or affecting any property or any facility owned, leased or used by Borrower. COMPLIANCE WITH GOVERNMENTAL REQUIREMENTS. Comply with all laws, ordinances, and regulations, now or hereafter in effect, of all governmental authorities applicable to the conduct of Borrower's properties, business and operations, and to the use or occupancy of the Collateral, including without limitation, the Americans With Disabilities Act. Borrower may contest in good faith any such law, ordinance, or regulation and withhold compliance during any proceeding, including appropriate appeals, so long as Borrower has notified Lender in writing prior to doing so and so long as, in Lender's sole opinion, Lender's interests in the Collateral are not jeopardized. Lender may require Borrower to post adequate security or a surety bond, reasonably satisfactory to Lender, to protect Lender's interest. INSPECTION. Permit employees or agents of Lender at any reasonable time to inspect any and all Collateral for the Loan or Loans and Borrower's other properties and to examine or audit Borrower's books, accounts, and records and to make copies and memoranda of Borrower's books, accounts, and records. If Borrower now or at any time hereafter maintains any records (including without limitation computer generated records and computer software programs for the generation of such records) in the possession of a third party, Borrower, upon request of Lender, shall notify such party to permit Lender free access to such records at all reasonable times and to provide Lender with copies of any records it may request, all at Borrower's expense. COMPLIANCE CERTIFICATES. Unless waived in writing by Lender, provide Lender at least annually, with a certificate executed by Borrower's chief financial officer, or other officer or person acceptable to Lender, certifying that the representations and warranties set forth in this Agreement are true and correct as of the date of the certificate and further certifying that, as of the date of the certificate, no Event of Default exists under this Agreement. ENVIRONMENTAL COMPLIANCE AND REPORTS. Borrower shall comply in all respects with any and all Environmental Laws; not cause or permit to exist, as a result of an intentional or unintentional action or omission on Borrower's part or on the part of any third party, on property owned and/or occupied by Borrower, any environmental activity where damage may result to the environment, unless such environmental activity is pursuant to and in compliance with the conditions of a permit issued by the appropriate federal, state or local governmental authorities; shall furnish to Lender promptly and in any event within thirty (30) days after receipt thereof a copy of any notice, summons, lien, citation, directive, letter or other communication from any governmental agency or instrumentality concerning any intentional or unintentional action or omission on Borrower's part in connection from any environmental activity whether or not there is damage to the environment and/or other natural resources. ADDITIONAL ASSURANCES. Make, execute and deliver to Lender such promissory notes, mortgages, deeds of trust, security agreements, assignments, financing statements, instruments, documents and other agreements as Lender or its attorneys may reasonably request to evidence and secure the Loans and to perfect all Security Interests. Lender'S EXPENDITURES. If any action or proceeding is commenced that would materially affect Lender's interest in the Collateral or if Borrower fails to comply with any provision of this Agreement or any Related Documents, including but not limited to Borrower's failure to discharge or pay when due any amounts Borrower is required to discharge or pay under this Agreement or any Related Documents, Lender on Borrower's behalf may (but shall not be obligated to) take any action that Lender deems appropriate, including but not limited to discharging or paying all taxes, liens, security interests, encumbrances and other claims, at any time levied or placed on any Collateral and paying all costs for insuring, maintaining and preserving any Collateral. All such expenditures incurred or paid by Lender for such purposes will then bear interest at the rate charged under the Note from the date incurred or paid by Lender to the date of repayment by Borrower. All such expenses will become a part of the Indebtedness and, at Lender's option, will (A) be payable on demand; (B) be added to the balance of the Note and be apportioned among and be payable with any installment payments to become due during either (1) the term of any applicable insurance policy; or (2) the remaining term of the Note; or (C) be treated as a balloon payment which will be due and payable at the Note's maturity. NEGATIVE COVENANTS. Borrower covenants and agrees with Lender that while this Agreement is in effect, Borrower shall not, without the prior written consent of Lender: INDEBTEDNESS AND LIENS. (1) Except for trade debt incurred in the normal course of business and indebtedness to Lender contemplated by this Agreement, create, incur or assume indebtedness for borrowed money, including capital leases, (2) sell, transfer, mortgage, assign, pledge, lease, grant a security interest in, or encumber any of Borrower's assets (except as allowed as Permitted Liens), or (3) sell with recourse any of Borrower's accounts, except to Lender. CONTINUITY OF OPERATIONS. (1) Engage in any business activities substantially different than those in which Borrower is presently engaged, (2) cease operations, liquidate, merge, transfer or consolidate with any other entity, change its name, dissolve or transfer or sell Collateral out of the ordinary course of business, or (3) pay any dividends on Borrower's stock (other than dividends payable in its stock), provided, however that notwithstanding the foregoing, but only so long as no Event of Default has occurred and is continuing or would result from the payment of dividends, if Borrower is a "Subchapter S Corporation" (as defined in the Internal Revenue Code of 1986, as amended), Borrower may pay cash dividends on its stock to its shareholders from time to time in amounts necessary to enable the shareholders to pay income taxes and make estimated income tax payments to satisfy their liabilities under federal and state law which arise solely from their status as Shareholders of a Subchapter S Corporation because of their ownership of shares of Borrower's stock, or purchase or retire any of Borrower's outstanding shares or alter or amend Borrower's capital structure. LOANS, ACQUISITIONS AND GUARANTIES. CESSATION OF ADVANCES. If Lender has made any commitment to make any Loan to Borrower, whether under this Agreement or under any other agreement, Lender shall have no obligation to make Loan Advances or to disburse Loan proceeds if: (A) Borrower or any Guarantor is in default under the terms of this Agreement or any of the Related Documents or any other agreement that Borrower or any Guarantor has with Lender; (B) Borrower or any Guarantor dies, becomes incompetent or becomes insolvent, files a petition in bankruptcy or similar proceedings, or is adjudged a bankrupt; (C) there occurs a material adverse change in Borrower's financial condition, in the financial condition of any Guarantor, or in the value of any Collateral securing any Loan; or (D) any Guarantor seeks, claims or otherwise attempts to limit, modify or revoke such Guarantor's guaranty of the BUSINESS LOAN AGREEMENT LOAN NO:932900001-3 (CONTINUED) PAGE 4 ============================================================================== Loan or any other loan with Lender; or (E) Lender in good faith deems itself insecure, even though no Event of Default shall have occurred. DEFAULT. Each of the following shall constitute an Event of Default under this Agreement: PAYMENT DEFAULT. Borrower fails to make any payment when due under the Loan. OTHER DEFAULTS. Borrower fails to comply with or to perform any other term, obligation, covenant or condition contained in this Agreement or in any of the Related Documents or to comply with or to perform any term, obligation, covenant or condition in any other Agreement between lender and Borrower. DEFAULT IN FAVOR OF THIRD PARTIES. Borrower or any Grantor defaults under any loan, extension of credit, security agreement, purchase or sales agreement, or any other agreement, in favor of any other creditor or person that may materially affect any of Borrower's or any Grantor's property of Borrower's or any Grantor's ability to repay the Loans or perform their respective obligations under this Agreement or any of the Related Documents. FALSE STATEMENTS. Any warranty, representation or statement made or furnished to Lender by Borrower or on Borrower's behalf under this Agreement of the Related Documents is false or misleading in any material respect, either now or at the time made or furnished or becomes false or misleading at any time thereafter. INSOLVENCY. The dissolution or termination of Borrower's existence as a going business, the insolvency of Borrower, the appointment of a receiver for any part of Borrower's property, any assignment for the benefit of creditors, any type of creditor workout, or the commencement of any proceeding under any bankruptcy or insolvency laws by or against Borrower. DEFECTIVE COLLATERALIZATION. This Agreement or any of the Related Documents ceases to be in full force and effect (including failure of any collateral document to create a valid and perfected security interest or lien) at any time and for any reason. CREDITOR OR FORFEITURE PROCEEDINGS. Commencement of foreclosure or forfeiture proceedings, whether by judicial proceeding, self-help, repossession or any other method, by and creditor of Borrower or by any governmental agency against any collateral securing the Loan. This includes a garnishment of any of Borrower's accounts, including deposit accounts, with Lender. However, this Event of Default shall not apply if there is a good faith dispute by Borrower as to the validity or reasonableness of the claim which is the basis of the creditor or forfeiture proceeding and if Borrower gives Lender written notice of the creditor or forfeiture proceeding and deposits with Lender monies or a surety bond for the creditor or forfeiture proceeding, in an amount determined by Lender, in its sole discretion, as being an adequate reserve or bond for the dispute. EVENTS AFFECTING GUARANTOR. Any of the preceding events occurs with respect to any Guarantor of any of the Indebtedness or any Guarantor dies or becomes incompetent, or revokes or disputes the validity of, or liability under, any Guaranty of the Indebtedness. In the event of a death, Lender, at its option, may, but shall not be required to, permit the Guarantor's estate to assume unconditionally the obligations arising under the guaranty in a manner satisfactory to Lender, and, in doing so, cure any Event of Default. CHANGE IN OWNERSHIP.** ADVERSE CHANGE. A material adverse change occurs in Borrower's financial condition, or Lender believes the prospect of payment or performance of the Loan is impaired. INSECURITY. Lender in good faith believes itself insecure. RIGHT TO CURE. If any default, other than a default on Indebtedness, is curable and if Borrower or Grantor, as the case may be, has not been given a notice of a similar default within the preceding twelve (12) months, it may be cured (and no Event of Default will have occurred) if Borrower or Grantor, as the case may be, after receiving written notice from Lender demanding cure of such default: (1) cure the default within fifteen (15) days; or (2) if the cure requires more than fifteen (15) days, immediately initiate steps which Lender deems in Lender's sole discretion to be sufficient to cure the default and thereafter continue and complete all reasonable and necessary steps sufficient to produce compliance as soon as reasonably practical. EFFECT OF AN EVENT OF DEFAULT. If any Event of Default shall occur, except where otherwise provided in this Agreement or the Related Documents, all commitments and obligations of Lender under this Agreement or the Related Documents or any other agreement immediately will terminate (including any obligation to make further Loan Advances or disbursements), and, at Lender's option, all Indebtedness immediately will become due and payable, all without notice of any kind to Borrower, except that in the case of an Event of Default of the type described in the "Insolvency" subsection above, such acceleration shall be automatic and not optional. In addition, Lender shall have all the rights and remedies provided in the Related Documents or available at law, in equity, or otherwise. Except as may be prohibited by applicable law, all of Lender's rights and remedies shall be cumulative and may be exercised singularly or concurrently. Election by Lender to pursue any remedy shall not exclude pursuit of any other remedy, and an election to make expenditures or to take action to perform an obligation of Borrower or of any Grantor shall not affect Lender's right to declare a default and to exercise its rights and remedies. DEPOSIT AGREEMENT SECURITY. Borrower hereby grants a security interest to Lender in any and all deposit accounts (checking, savings, money market or time) of Borrower at Lender, now existing or hereinafter opened, to secure the Indebtedness. this includes all deposit accounts Borrower holds jointly with someone else. FINANCIAL COVENANTS AND RATIOS. Borrower covenants and agrees with Lender that, while this Agreement is in effect, Borrower will comply with the following financial covenants and ratios: WORKING CAPITAL. Maintain Working Capital in excess of $6,250,000.00 effective for the quarter prior to California Bank & Trust funding and then changing to $4,500,000.00, effective for the immediate quarter subsequent to California Bank & Trust funding, to be monitored on a quarterly basis. TANGIBLE NET WORTH. Maintain a minimum Tangible Net Worth of not less than $10,750,000.00, to be monitored on a quarterly basis. DEBT/TANGIBLE NET WORTH RATIO. Maintain a ratio of Debt/Tangible Net Worth of not less than 1.25 to 1.00, to be monitored on a quarterly basis. EARNINGS BEFORE INTEREST, TAXES DEPRECIATION AND AMORTIZATION (CURRENT PORTION OF LONG-TERM DEBT + INTEREST EXPENSE) RATIO. Maintain a ration of Earnings before Interest, Taxes Depreciation and Amortization/(Current Portion of Long-Term Debt Interest Expense) Ratio of not less than 1.25 to 1.00 effective for the fiscal year end December 31, 2001 and for every quarter through September 30, 2002 and then changing to 1.50 to 1.00 effective for the fiscal year end December 31, 2002 and for every quarter thereafter. Covenant to be reviewed quarterly with the Earnings before Interest, Taxes Depreciation and Amortization and interest expense based upon a cumulative rolling 12-month basis. ADDITIONAL NEGATIVE COVENANT. For transactions in excess of $1,000,000.00, Borrower shall not, without prior written consent from Bank, loan, advance, invest, purchase or otherwise acquire the assets or business of any person or other entity; or merge, consolidate, or commence any proceedings thereof; or sell any assets except in the ordinary and normal course of its business as now conducted. MISCELLANEOUS PROVISIONS. The following miscellaneous provisions are part of this Agreement. AMENDMENTS. This Agreement, together with any Related Documents, constitutes the entire understanding and agreement of the parties as to the BUSINESS LOAN AGREEMENT Loan No: 932900001-3 (CONTINUED) Page 5 ================================================================================ matters set forth in this Agreement. No alteration of or amendment to this Agreement shall be effective unless given in writing and signed by the party or parties sought to be charged or bound by the alteration or amendment. ATTORNEYS' FEES; EXPENSES. Borrower agrees to pay upon demand all of Lender's costs and expenses, including Lender's attorneys' fees and Lender's legal expenses, incurred in connection with the enforcement of this Agreement. Lender may hire or pay someone else to help enforce this Agreement, and Borrower shall pay the costs and expenses of such enforcement. Costs and expenses include Lender's attorneys' fees and legal expenses whether or not there is a lawsuit, including attorneys' fees and legal expenses for bankruptcy proceedings (including efforts to modify or vacate any automatic stay or injunction), appeals, and any anticipated post-judgment collection services. Borrower also shall pay all court costs and such additional fees as may be directed by the court. CAPTION HEADINGS. Caption headings in this Agreement are for convenience purposes only and are not to be used to interpret or define the provisions of this Agreement. CONSENT TO LOAN PARTICIPATION. Borrower agrees and consents to Lender's sale or transfer, whether now or later, of one or more participation interests in the Loan to one or more purchasers, whether related or unrelated to Lender. Lender may provide, without any limitation whatsoever, to any one or more purchasers, or potential purchasers, any information or knowledge Lender may have about Borrower or about any other matter relating to the Loan, and Borrower hereby waives any rights to privacy Borrower may have with respect to such matters. Borrower additionally waives any and all notices of sale of participation interests, as well as all notices of any repurchase of such participation interests. Borrower also agrees that the purchasers of any such participation interests will be considered as the absolute owners of such interests in the Loan and will have all the rights granted under the participation agreement or agreements governing the sale of such participation interests. Borrower further waives all rights of offset or counterclaim that it may have now or later against Lender or against any purchaser of such a participation interest and unconditionally agrees that either Lender or such purchaser may enforce Borrower's obligation under the Loan irrespective of the failure or insolvency of any holder of any interest in the Loan. Borrower further agrees that the purchaser of any such participation interests may enforce its interests irrespective of any personal claims or defenses that Borrower may have against Lender. GOVERNING LAW. THIS AGREEMENT WILL BE GOVERNED BY, CONSTRUED AND ENFORCED IN ACCORDANCE WITH FEDERAL LAW AND THE LAWS OF THE STATE OF CALIFORNIA. THIS AGREEMENT HAS BEEN ACCEPTED BY LENDER IN THE STATE OF CALIFORNIA. CHOICE OF VENUE. If there is a lawsuit, Borrower agrees upon Lender's request to submit to the jurisdiction of the courts of Los Angeles County, State of California. NO WAIVER BY LENDER. Lender shall not be deemed to have waived any rights under this Agreement unless such waiver is given in writing and signed by Lender. No delay or omission on the part of Lender in exercising any right shall operate as a waiver of such right or any other right. A waiver by Lender of a provision of this Agreement shall not prejudice or constitute a waiver of Lender's right otherwise to demand strict compliance with that provision or any other provision of this Agreement. No prior waiver by Lender, nor any course of dealing between Lender and Borrower, or between Lender and any Grantor, shall constitute a waiver of any of Lender's rights or of any of Borrower's or any Grantor's obligations as to any future transactions. Whenever the consent of Lender is required under this Agreement, the granting of such consent by Lender in any instance shall not constitute continuing consent to subsequent instances where such consent is required and in all cases such consent may be granted or withheld in the sole discretion of Lender. NOTICES. Any notice required to be given under this Agreement shall be given in writing, and shall be effective when actually delivered, when actually received by telefacsimile (unless otherwise required by law), when deposited with a nationally recognized overnight courier, or, if mailed, when deposited in the United States mail, as first class, certified or registered mail postage prepaid, directed to the addresses shown near the beginning of this Agreement. Any party may change its address for notices under this Agreement by giving formal written notice to the other parties, specifying that the purpose of the notice is to change the party's address. For notice purposes, Borrower agrees to keep Lender informed at all times of Borrower's current address. Unless otherwise provided or required by law, if there is more than one Borrower, any notice given by Lender to any Borrower is deemed to be notice given to all Borrowers. SEVERABILITY. If a court of competent jurisdiction finds any provision of this Agreement to be illegal, invalid, or unenforceable as to any circumstance, that finding shall not make the offending provision illegal, invalid, or unenforceable as to any other circumstance. If feasible, the offending provision shall be considered modified so that it becomes legal, valid and enforceable. If the offending provision cannot be so modified, it shall be considered deleted from this Agreement. Unless otherwise required by law, the illegality, invalidity, or unenforceability of any provision of this Agreement shall not affect the legality, validity or enforceability of any other provision of this Agreement. SUBSIDIARIES AND AFFILIATES OF BORROWER. To the extent the context of any provisions of this Agreement makes it appropriate, including without limitation any representation, warranty or covenant, the word "Borrower" as used in this Agreement shall include all of Borrower's subsidiaries and affiliates. Notwithstanding the foregoing however, under no circumstances shall this Agreement be construed to require Lender to make any Loan or other financial accommodation to any of Borrower's subsidiaries or affiliates. SUCCESSORS AND ASSIGNS. All covenants and agreements contained by or on behalf of Borrower shall bind Borrower's successors and assigns and shall inure to the benefit of Lender and its successors and assigns. Borrower shall not, however, have the right to assign Borrower's rights under this Agreement or any interest therein, without the prior written consent of Lender. SURVIVAL OF REPRESENTATIONS AND WARRANTIES. Borrower understands and agrees that in making the Loan, Lender is relying on all representations, warranties, and covenants made by Borrower in this Agreement or in any certificate or other instrument delivered by Borrower to Lender under this Agreement or the Related Documents. Borrower further agrees that regardless of any investigation made by Lender, all such representations, warranties and covenants will survive the making of the Loan and delivery to Lender of the Related Documents, shall be continuing in nature, and shall remain in full force and effect until such time as Borrower's Indebtedness shall be paid in full, or until this Agreement shall be terminated in the manner provided above, whichever is the last to occur. TIME IS OF THE ESSENCE. Time is of the essence in the performance of this Agreement. WAIVE JURY. ALL PARTIES TO THIS AGREEMENT HEREBY WAIVE THE RIGHT TO ANY JURY TRIAL IN ANY ACTION, PROCEEDING, OR COUNTERCLAIM BROUGHT BY ANY PARTY AGAINST ANY OTHER PARTY. DEFINITIONS. The following capitalized words and terms shall have the following meanings when used in this Agreement. Unless specifically stated to the contrary, all references to dollar amounts shall mean amounts in lawful money of the United States of America. Words and terms used in the singular shall include the plural, and the plural shall include the singular, as the context may require. Words and terms not otherwise defined in this Agreement shall have the meanings attributed to such terms in the Uniform Commercial Code. Accounting words and terms not otherwise defined in this Agreement shall have the meanings assigned to them in accordance with generally accepted accounting principles as in effect on the date of this Agreement: ADVANCE. The word "Advance" means a disbursement of Loan funds made, or to be made, to Borrower or on Borrower's behalf on a line of credit or multiple advance basis under the terms and conditions of this Agreement. AGREEMENT. The word "Agreement" means this Business Loan Agreement, as this Business Loan Agreement may be amended or modified from BUSINESS LOAN AGREEMENT Loan No: 932900001-3 (Continued) Page 6 ================================================================================ time to time, together with all exhibits and schedules attached to this Business Loan Agreement from time to time. BORROWER. The word "Borrower" means International Remote Imaging Systems, Inc., and all other persons and entities signing the Note in whatever capacity. COLLATERAL. The word "Collateral" means all property and assets granted as collateral security for a Loan, whether real or personal property, whether granted directly or indirectly, whether granted now or in the future, and whether granted in the form of a security interest, mortgage, collateral mortgage, deed of trust, assignment, pledge, crop pledge, chattel mortgage, collateral chattel mortgage, chattel trust, factor's lien, equipment trust, conditional sale, trust receipt, lien, charge, lien or title retention contract, lease or consignment intended as a security device, or any other security or lien interest whatsoever, whether created by law, contract, or otherwise. ENVIRONMENTAL LAWS. The words "Environmental Laws" mean any and all state, federal and local statutes, regulations and ordinances relating to the protection of human health or the environment, including without limitation the Comprehensive Environmental Response, Compensation, and Liability Act of 1980, as amended, 42 U.S.C. Section 9601, et seq. ("CERCLA"), the Superfund Amendments and Reauthorization Act of 1986, Pub. L. No. 99-499 ("SARA"), the Hazardous Materials Transportation Act, 49 U.S.C. Section 1801, et seq., the Resource Conservation and Recovery Act, 42 U.S.C. Section 6901, et seq., Chapters 6.5 through 7.7 of Division 20 of the California Health and Safety Code, Section 25100, et seq., or other applicable state or federal laws, rules, or regulations adopted pursuant thereto. EVENT OF DEFAULT, The words "Event of Default" mean any of the events of default set forth in this Agreement in the default section of this Agreement. GAAP. The word "GAAP" means generally accepted accounting principles. GRANTOR. The word "Grantor" means each and all of the persons or entities granting a Security Interest in any Collateral for the Loan, including without limitation all Borrowers granting such a Security Interest. GUARANTOR. The word "Guarantor" means any guarantor, surety, or accommodation party of any or all of the Loan. GUARANTY. The word "Guaranty" means the guaranty from Guarantor to Lender, including without limitation a guaranty of all or part of the Note. HAZARDOUS SUBSTANCES. The words "Hazardous Substances" mean materials that, because of their quantity, concentration or physical, chemical or infectious characteristics, may cause or pose a present or potential hazard to human health or the environment when improperly used, treated, stored, disposed of, generated, manufactured, transported or otherwise handled. The words "Hazardous Substances" are used in their very broadest sense and include without limitation any and all hazardous or toxic substances, materials or waste as defined by or listed under the Environmental Laws. The term "Hazardous Substances" also includes, without limitation, petroleum and petroleum by-products or any fraction thereof and asbestos. INDEBTEDNESS. The word "Indebtedness" means the indebtedness evidenced by the Note or Related Documents, including all principal and interest together with all other indebtedness and costs and expenses for which Borrower is responsible under this Agreement or under any of the Related Documents. LENDER. The word "Lender" means California Bank & Trust, its successors and assigns. LOAN. The word "Loan" means any and all loans and financial accommodations from Lender to Borrower whether now or hereafter existing, and however evidenced, including without limitation those loans and financial accommodations described herein or described on any exhibit or schedule attached to this Agreement from time to time. NOTE. The word "Note" means the Note executed by International Remote Imaging Systems, Inc. in the principal amount of $500,000.00 dated February 7, 2002, together with all renewals of, extensions of, modifications of, refinancings of, consolidations of, and substitutions for the note or credit agreement. PERMITTED LIENS. The words "Permitted Liens" mean (1) liens and security interests securing Indebtedness owed by Borrower to Lender; (2) liens for taxes, assessments, or similar charges either not yet due or being contested in good faith; (3) liens of materialmen, mechanics, warehousemen, or carriers, or other like liens arising in the ordinary course of business and securing obligations which are not yet delinquent; (4) purchase money liens or purchase money security interests upon or in any property acquired or held by Borrower in the ordinary course of business to secure indebtedness outstanding on the date of this Agreement or permitted to be incurred under the paragraph of this Agreement titled "Indebtedness and Liens"; (5) liens and security interests which, as of the date of this Agreement, have been disclosed to and approved by the Lender in writing; and (6) those liens and security interests which in the aggregate constitute an immaterial and insignificant monetary amount with respect to the net value of Borrower's assets. RELATED DOCUMENTS. The words "Related Documents" mean all promissory notes, credit agreements, loan agreements, environmental agreements, guaranties, security agreements, mortgages, deeds of trust, security deeds, collateral mortgages, and all other instruments, agreements and documents, whether now or hereafter existing, executed in connection with the Loan. SECURITY AGREEMENT. The words "Security Agreement" mean and include without limitation any agreements, promises, covenants, arrangements, understandings or other agreements, whether created by law, contract, or otherwise, evidencing, governing, representing, or creating a Security Interest. SECURITY INTEREST. The words "Security Interest" mean, without limitation, any and all types of collateral security, present and future, whether in the form of a lien, charge, encumbrance, mortgage, deed of trust, security deed, assignment, pledge, crop pledge, chattel mortgage, collateral chattel mortgage, chattel trust, factor's lien, equipment trust, conditional sale, trust receipt, lien or title retention contract, lease or consignment intended as a security device, or any other security or lien interest whatsoever whether created by law, contract, or otherwise. BUSINESS LOAN AGREEMENT LOAN NO: 932900001-3 (CONTINUED) PAGE 7 ================================================================================ BORROWER ACKNOWLEDGES HAVING READ ALL THE PROVISIONS OF THIS BUSINESS LOAN AGREEMENT AND BORROWER AGREES TO ITS TERMS. THIS BUSINESS LOAN AGREEMENT IS DATED FEBRUARY 7, 2002. BORROWER: INTERNATIONAL REMOTE IMAGING SYSTEMS INC. By: /s/ John A. O'Malley By: /s/ John Caloz -------------------------------- ------------------------------- Dr. John A. O'Malley John Caloz CEO of International Remote CFO/Secretary of International Imaging Systems, Inc. Remote Imaging Systems, Inc. LENDER: CALIFORNIA BANK & TRUST By: /s/ [SIGNATURE ILLEGIBLE] --------------------------------- AUTHORIZED SIGNER - -------------------------------------------------------------------------------- ** Any acquisition of Borrower's common stock by merger, new issuance, or otherwise, that results in one holder owning twenty-five percent (25%) or more of such common stock. EX-11.1(B) 6 v80280ex11-1b.txt EXHIBIT 11.1(B) EXHIBIT 11.1(b) PROMISSORY NOTE

PRINCIPAL LOAN DATE MATURITY LOAN NO CALL/COLL ACCOUNT OFFICER INITIALS $6,500,000.00 02-07-2002 06-30-2004 932900001-1 932900001-1 22163 References in the shaded area are for Lender's use only and do not limit the applicability of this document to any particular loan or item. Any item above containing "***" has been omitted due to text length limitations.

Borrower: INTERNATIONAL REMOTE IMAGING SYSTEMS, INC. Lender: CALIFORNIA BANK & TRUST 9162 ETON AVENUE COMMERCIAL LOAN CENTER CHATSWORTH, CA 91311 550 SOUTH HOPE STREET, SUITE 300 LOS ANGELES, CA 90071 Principal Amount: $6,500,000.00 Initial Rate: 4.750% Date of Note: February 7, 2002

PROMISE TO PAY. INTERNATIONAL REMOTE IMAGING SYSTEMS, INC. ("BORROWER") PROMISES TO PAY TO CALIFORNIA BANK & TRUST ("LENDER"), OR ORDER, IN LAWFUL MONEY OF THE UNITED STATES OF AMERICA, THE PRINCIPAL AMOUNT OF SIX MILLION FIVE HUNDRED THOUSAND & 00/100 DOLLARS ($6,500,000.00) OR SO MUCH AS MAY BE OUTSTANDING, TOGETHER WITH INTEREST ON THE UNPAID OUTSTANDING PRINCIPAL BALANCE OF EACH ADVANCE. INTEREST SHALL BE CALCULATED FROM THE DATE OF EACH ADVANCE UNTIL REPAYMENT OF EACH ADVANCE. PAYMENT. BORROWER WILL PAY THIS LOAN IN ONE PAYMENT OF ALL OUTSTANDING PRINCIPAL PLUS ALL ACCRUED UNPAID INTEREST ON JUNE 30, 2004. IN ADDITION, BORROWER WILL PAY REGULAR MONTHLY PAYMENTS OF ALL ACCRUED UNPAID INTEREST DUE AS OF EACH PAYMENT DATE, BEGINNING FEBRUARY 28, 2002, WITH ALL SUBSEQUENT INTEREST PAYMENTS TO BE DUE ON THE LAST DAY OF EACH MONTH AFTER THAT. UNLESS OTHERWISE AGREED OR REQUIRED BY APPLICABLE LAW, PAYMENTS WILL BE APPLIED FIRST TO ACCRUED UNPAID INTEREST, THEN TO PRINCIPAL, AND ANY REMAINING AMOUNT TO ANY UNPAID COLLECTION COSTS AND LATE CHARGES. THE ANNUAL INTEREST RATE FOR THIS NOTE IS COMPUTED ON A 365/360 BASIS; THAT IS, BY APPLYING THE RATIO OF THE ANNUAL INTEREST RATE OVER A YEAR OF 360 DAYS, MULTIPLIED BY THE OUTSTANDING PRINCIPAL BALANCE, MULTIPLIED BY THE ACTUAL NUMBER OF DAYS THE PRINCIPAL BALANCE IS OUTSTANDING. BORROWER WILL PAY LENDER AT LENDER'S ADDRESS SHOWN ABOVE OR AT SUCH OTHER PLACE AS LENDER MAY DESIGNATE IN WRITING. VARIABLE INTEREST RATE. Subject to designation of a different interest rate index by Borrower as provided below, the interest rate on this Note is subject to change from time to time based on changes in an index which is the rate of interest set from time to time by Bank as its Prime Rate. California Bank & Trust Prime Rate is determined by Bank as a means of pricing credit extensions to some customers and is neither tied to any external rate of interest or index nor is it necessarily the lowest rate of interest charged by Bank at any given time for any particular class of customers or credit extensions (the "Index"). The Index is not necessarily the lowest rate charged by Lender on its loans and is set by Lender in its sole discretion. If the Index becomes unavailable during the term of this loan, Lender may designate a substitute index after notifying Borrower. Lender will tell Borrower the current Index rate upon Borrower's request. The interest rate change will not occur more often than each day. Borrower understands that Lender may make loans based on other rates as well. THE INDEX CURRENTLY IS 4.750%. THE INTEREST RATE TO BE APPLIED TO THE UNPAID PRINCIPAL BALANCE OF THIS NOTE WILL BE AT A RATE EQUAL TO THE INDEX, RESULTING IN AN INITIAL RATE OF 4.750%. NOTICE: Under no circumstances will the interest rate on this Note be more than the maximum rate allowed by applicable law. INTEREST RATE OPTIONS. On the terms and subject to the conditions set forth herein, Borrower will be able to select, from one of the following Rate Options, an interest rate which will be applicable to a particular dollar increment of amounts outstanding, or to be disbursed, under this Note. Principal shall be payable as specified herein in the "Payment" section, and interest shall be payable as specified for each Rate Option. The following Rate Options are available to Borrower: (A) DEFAULT OPTION. The interest rate margin and index described in the "VARIABLE INTEREST RATE" paragraph herein (the "Default Option"). (B) LONDON INTERBANK OFFERED RATE. A margin of 2.000 percentage points over London Interbank Offered Rate. For purposes of this Note, London Interbank Offered Rate shall mean the rate of interest at which deposits in U.S. Dollars for the relevant Interest Period is offered to first class banks in the London Interbank market as quoted for the mid-moving average LIBOR Rate as published by Telerate Systems, Inc. or such other publication of such rate as the holder of this Note shall reasonably select, two (2) Business Days prior to the commencement of the relevant Interest Period. An "Interest Period" is a one, two or three month period as selected by Borrower in a writing delivered to Lender as provided below. Interest based on this Rate Option is a floating rate and will change on and as of the date of a change in London Interbank Offered Rate (the "Interest Period"). Adjustments in the interest rate due to changes in the maximum nonusurious interest rate allowed (the "Highest Lawful Rate") shall be made on the effective day of any change in the Highest Lawful Rate. Under this Rate Option, Borrower shall make monthly interest payments on the same day of the month, with a final payment of all accrued and unpaid interest on the last day of such Interest Period and, in the case of an Interest Period greater than three (3) months, at three month (3 month) intervals after the first day of such Interest Period. The following provisions concerning Rate Options are a part of this Note: SELECTION OF RATE OPTIONS. Provided Borrower is not in default under this Note, Borrower may request (a "Rate Request") that a $250,000.00 increment or any amount in excess thereof (an "Increment") of the outstanding principal of, or amounts to be disbursed under, this Note bear interest at the selected rate. Borrower may make this Rate Request by telephonic notice, however no later than 10:00 AM PDT three (3) business days prior to the effective date of the Rate Request to permit Lender to quote the rate requested. * APPLICABLE INTEREST RATE. Borrower's Rate Request will become effective, and interest on the increment designated will be calculated at the rate (the "Effective Rate"), which Borrower requested, for the applicable Interest Period, subject to the following: (1) Notwithstanding any Rate Request, interest shall be calculated on the basis of the Default ion if (a) Lender, in good faith, is unable to ascertain the requested Rate Option by reason of circumstances then affecting the applicable money market or otherwise, (b) it becomes unlawful or impracticable for Lender to maintain loans based upon the requested Rate Option, or (c) Lender, in good faith, determines that it is impracticable to maintain loans based on the requested Rate Option because of increased taxes, regulatory costs, reserve requirements, expenses or any other costs or charges that affect such Rate Options. Upon the occurrence of any of the events described in this "Interest Rate Options" section, any increment to which a requested Rate Option applies shall be immediately (or at the option of Lender, at the end the current Interest Period), without further action of Lender or Borrower, converted to an increment to which the Default Option applies. (2) Borrower may have no more than a total of 3 Effective Rates applicable to amounts outstanding under this Note at any given time. (3) A Rate Request shall be effective as to amounts to be disbursed under this Note only if, on the effective date of the Rate Requests, such amounts are in fact disbursed to or for Borrower's account in accordance with the provisions of this Note and any related loan documents. (4) Any amounts of outstanding principal for which a Rate Request has not been made, or is otherwise not effective, shall bear interest until paid in full at the Default Option. (5) Any amounts of outstanding principal bearing interest based upon a Rate Option shall bear interest at such rate until the end of the Interest Period therefor, and thereafter shall bear interest based upon the Default Option unless a new Rate Request for a Rate Option complying with the terms hereof has been made and has become effective. (6) If Borrower is in default under this Note ("Default"), then Lender shall no longer be obligated to honor any Rate Requests. PROMISSORY NOTE LOAN NO: 932900001-1 (CONTINUED) PAGE 2 ================================================================================ (7) No Interest Period shall extend beyond the maturity date of this Note. NOTICES: AUTHORITY TO ACT. Borrower acknowledges and agrees that the agreement of Lender herein to receive certain notices by telephone is solely for Borrower's convenience. Lender shall be entitled to rely on the authority of the person purporting to be a person authorized by Borrower to give such notice, and Lender shall have no liability to Borrower on account of any action taken by Lender in reliance upon such telephonic notice. Borrower's obligation to repay all sums owing under the Note shall not be affected in any way or to any extent by any failure by Lender to receive written confirmation of any telephonic notice or the receipt by Lender of a confirmation which is at variance with the terms understood by Lender to be contained in the telephonic notice. PREPAYMENT; MINIMUM INTEREST CHARGE. In any event, even upon full prepayment of this Note, Borrower understands that Lender is entitled to a MINIMUM INTEREST CHARGE OF $200.00. Other than Borrower's obligation to pay any minimum interest charge, Borrower may pay without penalty all or a portion of the amount owed earlier than it is due. Early payments will not, unless agreed to by Lender in writing, relieve Borrower of Borrower's obligation to continue to make payments of accrued unpaid interest. Rather, early payments will reduce the principal balance due. Borrower agrees not to send Lender payments marked "paid in full", "without recourse", or similar language. If Borrower sends such a payment, Lender may accept it without losing any of Lender's rights under this Note, and Borrower will remain obligated to pay any further amount owed to Lender. All written communications concerning disputed amounts, including any check or other payment instrument that indicates that the payment constitutes "payment in full" of the amount owed or that is tendered with other conditions or limitations or as full satisfaction of a disputed amount must be mailed or delivered to: California Bank & Trust, Commercial Loan Center, 550 South Hope Street, Suite 300, Los Angeles, CA 90071. LATE CHARGE. If a payment is 15 days or more late, Borrower will be charged 6.000% OF THE REGULARLY SCHEDULED PAYMENT OR $500.00, WHICHEVER IS LESS. INTEREST AFTER DEFAULT. Upon Borrower's failure to pay all amounts declared due pursuant to this section, including failure to pay upon final maturity, Lender, at its option, may, if permitted under applicable law, increase the variable interest rate on this Note to 5.000 percentage points over the Index. DEFAULT. Each of the following shall constitute an event of default ("Event of Default") under this Note: PAYMENT DEFAULT. Borrower fails to make any payment when due under this Note. OTHER DEFAULTS. Borrower fails to comply with or to perform any other term, obligation, covenant or condition contained in this Note or in any of the related documents or to comply with or to perform any term, obligation, covenant or condition contained in any other agreement between Lender and Borrower. DEFAULT IN FAVOR OF THIRD PARTIES. Borrower or any Grantor defaults under any loan, extension of credit, security agreement, purchase or sales agreement, or any other agreement, in favor of any other creditor or person that may materially affect any of Borrower's property or Borrower's ability to repay this Note or perform Borrower's obligations under this Note or any of the related documents. FALSE STATEMENTS. Any warranty, representation or statement made or furnished to Lender by Borrower or on Borrower's behalf under this Note or the related documents is false or misleading in any material respect, either now or at the time made or furnished or becomes false or misleading at any time thereafter. INSOLVENCY. The dissolution or termination of Borrower's existence as a going business, the insolvency of Borrower, the appointment of a receiver for any part of Borrower's property, any assignment for the benefit of creditors, any type of creditor workout, or the commencement of any proceeding under any bankruptcy or insolvency laws by or against Borrower. CREDITOR OR FORFEITURE PROCEEDINGS. Commencement of foreclosure or forfeiture proceedings, whether by judicial proceeding, self-help, repossession or any other method, by any creditor of Borrower or by any governmental agency against any collateral securing the loan. This includes a garnishment of any of Borrower's accounts, including deposit accounts, with Lender. However, this Event of Default shall not apply if there is a good faith dispute by Borrower as to the validity or reasonableness of the claim which is the basis of the creditor or forfeiture proceeding and if Borrower gives Lender written notice of the creditor or forfeiture proceeding and deposits with Lender monies or a surety bond for the creditor or forfeiture proceeding, in an amount determined by Lender, in its sole discretion, as being an adequate reserve or bond for the dispute. EVENTS AFFECTING GUARANTOR. Any of the preceding events occurs with respect to any Guarantor of any of the indebtedness or any Guarantor dies or becomes incompetent, or revokes or disputes the validity of, or liability under, any guaranty of the indebtedness evidenced by this Note. In the event of a death, Lender, at its option, may, but shall not be required to, permit the Guarantor's estate to assume unconditionally the obligations arising under the guaranty in a manner satisfactory to Lender, and, in doing so, cure any Event of Default. CHANGE IN OWNERSHIP** ADVERSE CHANGE. A material adverse change occurs in Borrower's financial condition, or Lender believes the prospect of payment or performance of this Note is impaired. INSECURITY. Lender in good faith believes itself insecure. CURE PROVISIONS. If any default, other than a default in payment is curable and if Borrower has not been given a notice of a breach of the same provision of this Note within the preceding twelve (12) months, it may be cured (and no event of default will have occurred) if Borrower, after receiving written notice from Lender demanding cure of such default: (1) cures the default within fifteen (15) days; or (2) if the cure requires more than fifteen (15) days, immediately initiates steps which Lender deems in Lender's sole discretion to be sufficient to cure the default and thereafter continues and completes all reasonable and necessary steps sufficient to produce compliance as soon as reasonably practical. LENDER'S RIGHTS. Upon default, Lender may declare the entire unpaid principal balance on this Note and all accrued unpaid interest immediately due, and then Borrower will pay that amount. ATTORNEYS' FEES; EXPENSES. Lender may hire or pay someone else to help collect this Note if Borrower does not pay. Borrower will pay Lender that amount. This includes, subject to any limits under applicable law, Lender's attorneys' fees and Lender's legal expenses, whether or not there is a lawsuit, including attorneys' fees, expenses for bankruptcy proceedings (including efforts to modify or vacate any automatic stay or injunction), and appeals. Borrower also will pay any court costs, in addition to all other sums provided by law. JURY WAIVER. LENDER AND BORROWER HEREBY WAIVE THE RIGHT TO ANY JURY TRIAL IN ANY ACTION, PROCEEDING, OR COUNTERCLAIM BROUGHT BY EITHER LENDER OR BORROWER AGAINST THE OTHER. GOVERNING LAW. THIS NOTE WILL BE GOVERNED BY, CONSTRUED AND ENFORCED IN ACCORDANCE WITH FEDERAL LAW AND THE LAWS OF THE STATE OF CALIFORNIA. THIS NOTE HAS BEEN ACCEPTED BY LENDER IN THE STATE OF CALIFORNIA. CHOICE OF VENUE. If there is a lawsuit, Borrower agrees upon Lender's request to submit to the jurisdiction of the courts of Los Angeles County, State of California. COLLATERAL. Borrower acknowledges this Note is secured by the following collateral described in the security instruments listed herein: inventory, PROMISSORY NOTE LOAN NO: 932900001-1 (CONTINUED) PAGE 3 =============================================================================== chattel paper, accounts, equipment and general intangibles described in Commercial Security Agreements dated February 7, 2002. LINE OF CREDIT. This Note evidences a revolving line of credit. Advances under this Note may be requested orally by Borrower or as provided in this paragraph. All oral requests shall be confirmed in writing on the day of the request. All communications, instructions, or directions by telephone or otherwise to Lender are to be directed to Lender's office shown above. The following persons currently are authorized to request advances and authorize payments under the line of credit until Lender receives from Borrower, at Lender's address shown above, written notice of revocation of their authority: DR. JOHN A. O'MALLEY, CEO/CHAIRMAN OF INTERNATIONAL REMOTE IMAGING SYSTEMS, INC.; JOHN CALOZ, CFO/SECRETARY OF INTERNATIONAL REMOTE IMAGING SYSTEMS, INC.; AND DONALD HORACEK, CONTROLLER. Borrower agrees to be liable for all sums either: (A) advanced in accordance with the instructions of an authorized person or (B) credited to any of Borrower's accounts with Lender. The unpaid principal balance owing on this Note at any time may be evidenced by endorsements on this Note or by Lender's internal records, including daily computer print-outs. Lender will have no obligation to advance funds under this Note if: (A) borrower or any guarantor is in default under the terms of this Note or any agreement that Borrower or any guarantor has with Lender, including any agreement make in connection with the signing of this Note; (B) Borrower or any guarantor ceases doing business or is insolvent; (C) any guarantor seeks, claims or otherwise attempts to limit, modify or revoke such guarantor's guarantee of this Note or any other loan with Lender; (D) Borrower has applied funds provided pursuant to this Note for purposes other than those authorized by Lender; or (E) Lender in good faith believes itself insecure. DEPOSIT AGREEMENT SECURITY. Borrower hereby grants a security interest to Lender in any and all deposit accounts (checking, savings, money market or time) of Borrower at Lender, now existing or hereinafter opened, to secure its Indebtedness hereunder. This includes all deposit accounts Borrower holds jointly with someone else. FINANCIAL STATEMENT CERTIFICATIONS. The undersigned hereby certifies to California Bank & Trust ("Bank") that all financial information ("Information") submitted to bank now and at all times during the terms of this loan does, and will, fairly and accurately represent the financial condition of the undersigned, all Borrowers and Guarantors. Financial information includes, but is not limited to all business Financial Statements (including interim and year-end financial statements that are company prepared and/or CPA-prepared, Business Income Tax Returns, Borrowing Base Certificates, Accounts Receivable and Accounts Payable Agings, personal Financial Statements and Personal Income Tax Returns. The undersigned understands that the Bank will rely on all financial information, whenever provided, and that such information is a material inducement to Bank to make, to continue to make, or otherwise extend credit accommodations to the undersigned. The undersigned covenants and agrees to notify Bank of any adverse material changes in her/his/its financial condition in the future. The undersigned further understands and acknowledges that there are criminal penalties for giving false financial information to federally insured financial institutions. ADDITIONAL PROVISION FOR "SELECTION OF RATE OPTIONS" SECTION (SEE PAGE 1). The minimum initial LIBOR advance shall be $250,000.00 and in increments of $100,000.00 thereafter. * SUCCESSOR INTERESTS. The terms of this Note shall be binding upon Borrower, and upon Borrower's heirs, personal representatives, successors and assigns, and shall inure to the benefit of Lender and its successors and assigns. GENERAL PROVISIONS. Lender may delay or forgo enforcing any of its rights or remedies under this Note without losing them. Borrower and any other person who signs, guarantees or endorses this Note, to the extent allowed by law, waive any applicable statute of limitations, presentment, demand for payment, and notice of dishonor. Upon any change in the terms of this Note, and unless otherwise expressly stated in writing, no party who signs this Note, whether as maker, guarantor, accommodation maker or endorser, shall be released from liability. All such parties agree that Lender may renew or extend (repeatedly and for any length of time) this loan or release any party or guarantor or collateral; or impair, fail to realize upon or perfect lender's security interest in the collateral; and take any other action deemed necessary by Lender without the consent of or notice to anyone. All such parties also agree that Lender may modify this loan without the consent of or notice to anyone other than the party with whom the modification is made. The obligations under this Note are joint and several. PRIOR TO SIGNING THIS NOTE, BORROWER READ AND UNDERSTOOD ALL THE PROVISIONS OF THIS NOTE, INCLUDING THE VARIABLE INTEREST RATE PROVISIONS. BORROWER AGREES TO THE TERMS OF THE NOTE. BORROWER ACKNOWLEDGES RECEIPT OF A COMPLETED COPY OF THIS PROMISSORY NOTE BORROWER: BY: /s/ John A. O'Malley BY: /s/ John Caloz --------------------------------- ----------------------------------- Dr. John A. O'Malley, John Caloz, CFO/Secretary of CEO of International Remote International Remote Imaging, Inc. Imaging Systems, Inc. +++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++ **Any acquisition of Borrower's common stock by merger, new issuance, or otherwise, that results in one holder owning twenty-five percent (25%) or more of such common stock. PROMISSORY NOTE

- ---------------------------------------------------------------------------------------------------------------- PRINCIPAL LOAN DATE MATURITY LOAN NO. CALL/COLL ACCOUNT OFFICER INITIALS $500,00.00 02-07-2002 01-31-2007 93290001-3 932900001-3 22163 [INITIALS ILLEGIBLE] - ---------------------------------------------------------------------------------------------------------------- References in the shaded area are for Lender's use only and do not limit the applicability of this document to any particular loan or item. Any item above containing "***" has been omitted due to text length limitations. - ----------------------------------------------------------------------------------------------------------------

BORROWER: INTERNATIONAL REMOTE LENDER: CALIFORNIA BANK & TRUST IMAGING SYSTEMS, INC. COMMERCIAL LOAN CENTER 9162 ETON AVENUE 550 SOUTH HOPE STREET, SUITE 300 CHATSWORTH, CA 91311 LOS ANGELES, CA 90071 ================================================================================

PRINCIPAL AMOUNT: $500,000.00 INITIAL RATE: 4.750% DATE OF NOTE: FEBRUARY 7, 2002

PROMISE TO PAY. INTERNATIONAL REMOTE IMAGING SYSTEMS, INC. ("BORROWER") PROMISES TO PAY TO CALIFORNIA BANK & TRUST ("LENDER"), OR ORDER, IN LAWFUL MONEY OF THE UNITED STATES OF AMERICA, THE PRINCIPAL AMOUNT OF FIVE HUNDRED THOUSAND & 00/100 DOLLARS ($500,000.00), TOGETHER WITH INTEREST ON THE UNPAID PRINCIPAL BALANCE FROM FEBRUARY 7, 2002, UNTIL PAID IN FULL. PAYMENT. SUBJECT TO ANY PAYMENT CHANGES RESULTING FROM CHANGES IN THE INDEX, BORROWER WILL PAY THIS LOAN IN 59 PRINCIPAL PAYMENTS OF $8,333.34 EACH AND ONE FINAL PRINCIPAL AND INTEREST PAYMENT OF $8,367.02. BORROWER'S FIRST PRINCIPAL PAYMENT IS DUE FEBRUARY 28, 2002, AND ALL SUBSEQUENT PRINCIPAL PAYMENTS ARE DUE ON THE LAST DAY OF EACH MONTH AFTER THAT. IN ADDITION, BORROWER WILL PAY REGULAR MONTHLY PAYMENTS OF ALL ACCRUED UNPAID INTEREST DUE AS OF EACH PAYMENT DATE, BEGINNING FEBRUARY 28, 2002, WITH ALL SUBSEQUENT INTEREST PAYMENTS TO BE DUE ON THE LAST DAY OF EACH MONTH AFTER THAT. BORROWER'S FINAL PAYMENT DUE JANUARY 31, 2007, WILL BE FOR ALL PRINCIPAL AND ALL ACCRUED INTEREST NOT YET PAID. UNLESS OTHERWISE AGREED OR REQUIRED BY APPLICABLE LAW, PAYMENTS WILL BE APPLIED FIRST TO ACCRUED UNPAID INTEREST, THEN TO PRINCIPAL, AND ANY REMAINING AMOUNT TO ANY UNPAID COLLECTION COSTS AND LATE CHARGES. THE ANNUAL INTEREST RATE FOR THIS NOTE IS COMPUTED ON A 365/360 BASIS; THAT IS, BY APPLYING THE RATIO OF THE ANNUAL INTEREST RATE OVER A YEAR OF 360 DAYS, MULTIPLIED BY THE OUTSTANDING PRINCIPAL BALANCE, MULTIPLIED BY THE ACTUAL NUMBER OF DAYS THE PRINCIPAL BALANCE IS OUTSTANDING. BORROWER WILL PAY LENDER AT LENDER'S ADDRESS SHOWN ABOVE OR AT SUCH OTHER PLACE AS LENDER MAY DESIGNATE IN WRITING. VARIABLE INTEREST RATE. Subject to designation of a different interest rate index by Borrower as provided below, the interest rate on this Note is subject to change from time to time based on changes in an index which is the rate of interest set from time to time by Bank as its Prime Rate. California Bank & Trust Prime Rate is determined by Bank as a means of pricing credit extensions to some customers and is neither tied to any external rate of interest or index nor is it necessarily the lowest rate of interest charged by Bank at any given time for any particular class of customers or credit extensions (the "Index"). The Index is not necessarily the lowest rate charged by Lender on its loans and is set by Lender in its sole discretion. If the Index becomes unavailable during the term of this loan, Lender may designate a substitute index after notifying Borrower. Lender will tell Borrower the current Index rate upon Borrower's request. The interest rate change will not occur more often than each day. Borrower understands that Lender may make loans based on other rates as well. THE INDEX CURRENTLY IS 4.750%. THE INTEREST RATE TO BE APPLIED TO THE UNPAID PRINCIPAL BALANCE OF THIS NOTE WILL BE AT A RATE EQUAL TO THE INDEX, RESULTING IN AN INITIAL RATE OF 4.750%. NOTICE: Under no circumstances will the interest rate on this Note be more than the maximum rate allowed by applicable law. INTEREST RATE OPTIONS. On the terms and subject to the conditions set forth herein, Borrower will be able to select, from one of the following Rate Options, an interest rate which will be applicable to a particular dollar increment of amounts outstanding, or to be disbursed, under this Note. Principal shall be payable as specified herein in the "Payment" section, and interest shall be payable as specified for each Rate Option. The following Rate Options are available to Borrower: (A) DEFAULT OPTION. The interest rate margin and index described in the "VARIABLE INTEREST RATE" paragraph herein (the "Default Option"). (B) LONDON INTERBANK OFFERED RATE. A margin of 2.000 percentage points over London Interbank Offered Rate. For purposes of this Note, London Interbank Offered Rate shall mean the rate of interest at which deposits in U.S. Dollars for the relevant Interest Period is offered to first class banks in the London Interbank market as quoted for the mid-moving average LIBOR Rate as published by Telerate Systems, Inc. or such other publication of such rate as the holder of this Note shall reasonably select, two (2) Business Days prior to the commencement of the relevant Interest Period. An "Interest Period" is a one, two or three month period as selected by Borrower in a writing delivered to Lender as provided below. Interest based on this Rate Option is a floating rate and will change on and as of the date of a change in London Interbank Offered Rate (the "Interest Period"). Adjustments in the interest rate due to changes in the maximum nonusurious interest rate allowed (the "Highest Lawful Rate") shall be made on the effective day of any change in the Highest Lawful Rate. Under this Rate Option, Borrower shall make monthly interest payments on the same day of the month, with a final payment of all accrued and unpaid interest on the last day of such Interest Period and, in the case of an Interest Period greater than three (3) months, at three month (3 month) intervals after the first day of such Interest Period. The following provisions concerning Rate Options are a part of this Note: SELECTION OF RATE OPTIONS. Provided Borrower is not in default under this Note, Borrower may request (a "Rate Request") that a $250,000.00 increment or any amount in excess thereof (an "Increment") of the outstanding principal of, or amount be disbursed under, this Note bear interest at the selected rate. Borrower may make this Rate Request by telephonic notice, however no later than 10:00 AM PDT three (3) business days prior to the effective date of the Rate Request to permit Lender to quote the rate requested.* APPLICABLE INTEREST RATE. Borrower's Rate Request will become effective, and interest on the increment designated will be calculated at the rate (the "Effective Rate"), which Borrower requested, for the applicable Interest Period, subject to the following: (1) Notwithstanding any Rate Request, interest shall be calculated on the basis of the Default Option if (a) Lender, in good faith, is unable to ascertain the requested Rate Option by reason of circumstances then affecting the applicable money market or otherwise, (b) it becomes unlawful or impracticable for Lender to maintain loans based upon the requested Rate Option, or (c) Lender, in good faith, determines that it is impracticable to maintain loans based on the requested Rate Option because of increased taxes, regulatory costs, reserve requirements, expenses or any other costs or charges that affect such Rate Options. Upon the occurrence of any of the events described in this "Interest Rate Options" section, any increment to which a requested Rate Option applies shall be immediately (or at the option of Lender, at the end the current Interest Period), without further action of Lender or Borrower, converted to an increment to which the Default Option applies. (2) Borrower may have no more than a total of 3 Effective Rates applicable to amounts outstanding under this Note at any given time. (3) A Rate Request shall be effective as to amounts to be disbursed under this Note only if, on the effective date of the Rate Requests, such amounts are in fact disbursed to or for Borrower's account in accordance with the provisions of this Note and any related loan documents. (4) Any amounts of outstanding principal for which a Rate Request has not been made, or is otherwise not effective, shall bear interest until paid in full at the Default Option. (5) Any amounts of outstanding principal bearing interest based upon a Rate Option shall bear interest at such rate until the end of the Interest Period therefor, and thereafter shall bear interest based upon the Default Option unless a new Rate Request for a Rate Option complying with the terms hereof has been made and has become effective. PROMISSORY NOTE LOAN NO: 932900001-3 (CONTINUED) PAGE 2 ================================================================================ (6) If Borrower is in default under this Note ("Default"), then Lender shall no longer be obligated to honor any Rate Requests. (7) No Interest Period shall extend beyond the maturity date of this Note. NOTICES: AUTHORITY TO ACT. Borrower acknowledges and agrees that the agreement of Lender herein to receive certain notices by telephone is solely for Borrower's convenience. Lender shall be entitled to rely on the authority of the person purporting to be a person authorized by Borrower to give such notice, and Lender shall have no liability to Borrower on account of any action taken by Lender in reliance upon such telephonic notice. Borrower's obligation to repay all sums owing under the Note shall not be affected in any way or to any extent by any failure by Lender to receive written confirmation of any telephonic notice or the receipt by Lender of a confirmation which is at variance with the terms understood by Lender to be contained in the telephonic notice. PREPAYMENT; MINIMUM INTEREST CHARGE. In any event, even upon full prepayment of this Note, Borrower understands that Lender is entitled to a MINIMUM INTEREST CHARGE OF $200.00. Other than Borrower's obligation to pay any minimum interest charge, Borrower may pay without penalty all or a portion of the amount owed earlier than it is due. Early payments will not, unless agreed to by Lender in writing, relieve Borrower of Borrower's obligation to continue to make payments under the payment schedule. Rather, early payments will reduce the principal balance due and may result in Borrower's making fewer payments. Borrower agrees not to send Lender payments marked "paid in full", "without recourse", or similar language. If Borrower sends such a payment, Lender may accept it without losing any of Lender's rights under this Note, and Borrower will remain obligated to pay any further amount owed to Lender. All written communications concerning disputed amounts, including any check or other payment instrument that indicates that the payment constitutes "payment in full" of the amount owed or that is tendered with other conditions or limitations or as full satisfaction of a disputed amount must be mailed or delivered to: California Bank & Trust, Commercial Loan Center, 550 South Hope Street, Suite 300, Los Angeles, CA 90071. LATE CHARGE. If a payment is 15 days or more late, Borrower will be charged 6.000% OF THE REGULARLY SCHEDULED PAYMENT OR $500.00, WHICHEVER IS LESS. INTEREST AFTER DEFAULT. Upon Borrower's failure to pay all amounts declared due pursuant to this section, including failure to pay upon final maturity, Lender, at its option, may, if permitted under applicable law, increase the variable interest rate on this Note to 5.000 percentage points over the Index. DEFAULT. Each of the following shall constitute an event of default ("Event of Default") under this Note: PAYMENT DEFAULT. Borrower fails to make any payment when due under this Note. OTHER DEFAULTS. Borrower fails to comply with or to perform any other term, obligation, covenant or condition contained in this Note or in any of the related documents or to comply with or to perform any term, obligation, covenant or condition contained in any other agreement between Lender and Borrower. DEFAULT IN FAVOR OF THIRD PARTIES. Borrower or any Grantor defaults under any loan, extension of credit, security agreement, purchase or sales agreement, or any other agreement, in favor of any other creditor or person that may materially affect any of Borrower's property or Borrower's ability to repay this Note or perform Borrower's obligations under this Note or any of the related documents. FALSE STATEMENTS. Any warranty, representation or statement made or furnished to Lender by Borrower or on Borrower's behalf under this Note or the related documents is false or misleading in any material respect, either now or at the time made or furnished or becomes false or misleading at any time thereafter. INSOLVENCY. The dissolution or termination of Borrower's existence as a going business, the insolvency of Borrower, the appointment of a receiver for any part of Borrower's property, any assignment for the benefit of creditors, any type of creditor workout, or the commencement of any proceeding under any bankruptcy or insolvency laws by or against Borrower. CREDITOR OR FORFEITURE PROCEEDINGS. Commencement of foreclosure or forfeiture proceedings, whether by judicial proceeding, self-help, repossession or any other method, by any creditor of Borrower or by any governmental agency against any collateral securing the loan. This includes a garnishment of any of Borrower's accounts, including deposit accounts, with Lender. However, this Event of Default shall not apply if there is a good faith dispute by Borrower as to the validity or reasonableness of the claim which is the basis of the creditor or forfeiture proceeding and if Borrower gives Lender written notice of the creditor or forfeiture proceeding and deposits with Lender monies or a surety bond for the creditor or forfeiture proceeding, in an amount determined by Lender, in its sole discretion, as being an adequate reserve or bond for the dispute. EVENTS AFFECTING GUARANTOR. Any of the preceding events occurs with respect to any Guarantor of any of the indebtedness or any Guarantor dies or becomes incompetent, or revokes or disputes the validity of, or liability under, any guaranty of the indebtedness evidenced by this Note. In the event of a death, Lender, at its option, may, but shall not be required to, permit the Guarantor's estate to assume unconditionally the obligations arising under the guaranty in a manner satisfactory to Lender, and, in doing so, cure any Event of Default. CHANGE IN OWNERSHIP.** ADVERSE CHANGE. A material adverse change occurs in Borrower's financial condition, or Lender believes the prospect of payment or performance of this Note is impaired. INSECURITY. Lender in good faith believes itself insecure. CURE PROVISIONS. If any default, other than a default in payment is curable and if Borrower has not been given a notice of a breach of the same provision of this Note within the preceding twelve (12) months, it may be cured (and no event of default will have occurred) if Borrower, after receiving written notice from Lender demanding cure of such default: (1) cures the default within fifteen (15) days; or (2) if the cure requires more than fifteen (15) days, immediately initiates steps which Lender deems in Lender's sole discretion to be sufficient to cure the default and thereafter continues and completes all reasonable and necessary steps sufficient to produce compliance as soon as reasonably practical. LENDER'S RIGHTS. Upon default, Lender may declare the entire unpaid principal balance on this Note and all accrued unpaid interest immediately due, and then Borrower will pay that amount. ATTORNEYS' FEES; EXPENSES. Lender may hire or pay someone else to help collect this Note if Borrower does not pay. Borrower will pay Lender that amount. This includes, subject to any limits under applicable law, Lender's attorneys' fees and Lender's legal expenses, whether or not there is a lawsuit, including attorneys' fees, expenses for bankruptcy proceedings (including efforts to modify or vacate any automatic stay or injunction), and appeals. Borrower also will pay any court costs, in addition to all other sums provided by law. JURY WAIVER. LENDER AND BORROWER HEREBY WAIVE THE RIGHT TO ANY JURY TRIAL IN ANY ACTION, PROCEEDING, OR COUNTERCLAIM BROUGHT BY EITHER LENDER OR BORROWER AGAINST THE OTHER. GOVERNING LAW. THIS NOTE WILL BE GOVERNED BY, CONSTRUED AND ENFORCED IN ACCORDANCE WITH FEDERAL LAW AND THE LAWS OF THE STATE OF CALIFORNIA. THIS NOTE HAS BEEN ACCEPTED BY LENDER IN THE STATE OF CALIFORNIA. CHOICE OF VENUE. If there is a lawsuit, Borrower agrees upon Lender's request to submit to the jurisdiction of the courts of Los Angeles County, PROMISSORY NOTE LOAN NO. 93290001-3 (CONTINUED) PAGE 3 ================================================================================ State of California. COLLATERAL. Borrower acknowledges this Note is secured by the following collateral described in the security instrument listed herein: inventory, chattel paper, accounts, equipment and general intangibles described in a Commercial Security Agreement dated February 7, 2002. DEPOSIT AGREEMENT SECURITY. Borrower hereby grants a security interest to Lender in any and all deposit accounts (checking, savings, money market or time) of Borrower at Lender, now existing or hereinafter opened, to secure its indebtedness hereunder. This includes all deposit accounts Borrower holds jointly with someone else. FINANCIAL STATEMENT CERTIFICATIONS. The undersigned hereby certifies to California Bank & Trust ("Bank") that all financial information ("Information") submitted to Bank now and at all times during the terms of this loan does, and will, fairly and accurately represent the financial condition of the undersigned, all Borrowers and Guarantors. Financial Information includes, but it is not limited to all Business Financial Statements (including Interim and Year-End financial statements that are company prepared and/or CPA-prepared), Business Income Tax Returns, Borrowing Base Certificates, Accounts Receivable and Accounts Payable Agings, Personal Financial Statements and Personal Income Tax Returns. The undersigned understands that the Bank will rely on all financial information, whenever provided, and that such information is a material inducement to Bank to make, to continue to make, or otherwise extend credit accommodations to the undersigned. The undersigned covenants and agrees to notify Bank of any adverse material changes in her/his/its financial condition in the future. The undersigned further understands and acknowledges that there are criminal penalties for giving false financial information to federally insured financial institutions. ADDITIONAL PROVISION FOR "SELECTION OF RATE OPTION" SECTION (SEE PAGE 1). The minimum initial LIBOR advance shall be $250,000.00 and in increments of $100,000.00 thereafter.* SUCCESSOR INTERESTS. The terms of this Note shall be binding upon Borrower, and upon Borrower's heirs, personal representatives, successors and assigns, and shall insure to the benefit of Lender and its successor and assigns. GENERAL PROVISIONS. Lender may delay or forgo enforcing any of its rights or remedies under this Note without losing them. Borrower and any other person who signs, guarantees or endorses this Note, to the extent allowed by law, waive any applicable statute of limitations, presentment, demand for payment, and notice of dishonor. Upon any change in the terms of this Note, and unless otherwise expressly stated in writing, no party who signs this Note, whether as a maker, guarantor, accommodation maker or endorser, shall be released from liability. All such parties agree that Lender may renew or extend (repeatedly and for any length of time) this loan or release any party or guarantor or collateral; or impair, fail to realize upon or perfect Lender's security interest in the collateral; and take any other action deemed necessary by Lender without the consent of or notice to anyone. All such parties also agree that Lender may modify this loan without the consent of or notice to anyone other than the party with whom the modification is made. The obligations under this Note are joint and several. PRIOR TO SIGNING THIS NOTE, BORROWER READ AND UNDERSTOOD ALL THE PROVISIONS OF THIS NOTE, INCLUDING THE VARIABLE INTEREST RATE PROVISIONS. BORROWER AGREES TO THE TERMS OF THE NOTE. BORROWER ACKNOWLEDGES RECEIPT OF A COMPLETED COPY OF THIS PROMISSORY NOTE. BORROWER: INTERNATIONAL REMOTE IMAGING SYSTEMS, INC. By:/s/ Dr. John A. O'Malley By:/s/ John Caloz ---------------------------- ---------------------------- Dr. John A. O'Malley, CEO of John Caloz, CFO/Secretary of International Remote Imaging International Remote Imaging Systems, Inc. Systems, Inc. ** Any acquisition of Borrower's common stock by merger, new issuance, or otherwise, that results in one holder owning twenty-five percent (25%) or more of such common stock. PROMISSORY NOTE

- ---------------------------------------------------------------------------------------------------------------------------------- PRINCIPAL LOAN DATE MATURITY LOAN NO CALL/COLL ACCOUNT OFFICER INITIALS $1,000,000.00 02-07-2002 02-28-2007 932900001-4 932900001-4 22163 [INITIALS ILLEGIBLE] - ---------------------------------------------------------------------------------------------------------------------------------- References in the shaded area are for Lender's use only and do not limit the applicability of this document to any particular loan or item. Any item above containing "***" has been omitted due to text length limitations. - ----------------------------------------------------------------------------------------------------------------------------------

BORROWER: INTERNATIONAL REMOTE LENDER: CALIFORNIA BANK & TRUST IMAGING SYSTEMS, INC. COMMERCIAL LOAN CENTER 9162 ETON AVENUE 550 SOUTH HOPE STREET, SUITE 300 CHATSWORTH, CA 91311 LOS ANGELES, CA 90071 ================================================================================ PRINCIPAL AMOUNT: $1,000,000.00 INITIAL RATE: 4.750% DATE OF NOTE: FEBRUARY 7, 2002 PROMISE TO PAY. INTERNATIONAL REMOTE IMAGING SYSTEMS, INC. ("BORROWER") PROMISES TO PAY TO CALIFORNIA BANK & TRUST ("LENDER"), OR ORDER, IN LAWFUL MONEY OF THE UNITED STATES OF AMERICA, THE PRINCIPAL AMOUNT OF ONE MILLION & 00/100 DOLLARS ($1,000,000.00) OR SO MUCH AS MAY BE OUTSTANDING, TOGETHER WITH INTEREST ON THE UNPAID OUTSTANDING PRINCIPAL BALANCE OF EACH ADVANCE. INTEREST SHALL BE CALCULATED FROM THE DATE OF EACH ADVANCE UNTIL REPAYMENT OF EACH ADVANCE. PAYMENT. BORROWER WILL PAY THIS LOAN IN ACCORDANCE WITH THE FOLLOWING PAYMENT SCHEDULE: SUBJECT TO ANY PAYMENT CHANGES RESULTING FROM CHANGES IN THE INDEX, BORROWER WILL PAY 12 CONSECUTIVE MONTHLY PAYMENTS OF ACCRUED UNPAID INTEREST, BEGINNING FEBRUARY 28, 2002 FOLLOWED BY 48 PRINCIPAL PLUS INTEREST PAYMENTS. BORROWER'S FIRST PRINCIPAL PLUS INTEREST IS DUE FEBRUARY 28, 2003, AND ALL SUBSEQUENT PRINCIPAL PLUS ACCRUED INTEREST PAYMENTS ARE DUE ON THE SAME DAY OF EACH MONTH AFTER THAT. BORROWER'S FINAL PAYMENT DUE FEBRUARY 28, 2007, WILL BE FOR ALL PRINCIPAL AND ACCRUED INTEREST NOT YET PAID. UNLESS OTHERWISE AGREED OR REQUIRED BY APPLICABLE LAW, PAYMENTS WILL BE APPLIED FIRST TO ACCRUED UNPAID INTEREST, THEN TO PRINCIPAL, AND ANY REMAINING AMOUNT TO ANY UNPAID COLLECTION COSTS AND LATE CHARGES. THE ANNUAL INTEREST RATE FOR THIS NOTE IS COMPUTED ON A 365/360 BASIS; THAT IS, BY APPLYING THE RATIO OF THE ANNUAL INTEREST RATE OVER A YEAR OF 360 DAYS, MULTIPLIED BY THE OUTSTANDING PRINCIPAL BALANCE, MULTIPLIED BY THE ACTUAL NUMBER OF DAYS THE PRINCIPAL BALANCE IS OUTSTANDING. BORROWER WILL PAY LENDER AT LENDER'S ADDRESS SHOWN ABOVE OR AT SUCH OTHER PLACE AS LENDER MAY DESIGNATE IN WRITING. VARIABLE INTEREST RATE. Subject to designation of a different interest rate index by Borrower as provided below, the interest rate on this Note is subject to change from time to time based on changes in an index which is the rate of interest set from time to time by Bank as its Prime Rate. California Bank & Trust Prime Rate is determined by Bank as a means of pricing credit extensions to some customers and is neither tied to any external rate of interest or index nor is it necessarily the lowest rate of interest charged by Bank at any given time for any particular class of customers or credit extensions (the "Index"). The Index is not necessarily the lowest rate charged by Lender on its loans and is set by Lender in its sole discretion. If the Index becomes unavailable during the term of this loan, Lender may designate a substitute index after notifying Borrower. Lender will tell Borrower the current Index rate upon Borrower's request. The interest rate change will not occur more often than each day. Borrower understands that Lender may make loans based on other rates as well. THE INDEX CURRENTLY IS 4.750%. THE INTEREST RATE TO BE APPLIED TO THE UNPAID PRINCIPAL BALANCE OF THIS A NOTE WILL BE AT A RATE EQUAL TO THE INDEX, RESULTING IN AN INITIAL RATE OF 4.750%. NOTICE: Under no circumstances will the interest rate on this Note be more than the maximum rate allowed by applicable law. INTEREST RATE OPTIONS. On the terms and subject to the conditions set forth herein, Borrower will be able to select, from one of the following Rate Options, an interest rate which will be applicable to a particular dollar increment of amounts outstanding, or to be disbursed, under this Note. Principal shall be payable as specified herein in the "Payment" section, and interest shall be payable as specified for each Rate Option. The following Rate Options are available to Borrower: (A) DEFAULT OPTION. The interest rate margin and index described in the "VARIABLE INTEREST RATE" paragraph herein (the "Default Option"). (B) LONDON INTERBANK OFFERED RATE. A margin of 2.000 percentage points over London Interbank Offered Rate. For purposes of this Note, low London Interbank Offered Rate shall mean the rate of interest at which deposits in U.S. Dollars for the relevant Interest Period is offered to first class banks in the London Interbank market as quoted for the mid-moving average LIBOR Rate as published by Telerate Systems, Inc. or such other publication of such rate as the holder of this Note shall reasonably select, two (2) Business Days prior to the commencement of the relevant Interest Period. An "Interest Period" is a one, two or three month period as selected by Borrower in a writing delivered to Lender as provided below. Interest based on this Rate Option is a floating rate and will change on and as of the date of a change in London Interbank Offered Rate (the "Interest Period"). Adjustments in the interest rate due to changes in the maximum nonusurious interest rate allowed (the "Highest Lawful Rate") shall be made on the effective day of any change in the Highest Lawful Rate. Under this Rate Option, Borrower shall make monthly interest payments on the same day of the month, with a final payment of all accrued and unpaid interest on the last day of such Interest Period and, in the case of an Interest Period greater than three (3) months, at three month (3 month) intervals after the first day of such Interest Period. The following provisions concerning Rate Options are a part of this Note: SELECTION OF RATE OPTIONS. Provided Borrower is not in default under this Note, Borrower may request (a "Rate Request") that a $250,000.00 increment or any amount in excess thereof (an "Increment") of the outstanding principal of, or amounts to be disbursed under, this Note bear interest at the selected rate. Borrower may make this Rate Request by telephonic notice, however no later than 10:00 AM PDT three (3) business days prior to the effective date of the Rate Request to permit Lender to quote the rate requested.* APPLICABLE INTEREST RATE. Borrower's Rate Request will become effective, and interest on the increment designated will be calculated at the rate (the "Effective Rate"), which Borrower requested, for the applicable Interest Period, subject to the following: (1) Notwithstanding any Rate Request, interest shall be calculated on the basis of the Default Option if (a) Lender, in good faith, is unable to ascertain the requested Rate Option by reason of circumstances then affecting the applicable money market or otherwise, (b) it becomes unlawful or impracticable for Lender to maintain loans based upon the requested Rate Option, or (c) Lender, in good faith, determines that it is impracticable to maintain loans based on the requested Rate Option because of increased taxes, regulatory costs, reserve requirements, expenses or any other costs or charges that affect such Rate Options. Upon the occurrence of any of the events described in this "Interest Rate Options" section, any increment to which a requested Rate Option applies shall be immediately (or at the option of Lender, at the end the current Interest Period), without further action of Lender or Borrower, converted to an increment to which the Default Option applies. (2) Borrower may have no more than a total of 3 Effective Rates applicable to amounts outstanding under this Note at any given time. (3) A Rate Request shall be effective as to amounts to be disbursed under this Note only if, on the effective date of the Rate Requests, such amounts are in fact disbursed to or for Borrower's account in accordance with the provisions of this Note and any related loan documents. (4) Any amounts of outstanding principal for which a Rate Request has not been made, or is otherwise not effective, shall bear interest until paid in full at the Default Option. (5) Any amounts of outstanding principal bearing interest based upon a Rate Option shall bear interest at such rate until the end of the PROMISSORY NOTE LOAN NO: 932900001-4 (CONTINUED) PAGE 2 ================================================================================ Interest Period therefor, and thereafter shall bear interest based upon the Default Option unless a new Rate Request for a Rate Option complying with the terms hereof has been made and has become effective. (6) If Borrower is in default under this Note ("Default"), then Lender shall no longer be obligated to honor any Rate Requests. (7) No Interest Period shall extend beyond the maturity date of this Note. NOTICES: AUTHORITY TO ACT. Borrower acknowledges and agrees that the agreement of Lender herein to receive certain notices by telephone is solely for Borrower's convenience. Lender shall be entitled to rely on the authority of the person purporting to be a person authorized by Borrower to give such notice, and Lender shall have no liability to Borrower on account of any action taken by Lender in reliance upon such telephonic notice. Borrower's obligation to repay all sums owing under the Note shall not be affected in any way or to any extent by any failure by Lender to receive written confirmation of any telephonic notice or the receipt by Lender of a confirmation which is at variance with the terms understood by Lender to be contained in the telephonic notice. PREPAYMENT; MINIMUM INTEREST CHARGE. In any event, even upon full prepayment of this Note, Borrower understands that Lender is entitled to a MINIMUM INTEREST CHARGE OF $200.00. Other than Borrower's obligation to pay any minimum interest charge, Borrower may pay without penalty all or a portion of the amount owed earlier than it is due. Early payments will not, unless agreed to by Lender in writing, relieve Borrower of Borrower's obligation to continue to make payments of accrued unpaid interest. Rather, early payments will reduce the principal balance due. Borrower agrees not to send Lender payments marked "paid in full", "without recourse", or similar language. If Borrower sends such a payment, Lender may accept it without losing any of Lender's rights under this Note, and Borrower will remain obligated to pay any further amount owed to Lender. All written communications concerning disputed amounts, including any check or other payment instrument that indicates that the payment constitutes "payment in full" of the amount owed or that is tendered with other conditions or limitations or as full satisfaction of a disputed amount must be mailed or delivered to: California Bank & Trust, Commercial Loan Center, 550 South Hope Street, Suite 300, Los Angeles, CA 90071. LATE CHARGE. If a payment is 15 days or more late, Borrower will be charged 6.000% OF THE REGULARLY SCHEDULED PAYMENT OR $500.00, WHICHEVER IS LESS. INTEREST AFTER DEFAULT. Upon Borrower's failure to pay all amounts declared due pursuant to this section, including failure to pay upon final maturity, Lender, at its option, may, if permitted under applicable law, increase the variable interest rate on this Note to 5.000 percentage points over the Index. DEFAULT. Each of the following shall constitute an event of default ("Event of Default") under this Note: PAYMENT DEFAULT. Borrower fails to make any payment when due under this Note. OTHER DEFAULTS. Borrower fails to comply with or to perform any other term, obligation, covenant or condition contained in this Note or in any of the related documents or to comply with or to perform any term, obligation, covenant or condition contained in any other agreement between Lender and Borrower. DEFAULT IN FAVOR OF THIRD PARTIES. Borrower or any Grantor defaults under any loan, extension of credit, security agreement, purchase or sales agreement, or any other agreement, in favor of any other creditor or person that may materially affect any of Borrower's property or Borrower's ability to repay this Note or perform Borrower's obligations under this Note or any of the related documents. FALSE STATEMENTS. Any warranty, representation or statement made or furnished to Lender by Borrower or on Borrower's behalf under this Note or the related documents is false or misleading in any material respect, either now or at the time made or furnished or becomes false or misleading at any time thereafter. INSOLVENCY. The dissolution or termination of Borrower's existence as a going business, the insolvency of Borrower, the appointment of a receiver for any part of Borrower's property, any assignment for the benefit of creditors, any type of creditor workout, or the commencement of any proceeding under any bankruptcy or insolvency laws by or against Borrower. CREDITOR OR FORFEITURE PROCEEDINGS. Commencement of foreclosure or forfeiture proceedings, whether by judicial proceeding, self-help, repossession or any other method, by any creditor of Borrower or by any governmental agency against any collateral securing the loan. This includes a garnishment of any of Borrower's accounts, including deposit accounts, with Lender. However, this Event of Default shall not apply if there is a good faith dispute by Borrower as to the validity or reasonableness of the claim which is the basis of the creditor or forfeiture proceeding and if Borrower gives Lender written notice of the creditor or forfeiture proceeding and deposits with Lender monies or a surety bond for the creditor or forfeiture proceeding, in an amount determined by Lender, in its sole discretion, as being an adequate reserve or bond for the dispute. EVENTS AFFECTING GUARANTOR. Any of the preceding events occurs with respect to any Guarantor of any of the indebtedness or any Guarantor dies or becomes incompetent, or revokes or disputes the validity of, or liability under, any guaranty of the indebtedness evidenced by this Note. In the event of a death, Lender, at its option, may, but shall not be required to, permit the Guarantor's estate to assume unconditionally the obligations arising under the guaranty in a manner satisfactory to Lender, and, in doing so, cure any Event of Default. CHANGE IN OWNERSHIP.** ADVERSE CHANGE. A material adverse change occurs in Borrower's financial condition, or Lender believes the prospect of payment or performance of this Note is impaired. INSECURITY. Lender in good faith believes itself insecure. CURE PROVISIONS. If any default, other than a default in payment is curable and if Borrower has not been given a notice of a breach of the same provision of this Note within the preceding twelve (12) months, it may be cured (and no event of default will have occurred) if Borrower, after receiving written notice from Lender demanding cure of such default: (1) cures the default within fifteen (15) days; or (2) if the cure requires more than fifteen (15) days, immediately initiates steps which Lender deems in Lender's sole discretion to be sufficient to cure the default and thereafter continues and completes all reasonable and necessary steps sufficient to produce compliance as soon as reasonably practical. LENDER'S RIGHTS. Upon default, Lender may declare the entire unpaid principal balance on this Note and all accrued unpaid interest immediately due, and then Borrower will pay that amount. ATTORNEYS' FEES; EXPENSES. Lender may hire or pay someone else to help collect this Note if Borrower does not pay. Borrower will pay Lender that amount. This includes, subject to any limits under applicable law, Lender's attorneys' fees and Lender's legal expenses, whether or not there is a lawsuit, including attorneys' fees, expenses for bankruptcy proceedings (including efforts to modify or vacate any automatic stay or injunction), and appeals. Borrower also will pay any court costs, in addition to all other sums provided by law. JURY WAIVER. LENDER AND BORROWER HEREBY WAIVE THE RIGHT TO ANY JURY TRIAL IN ANY ACTION, PROCEEDING, OR COUNTERCLAIM BROUGHT BY EITHER LENDER OR BORROWER AGAINST THE OTHER. GOVERNING LAW. THIS NOTE WILL BE GOVERNED BY, CONSTRUED AND ENFORCED IN ACCORDANCE WITH FEDERAL LAW AND THE LAWS OF THE STATE OF CALIFORNIA. THIS NOTE HAS BEEN ACCEPTED BY LENDER IN THE STATE OF CALIFORNIA. PROMISSORY NOTE LOAN NO: 932900001-4 (CONTINUED) PAGE 3 - -------------------------------------------------------------------------------- CHOICE OF VENUE. If there is a lawsuit, Borrower agrees upon Lender's request to submit to the jurisdiction of the courts of Los Angeles County, State of California. COLLATERAL. Borrower acknowledges this Note is secured by the following collateral described in the security instrument listed herein: inventory, chattel paper, accounts, equipment and general intangibles described in a Commercial Security Agreement dated February 7, 2002. LINE OF CREDIT. This Note evidences a straight line of credit. Once the total amount of principal has been advanced, Borrower is not entitled to further loan advances. Advances under this Note may be requested either orally or in writing by Borrower or as provided in this paragraph. Lender may, but need not, require that all oral requests be confirmed in writing. All communications, instructions, or directions by telephone or otherwise to Lender are to be directed to Lender's office shown above. The following persons currently are authorized to request advances and authorize payments under the line of credit until Lender receives from Borrower, at Lender's address shown above, written notice of revocation of their authority: DR. JOHN A. O'MALLEY, CEO/CHAIRMAN OF INTERNATIONAL REMOTE IMAGING SYSTEMS, INC.; JOHN CALOZ, CFO/SECRETARY OF INTERNATIONAL REMOTE IMAGING SYSTEMS, INC.; AND DONALD HORACEK, CONTROLLER OF ADVANCED DIGITAL IMAGING RESEARCH, LLC. Borrower agrees to be liable for all sums either: (A) advanced in accordance with the instructions of an authorized person or (B) credited to any of Borrower's accounts with Lender. The unpaid principal balance owing on this Note at any time may be evidenced by endorsements on this Note or by Lender's internal records, including daily computer print-outs. Lender will have no obligation to advance funds under this Note if: (A) Borrower or any guarantor is in default under the terms of this Note or any agreement that Borrower or any guarantor has with Lender, including any agreement made in connection with the signing of this Note; (B) Borrower or any guarantor ceases doing business or is insolvent; (C) any guarantor seeks, claims or otherwise attempts to limit, modify or revoke such guarantor's guarantee of this Note or any other loan with Lender; (D) Borrower has applied funds provided pursuant to this Note for purposes other than those authorized by Lender; or (E) Lender in good faith believes itself insecure. DEPOSIT AGREEMENT SECURITY. Borrower hereby grants a security interest to Lender in any and all deposit accounts (checking, savings, money market or time) of Borrower at Lender, now existing or hereinafter opened, to secure its indebtedness hereunder. This includes all deposit accounts Borrower holds jointly with someone else. FINANCIAL STATEMENT CERTIFICATIONS. The undersigned hereby certifies to California Bank & Trust ("Bank") that all financial information ("Information") submitted to Bank now and at all times during the terms of this loan does, and will, fairly and accurately represent the financial condition of the undersigned, all Borrowers and Guarantors. Financial Information includes, but is not limited to all Business Financial Statements (including Interim and Year-End financial statements that are company prepared and/or CPA-prepared), Business Income Tax Returns, Borrowing Base Certificates, Accounts Receivable and Accounts Payable Agings, Personal Financial Statements and Personal Income Tax Returns. The undersigned understand that the Bank will rely on all financial information, whenever provided, and that such information is a material inducement to Bank to make, to continue to make, or otherwise extend credit accommodations to the undersigned. The undersigned covenants and agrees to notify Bank of any adverse material changes in her/his/its financial condition in the future. The undersigned further understands and acknowledges that there are criminal penalties for giving false financial information to federally insured financial institutions. TERM OUT OF NON-REVOLVING LINE OF CREDIT. Borrower covenants and agrees with Lender, that upon the end of the twelve (12) month interest only payment period, the non-revolving feature of this loan will be discontinued and the loan balance will be converted to a forty-eight (48) month installment loan, with payments of Principal plus accrued interest at an interest rate based on selected interest rate as per the options described in the "Interest Rate Options" Section of this Note. LOAN AGREEMENT. This Note is subject to the terms and conditions of that Loan Agreement executed by Borrower in favor of Lender on February 7, 2002. ADDITIONAL PROVISION FOR "SELECTION OF RATE OPTIONS" SECTION (SEE PAGE 1). The minimum initial LIBOR advance shall be $250,000.00 and in increments of $100,000.00 thereafter.* SUCCESSOR INTERESTS. The terms of this Note shall be binding upon Borrower, and upon Borrower's heirs, personal representatives, successors and assigns, and shall inure to the benefit of Lender and its successors and assigns. GENERAL PROVISIONS. Lender may delay or forgo enforcing any of its rights or remedies under this Note without losing them. Borrower and any other person who signs, guarantees or endorses this Note, to the extent allowed by law, waive any applicable statute of limitations, presentment, demand for payment, and notice of dishonor. Upon any change in the terms of this Note, and unless otherwise expressly stated in writing, no party who signs this Note, whether as maker, guarantor, accommodation maker or endorser, shall be released from liability. All such parties agree that Lender may renew or extend (repeatedly and for any length of time) this loan or release any party or guarantor or collateral; or impair, fail to realize upon or perfect Lender's security interest in the collateral; and take any other action deemed necessary by Lender without the consent of or notice to anyone. All such parties also agree that Lender may modify this loan without the consent of or notice to anyone other than the party with whom the modification is made. The obligations under this Note are joint and several. PRIOR TO SIGNING THIS NOTE, BORROWER READ AND UNDERSTOOD ALL THE PROVISIONS OF THIS NOTE, INCLUDING THE VARIABLE INTEREST RATE PROVISIONS. BORROWER AGREES TO THE TERMS OF THE NOTE. BORROWER ACKNOWLEDGES RECEIPT OF A COMPLETED COPY OF THIS PROMISSORY NOTE. BORROWER: INTERNATIONAL REMOTE IMAGING SYSTEMS INC. By: /s/ John A. O'Malley By: /s/ John Caloz ------------------------------------ ---------------------------------- DR. JOHN A. O'MALLEY, CEO/CHAIRMAN JOHN CALOZ, CFO/SECRETARY OF OF INTERNATIONAL REMOTE IMAGING INTERNATIONAL REMOTE IMAGING SYSTEMS, INC. SYSTEMS, INC. - -------------------------------------------------------------------------------- ** Any acquisition of Borrower's common stock by merger, new issuance, or otherwise, that results in one holder owning twenty-five percent (25%) or more of such common stock. EX-11.1(C) 7 v80280ex11-1c.txt EXHIBIT 11.1(C) EXHIBIT 11.1(c) COMMERCIAL SECURITY AGREEMENT

- ------------------------------------------------------------------------------------------------------------------ PRINCIPAL LOAN DATE MATURITY LOAN NO CALL/COLL ACCOUNT OFFICER INITIALS $6,500,000.0 02-07-2002 06-30-2004 932900001-1 932900001-1 22163 [INITIALS ILLEGIBLE] - ------------------------------------------------------------------------------------------------------------------- References in the shaded area are for Lender's use only and do not limit the applicability of this document to any particular loan or item. Any item above containing "***" has been omitted due to text length limitations. - -------------------------------------------------------------------------------------------------------------------

GRANTOR: INTERNATIONAL REMOTE LENDER: CALIFORNIA BANK & TRUST IMAGING SYSTEMS, INC. COMMERCIAL LOAN CENTER 9162 ETON AVENUE 550 SOUTH HOPE STREET, SUITE 300 CHATSWORTH, CA 91311 LOS ANGELES, CA 90071 ================================================================================ THIS COMMERCIAL SECURITY AGREEMENT dated February 7, 2002, is made and executed between International Remote Imaging Systems, Inc. ("Grantor") and California Bank & Trust ("Lender"). GRANT OF SECURITY INTEREST. For valuable consideration, Grantor grants to Lender a security interest in the Collateral to secure the Indebtedness and agrees that Lender shall have the rights stated in this Agreement with respect to the Collateral, in addition to all other rights which Lender may have by law. COLLATERAL DESCRIPTION. The word "Collateral" as used in this Agreement means the following described property, whether now owned or hereafter acquired, whether now existing or hereafter arising, and wherever located, in which Grantor is giving to Lender a security interest for the payment of the Indebtedness and performance of all other obligations under the Note and this Agreement: ALL INVENTORY, EQUIPMENT, ACCOUNTS (INCLUDING BUT NOT LIMITED TO ALL HEALTH-CARE-INSURANCE RECEIVABLES), CHATTEL PAPER, INSTRUMENTS (INCLUDING BUT NOT LIMITED TO ALL PROMISSORY NOTES), LETTER-OF-CREDIT RIGHTS, LETTERS OF CREDIT, DOCUMENTS, DEPOSIT ACCOUNTS, INVESTMENT PROPERTY, MONEY, OTHER RIGHTS TO PAYMENT AND PERFORMANCE, AND GENERAL INTANGIBLES (INCLUDING BUT NOT LIMITED TO ALL SOFTWARE AND ALL PAYMENT INTANGIBLES); ALL FIXTURES; ALL ATTACHMENTS, ACCESSIONS, ACCESSORIES, FITTINGS, INCREASES, TOOLS, PARTS, REPAIRS, SUPPLIES, AND COMMINGLED GOODS RELATING TO THE FOREGOING PROPERTY, AND ALL ADDITIONS, REPLACEMENTS OF AND SUBSTITUTIONS FOR ALL OR ANY PART OF THE FOREGOING PROPERTY; ALL INSURANCE REFUNDS RELATING TO THE FOREGOING PROPERTY; ALL GOOD WILL RELATING TO THE FOREGOING PROPERTY; ALL RECORDS AND DATA AND EMBEDDED SOFTWARE RELATING TO THE FOREGOING PROPERTY, AND ALL EQUIPMENT, INVENTORY AND SOFTWARE TO UTILIZE, CREATE, MAINTAIN AND PROCESS ANY SUCH RECORDS AND DATA ON ELECTRONIC MEDIA; AND ALL SUPPORTING OBLIGATIONS RELATING TO THE FOREGOING PROPERTY; ALL WHETHER NOW EXISTING OR HEREAFTER ARISING, WHETHER NOW OWNED OR HEREAFTER ACQUIRED OR WHETHER NOW OR HEREAFTER SUBJECT TO ANY RIGHTS IN THE FOREGOING PROPERTY; AND ALL PRODUCTS AND PROCEEDS (INCLUDING BUT NOT LIMITED TO ALL INSURANCE PAYMENTS) OF OR RELATING TO THE FOREGOING PROPERTY. In addition, the word "Collateral" also includes all the following, whether now owned or hereafter acquired, whether now existing or hereafter arising, and wherever located: (A) All accessions, attachments, accessories, tools, parts, supplies, replacements of and additions to any of the collateral described herein, whether added now or later. (B) All products and produce of any of the property described in this Collateral section. (B) All products and produce of any of the property described in this Collateral Section. (C) All accounts, general intangibles, instruments, rents, monies, payments, and all other rights, arising out of a sale, lease, or other disposition of any of the property described in this Collateral section. (D) All proceeds (including insurance proceeds) from the sale, destruction, loss, or other disposition of any of the property described in this Collateral section, and sums due from a third party who has damaged or destroyed the Collateral or from that party's insurer, whether due to judgment, settlement or other process. (E) All records and data relating to any of the property described in this Collateral section, whether in the form of a writing, photograph, microfilm, microfiche, or electronic media, together with all of Grantor's right, title, and interest in and to all computer software required to utilize, create, maintain, and process any such records or data on electronic media. (E) All records and data relating to any of the property described in this Collateral Section, whether in the form of a writing, photograph, microfilm, microfiche, or electronic media, together with all of Grantors right, title, and interest in and to all computer software required to utilize, create, maintain, and process any such records or data on electronic media. Despite any other provision of this Agreement, Lender is not granted, and will not have, a nonpurchase money security interest in household goods, to the extent such a security interest would be prohibited by applicable law. In addition, if because of the type of any Property, Lender is required to give a notice of the right to cancel under Truth in Lending for the Indebtedness, then Lender will not have a security interest in such Collateral unless and until such a notice is given. CROSS-COLLATERALIZATION. In addition to the Note, this Agreement secures all obligations, debts and liabilities, plus interest thereon, of Grantor to Lender, or any one or more of them, as well as all claims by Lender against Grantor or any one or more of them, whether now existing or hereafter arising, whether related or unrelated to the purpose of the Note, whether voluntary or otherwise, whether due or not due, direct or indirect, determined or undetermined, absolute or contingent, liquidated or unliquidated whether Grantor may be liable individually or jointly with others, whether obligated as guarantor, surety, accommodation party or otherwise, and whether recovery upon such amounts may be or hereafter may become barred by any statute of limitations, and whether the obligation to repay such amounts may be or hereafter may become otherwise unenforceable. GRANTOR'S REPRESENTATIONS AND WARRANTIES WITH RESPECT TO THE COLLATERAL. With respect to the Collateral, Grantor represents and promises to Lender that: PERFECTION OF SECURITY INTEREST. Grantor agrees to execute financing statements and to take whatever other actions are requested by Lender to perfect and continue Lender's security interest in the Collateral. Upon request of Lender, Grantor will deliver to Lender any and all of the documents evidencing or constituting the Collateral, and Grantor will note Lender's interest upon any and all chattel paper if not delivered to Lender for possession by Lender. THIS IS A CONTINUING SECURITY AGREEMENT AND WILL CONTINUE IN EFFECT EVEN THOUGH ALL OR ANY PART OF THE INDEBTEDNESS IS PAID IN FULL AND EVEN THOUGH FOR A PERIOD OF TIME GRANTOR MAY NOT BE INDEBTED TO LENDER. NOTICES TO LENDER. Grantor will promptly notify Lender in writing at Lender's address shown above (or such other addresses as Lender may designate from time to time) prior to any (1) change in Grantor's name; (2) change in Grantor's assumed business name(s); (3) change in the management of the Corporation Grantor; (4) change in the authorized signer(s); (5) change in Grantor's principal office address; (6) change in Grantor's state of organization; (7) conversion of Grantor to a new or different type of business entity; or (8) change in any other aspect of Grantor that directly or indirectly relates to any agreements between Grantor and Lender. No change in Grantor's name or state of organization will take effect until after Lender has received notice NO VIOLATION. The execution and delivery of this Agreement will not violate any law or agreement governing Grantor or to which Grantor is a party, and its certificate or articles of incorporation and bylaws do not prohibit any term or condition of this Agreement. ENFORCEABILITY OF COLLATERAL. To the extent the Collateral consists of accounts, chattel paper, or general intangibles, as defined by the Uniform Commercial Code, the Collateral is enforceable in accordance with its terms, is genuine, and fully complies with all applicable laws and regulations COMMERCIAL SECURITY AGREEMENT LOAN NO: 932900001-1 (CONTINUED) PAGE 2 ================================================================================ concerning form, content and manner of preparation and execution, and all persons appearing to be obligated on the Collateral have authority and capacity to contract and are in fact obligated as they appear to be on the Collateral. At the time any Account becomes subject to a security interest in favor of Lender, the Account shall be a good and valid account representing an undisputed, bona fide indebtedness incurred by the account debtor, for merchandise held subject to delivery instructions or previously shipped or delivered pursuant to a contract of sale, or for services previously performed by Grantor with or for the account debtor. So long as this Agreement remains in effect, Grantor shall not, without Lender's prior written consent, compromise, settle, adjust, or extend payment under or with regard to any such Accounts. There shall be no setoffs or counterclaims against any of the Collateral, and no agreement shall have been made under which any deductions or discounts may be claimed concerning the Collateral except those disclosed to Lender in writing. LOCATION OF THE COLLATERAL. Except in the ordinary course of Grantor's business, Grantor agrees to keep the Collateral (or to the extent the Collateral consists of intangible property such as accounts or general intangibles, the records concerning the Collateral) at Grantor's address shown above or at such other locations as are acceptable to Lender. Upon Lender's request. Grantor will deliver to Lender in form satisfactory to Lender a schedule of real properties and Collateral locations relating to Grantor's operations, including without limitation the following: (1) all real property Grantor owns or is purchasing; (2) all real property Grantor is renting or leasing; (3) all storage facilities Grantor owns, rents, leases, or uses; and (4) all other properties where Collateral is or may be located. REMOVAL OF THE COLLATERAL. Except in the ordinary course of Grantor's business, including the sales of inventory, Grantor shall not remove the Collateral from its existing location without Lender's prior written consent. To the extent that the Collateral consists of vehicles, or other titled property, Grantor shall not take or permit any action which would require application for certificates of title for the vehicles outside the State of Delaware, without Lender's prior written consent. Grantor shall, whenever requested, advise Lender of the exact location of the Collateral. TRANSACTIONS INVOLVING COLLATERAL. Except for inventory sold or accounts collected in the ordinary course of Grantor's business, or as otherwise provided for in this Agreement, Grantor shall not sell, offer to sell, or otherwise transfer or dispose of the Collateral. While Grantor is not in default under this Agreement, Grantor may sell inventory, but only in the ordinary course of its business and only to buyers who qualify as a buyer in the ordinary course of business. A sale in the ordinary course of Grantor's business does not include a transfer in partial or total satisfaction of a debt or any bulk sale. Grantor shall not pledge, mortgage, encumber or otherwise permit the Collateral to be subject to any lien, security interest, encumbrance, or charge, other than the security interest provided for in this Agreement, without the prior written consent of Lender. This includes security interests even if junior in right to the security interests granted under this Agreement. Unless waived by Lender, all proceeds from any disposition of the Collateral (for whatever reason) shall be held in trust for Lender and shall not be commingled with any other funds; provided however, this requirement shall not constitute consent by Lender to any sale or other disposition. Upon receipt, Grantor shall immediately deliver any such proceeds to Lender. TITLE. Grantor represents and warrants to Lender that Grantor holds good and marketable title to the Collateral, free and clear of all liens and encumbrances except for the lien of this Agreement. No financing statement covering any of the Collateral is on file in any public office other than those which reflect the security interest created by this Agreement or to which Lender has specifically consented. Grantor shall defend Lender's rights in the Collateral against the claims and demands of all other persons. REPAIRS AND MAINTENANCE. Grantor agrees to keep and maintain, and to cause others to keep and maintain, the Collateral in good order, repair and condition at all times while this Agreement remains in effect. Grantor further agrees to pay when due all claims for work done on, or services rendered or material furnished in connection with the Collateral so that no lien or encumbrance may ever attach to or be filed against the Collateral. INSPECTION OF COLLATERAL. Lender and Lender's designated representatives and agents shall have the right at all reasonable times to examine and inspect the Collateral wherever located. TAXES, ASSESSMENTS AND LIENS. Grantor will pay when due all taxes, assessments and liens upon the Collateral, its use or operation, upon this Agreement, upon any promissory note or notes evidencing the Indebtedness, or upon any of the other Related Documents. Grantor may withhold any such payment or may elect to contest any lien if Grantor is in good faith conducting an appropriate proceeding to contest the obligation to pay and so long as Lender's interest in the Collateral is not jeopardized in Lender's sole opinion. If the Collateral is subjected to a lien which is not discharged within fifteen (15) days, Grantor shall deposit with Lender cash, a sufficient corporate surety bond or other security satisfactory to Lender in an amount adequate to provide for the discharge of the lien plus any interest, costs, reasonable attorneys' fees or other charges that could accrue as a result of foreclosure or sale of the Collateral. In any contest Grantor shall defend itself and Lender and shall satisfy any final adverse judgment before enforcement against the Collateral. Grantor shall name Lender as an additional obligee under any surety bond furnished in the contest proceedings. Grantor further agrees to furnish Lender with evidence that such taxes, assessments, and governmental and other charges have been paid in full and in a timely manner. Grantor may withhold any such payment or may elect to contest any lien if Grantor is in good faith conducting an appropriate proceeding to contest the obligation to pay and so long as Lender's interest in the Collateral is not jeopardized. COMPLIANCE WITH GOVERNMENTAL REQUIREMENTS. Grantor shall comply promptly with all laws, ordinances, rules and regulations of all governmental authorities, now or hereafter in effect, applicable to the ownership, production, disposition, or use of the Collateral, including all laws or regulations relating to the undue erosion of highly-erodible land or relating to the conversion of wetlands for the production of an agricultural product or commodity. Grantor may contest in good faith any such law, ordinance or regulation and withhold compliance during any proceeding, including appropriate appeals, so long as Lender's interest in the Collateral, in Lender's opinion, is not jeopardized. HAZARDOUS SUBSTANCES. Grantor represents and warrants that the Collateral never has been, and never will be so long as this Agreement remains a lien on the Collateral, used in violation of any Environmental Laws or for the generation, manufacture, storage, transportation, treatment, disposal, release or threatened release of any Hazardous Substance. The representations and warranties contained herein are based on Grantor's due diligence in investigating the Collateral for Hazardous Substances. Grantor hereby (1) releases and waives any future claims against Lender for indemnity or contribution in the event Grantor becomes liable for cleanup or other costs under any Environmental Laws, and (2) agrees to indemnify and hold harmless Lender against any and all claims and losses resulting from a breach of this provision of this Agreement. This obligation to indemnify shall survive the payment of the Indebtedness and the satisfaction of this Agreement. MAINTENANCE OF CASUALTY INSURANCE. Grantor shall procure and maintain all risks insurance, including without limitation fire, theft and liability coverage together with such other insurance as Lender may require with respect to the Collateral, in form, amounts, coverages and basis reasonably acceptable to Lender and issued by a company or companies reasonably acceptable to Lender. Grantor, upon request of Lender, will deliver to Lender from time to time the policies or certificates of insurance in form satisfactory to Lender, including stipulations that coverages will not be cancelled or diminished without at least ten (10) days' prior written notice to Lender and not including any disclaimer of the insurer's liability for failure to give such a notice. Each insurance policy also shall include an endorsement providing that coverage in favor of Lender will not be impaired in any way by any act, omission or default of Grantor or any other person. In connection with all policies covering assets in which Lender holds or is offered a security interest, Grantor will provide Lender with such loss payable or other endorsements as Lender may require. If Grantor at any time fails to obtain or maintain any insurance as required under this Agreement, Lender may (but shall not be obligated to) obtain such insurance as Lender deems appropriate, including if Lender so chooses "single interest insurance;" which will cover only Lender's interest in the Collateral. COMMERCIAL SECURITY AGREEMENT LOAN NO: 932900001-1 (CONTINUED) PAGE 3 ================================================================================ APPLICATION OF INSURANCE PROCEEDS. Grantor shall promptly notify Lender of any loss or damage to the Collateral. Lender may make proof of loss if Grantor fails to do so within fifteen (15) days of the casualty. All proceeds of any insurance on the Collateral, including accrued proceeds thereon, shall be held by Lender as part of the Collateral. If Lender consents to repair or replacement of the damaged or destroyed Collateral, Lender shall, upon satisfactory proof of expenditure, pay or reimburse Grantor from the proceeds for the reasonable cost of repair or restoration. If Lender does not consent to repair or replacement of the Collateral, Lender shall retain a sufficient amount of the proceeds to pay all of the Indebtedness, and shall pay the balance to Grantor. Any proceeds which have not been disbursed within six (6) months after their receipt and which Grantor has not committed to the repair or restoration of the Collateral shall be used to prepay the Indebtedness. INSURANCE RESERVES. Lender may require Grantor to maintain with Lender reserves for payment of insurance premiums, which reserves shall be created by monthly payments from Grantor of a sum estimated by Lender to be sufficient to produce, at least fifteen (15) days before the premium due date, amounts at least equal to the insurance premiums to be paid. If fifteen (15) days before payment is due, the reserve funds are insufficient, Grantor shall upon demand pay any deficiency to Lender. The reserve funds shall be held by Lender as a general deposit and shall constitute a non-interest-bearing account which Lender may satisfy by payment of the insurance premiums required to be paid by Grantor as they become due. Lender does not hold the reserve funds in trust for Grantor, and Lender is not the agent of Grantor for payment of the insurance premiums required to be paid by Grantor. The responsibility for the payment of premiums shall remain Grantor's sole responsibility. INSURANCE REPORTS. Grantor, upon request of Lender, shall furnish to Lender reports on each existing policy of insurance showing such information as Lender may reasonably request including the following: (1) the name of the insurer; (2) the risks insured; (3) the amount of the policy; (4) the property insured; (5) the then current value on the basis of which insurance has been obtained and the manner of determining that value; and (6) the expiration date of the policy. In addition, Grantor shall upon request by Lender (however not more often than annually) have an independent appraiser satisfactory to Lender determine, as applicable, the cash value or replacement cost of the Collateral. FINANCING STATEMENTS. Grantor authorizes Lender to file a UCC-1 financing statement, or alternatively, a copy of this Agreement to perfect Lender's security interest. At Lender's request, Grantor additionally agrees to sign all other documents that are necessary to perfect, protect, and continue Lender's security interest in the Property. Grantor will pay all filing fees, title transfer fees, and other fees and costs involved unless prohibited by law or unless Lender is required by law to pay such fees and costs. Grantor irrevocably appoints Lender to execute financing statements and documents of title in Grantor's name and to execute all documents necessary to transfer title if there is a default. Lender may file a copy of this Agreement as a financing statement. If Grantor changes Grantor's name or address, or the name or address of any person granting a security interest under this Agreement changes, Grantor will promptly notify the Lender of such change. GRANTOR'S RIGHT TO POSSESSION AND TO COLLECT ACCOUNTS. Until default and except as otherwise provided below with respect to accounts, Grantor may have possession of the tangible personal property and beneficial use of all the Collateral and may use it in any lawful manner not inconsistent with this Agreement or the Related Documents, provided that Grantor's right to possession and beneficial use shall not apply to any Collateral where possession of the Collateral by Lender is required by law to perfect Lender's security interest in such Collateral. Until otherwise notified by Lender, Grantor may collect any of the Collateral consisting of accounts. At any time and even though no Event of Default exists, Lender may exercise its rights to collect the accounts and to notify account debtors to make payments directly to Lender for application to the Indebtedness. If Lender at any time has possession of any Collateral, whether before or after an Event of Default, Lender shall be deemed to have exercised reasonable care in the custody and preservation of the Collateral if Lender takes such action for that purpose as Grantor shall request or as Lender, in Lender's sole discretion, shall deem appropriate under the circumstances, but failure to honor any request by Grantor shall not of itself be deemed to be a failure to exercise reasonable care. Lender shall not be required to take any steps necessary to preserve any rights in the Collateral against prior parties, nor to protect, preserve or maintain any security interest given to secure the Indebtedness. LENDER'S EXPENDITURES. If any action or proceeding is commenced that would materially affect Lender's interest in the Collateral or if Grantor fails to comply with any provision of this Agreement or any Related Documents, including but not limited to Grantor's failure to discharge or pay when due any amounts Grantor is required to discharge or pay under this Agreement or any Related Documents, Lender on Grantor's behalf may (but shall not be obligated to) take any action that Lender deems appropriate, including but not limited to discharging or paying all taxes, liens, security interests, encumbrances and other claims, at any time levied or placed on the Collateral and paying all costs for insuring, maintaining and preserving the Collateral. All such expenditures incurred or paid by Lender for such purposes will then bear interest at the rate charged under the Note from the date incurred or paid by Lender to the date of repayment by Grantor. All such expenses will become a part of the Indebtedness and, at Lender's option, will (A) be payable on demand; (B) be added to the balance of the Note and be apportioned among and be payable with any installment payments to become due during either (1) the term of any applicable insurance policy; or (2) the remaining term of the Note; or (C) be treated as a balloon payment which will be due and payable at the Note's maturity. The Agreement also will secure payment of these amounts. Such right shall be in addition to all other rights and remedies to which Lender may be entitled upon Default. DEFAULT. Each of the following shall constitute an Event of Default under this Agreement: PAYMENT DEFAULT. Grantor fails to make any payment when due under the Indebtedness. OTHER DEFAULTS. Grantor fails to comply with or to perform any other term, obligation, covenant or condition contained in this Agreement or in any of the Related Documents or to comply with or to perform any term, obligation, covenant or condition contained in any other agreement between Lender and Grantor. DEFAULT IN FAVOR OF THIRD PARTIES. Should Borrower or any Grantor default under any loan, extension of credit, security agreement, purchase or sales agreement, or any other agreement, in favor of any other creditor or person that may materially affect any of Grantor's property or Grantor's or any Grantor's ability to repay the Indebtedness or perform their respective obligations under this Agreement or any of the Related Documents. FALSE STATEMENTS. Any warranty, representation or statement made or furnished to Lender by Grantor or on Grantor's behalf under this Agreement or the Related Documents is false or misleading in any material respect, either now or at the time made or furnished or becomes false or misleading at any time thereafter. DEFECTIVE COLLATERALIZATION. This Agreement or any of the Related Documents ceases to be in full force and effect (including failure of any collateral document to create a valid and perfected security interest or lien) at any time and for any reason. INSOLVENCY. The dissolution or termination of Grantor's existence as a going business, the insolvency of Grantor, the appointment of a receiver for any part of Grantor's property, any assignment for the benefit of creditors, any type of creditor workout, or the commencement of any proceeding under any bankruptcy or insolvency laws by or against Grantor. CREDITOR OR FORFEITURE PROCEEDINGS. Commencement of foreclosure or forfeiture proceedings, whether by judicial proceeding, self-help, repossession or any other method, by any creditor of Grantor or by any governmental agency against any collateral securing the Indebtedness. This includes a garnishment of any of Grantor's accounts, including deposit accounts, with Lender. However, this Event of Default shall not apply if there is a good faith dispute by Grantor as to the validity or reasonableness of the claim which is the basis of the creditor or forfeiture proceeding and if Grantor gives Lender written notice of the creditor or forfeiture proceeding and deposits with Lender monies or a surety bond for the creditor or forfeiture proceeding, in an amount determined by Lender, in its sole discretion, as being an adequate reserve or bond for the dispute. EVENTS AFFECTING GUARANTOR. Any of the preceding events occurs with respect to Guarantor of any of the Indebtedness or Guarantor dies or COMMERCIAL SECURITY AGREEMENT LOAN NO: 932900001-1 (CONTINUED) PAGE 4 ================================================================================ becomes incompetent or revokes or disputes the validity of, or liability under, any Guaranty of the Indebtedness. ADVERSE CHANGE. A material adverse change occurs in Grantor's financial condition, or Lender believes the prospect of payment or performance of the Indebtedness is impaired. INSECURITY. Lender in good faith believes itself insecure. CURE PROVISIONS. If any default, other than a default in payment is curable and if Grantor has not been given a notice of a breach of the same provision of this Agreement within the preceding twelve (12) months, it may be cured (and no event of default will have occurred) if Grantor, after receiving written notice from Lender demanding cure of such default: (1) cures the default within fifteen (15) days; or (2) if the cure requires more than fifteen (15) days, immediately initiates steps which Lender deems in Lender's sole discretion to be sufficient to cure the default and thereafter continues and completes all reasonable and necessary steps sufficient to produce compliance as soon as reasonably practical. RIGHTS AND REMEDIES ON DEFAULT. If an Event of Default occurs under this Agreement, at any time thereafter, Lender shall have all the rights of a secured party under the Delaware Uniform Commercial Code. In addition and without limitation, Lender may exercise any one or more of the following rights and remedies: ACCELERATE INDEBTEDNESS. Lender may declare the entire Indebtedness, including any prepayment penalty which Grantor would be required to pay, immediately due and payable, without notice of any kind to Grantor. ASSEMBLE COLLATERAL. Lender may require Grantor to deliver to Lender all or any portion of the Collateral and any and all certificates of title and other documents relating to the Collateral. Lender may require Grantor to assemble the Collateral and make it available to Lender at a place to be designated by Lender. Lender also shall have full power to enter upon the property of Grantor to take possession of and remove the Collateral. If the Collateral contains other goods not covered by this Agreement at the time of repossession, Grantor agrees Lender may take such other goods, provided that Lender makes reasonable efforts to return them to Grantor after repossession. SELL THE COLLATERAL. Lender shall have full power to sell, lease, transfer, or otherwise deal with the Collateral or proceeds thereof in Lender's own name or that of Grantor. Lender may sell the Collateral at public auction or private sale. Unless the Collateral threatens to decline speedily in value or is of a type customarily sold on a recognized market, Lender will give Grantor, and other persons as required by law, reasonable notice of the time and place of any public sale, or the time after which any private sale or any other disposition of the Collateral is to be made. However, no notice need be provided to any person who, after Event of Default occurs, enters into and authenticates an agreement waiving that person's right to notification of sale. The requirements of reasonable notice shall be met if such notice is given at least ten (10) days before the time of the sale or disposition. All expenses relating to the disposition of the Collateral, including without limitation the expenses of retaking, holding, insuring, preparing for sale and selling the Collateral, shall become a part of the Indebtedness secured by this Agreement and shall be payable on demand, with interest at the Note rate from date of expenditure until repaid. APPOINT RECEIVER. Lender shall have the right to have a receiver appointed to take possession of all or any part of the Collateral, with the power to protect and preserve the Collateral, to operate the Collateral preceding foreclosure or sale, and to collect the Rents from the Collateral and apply the proceeds, over and above the cost of the receivership, against the Indebtedness. The receiver may serve without bond if permitted by law. Lender's right to the appointment of a receiver shall exist whether or not the apparent value of the Collateral exceeds the Indebtedness by a substantial amount. Employment by Lender shall not disqualify a person from serving as a receiver. COLLECT REVENUES, APPLY ACCOUNTS. Lender, either itself or through a receiver, may collect the payments, rents, income, and revenues from the Collateral. Lender may at any time in Lender's discretion transfer any Collateral into Lender's own name or that of Lender's nominee and receive the payments, rents, income, and revenues therefrom and hold the same as security for the Indebtedness or apply it to payment of the Indebtedness in such order of preference as Lender may determine. Insofar as the Collateral consists of accounts, general intangibles, insurance policies, instruments, chattel paper, choses in action, or similar property, Lender may demand, collect, receipt for, settle, compromise, adjust, sue for, foreclose, or realize on the Collateral as Lender may determine, whether or not Indebtedness or Collateral is then due. For these purposes, Lender may, on behalf of and in the name of Grantor, receive, open and dispose of mail addressed to Grantor; change any address to which mail and payments are to be sent; and endorse notes, checks, drafts, money orders, documents of title, instruments and items pertaining to payment, shipment, or storage of any Collateral. To facilitate collection, Lender may notify account debtors and obligors on any Collateral to make payments directly to Lender. OBTAIN DEFICIENCY. If Lender chooses to sell any or all of the Collateral, Lender may obtain a judgment against Grantor for any deficiency remaining on the Indebtedness due to Lender after application of all amounts received from the exercise of the rights provided in this Agreement. Grantor shall be liable for a deficiency even if the transaction described in this subsection is a sale of accounts or chattel paper. OTHER RIGHTS AND REMEDIES. Lender shall have all the rights and remedies of a secured creditor under the provisions of the Uniform Commercial Code, as may be amended from time to time. In addition, Lender shall have and may exercise any or all other rights and remedies it may have available at law, in equity, or otherwise. ELECTION OF REMEDIES. Except as may be prohibited by applicable law, all of Lender's rights and remedies, whether evidenced by this Agreement, the Related Documents, or by any other writing, shall be cumulative and may be exercised singularly or concurrently. Election by Lender to pursue any remedy shall not exclude pursuit of any other remedy, and an election to make expenditures or to take action to perform an obligation of Grantor under this Agreement, after Grantor's failure to perform, shall not affect Lender's right to declare a default and exercise its remedies. DEPOSIT AGREEMENT SECURITY. Grantor hereby grants a security interest to Lender in any and all deposit accounts (checking, savings, money market or time) of Grantor at Lender, now existing or hereinafter opened, to secure the Indebtedness. This includes all deposit accounts Grantor holds jointly with someone else. MISCELLANEOUS PROVISIONS. The following miscellaneous provisions are a part of this Agreement: AMENDMENTS. This Agreement, together with any Related Documents, constitutes the entire understanding and agreement of the parties as to the matters set forth in this Agreement. No alteration of or amendment to this Agreement shall be effective unless given in writing and signed by the party or parties sought to be charged or bound by the alteration or amendment. ATTORNEYS' FEES; EXPENSES. Grantor agrees to pay upon demand all of Lender's costs and expenses, including Lender's reasonable attorneys' fees and Lender's legal expenses, incurred in connection with the enforcement of this Agreement. Lender may hire or pay someone else to help enforce this Agreement, and Grantor shall pay the costs and expenses of such enforcement. Costs and expenses include Lender's reasonable attorneys' fees and legal expenses whether or not there is a lawsuit, including reasonable attorneys' fees and legal expenses for bankruptcy proceedings (including efforts to modify or vacate any automatic stay or injunction), appeals, and any anticipated post-judgment collection services. Lender may also recover from Grantor all court, alternative dispute resolution or other collection costs (including, without limitation, fees and charges of collection agencies) actually incurred by Lender. CAPTION HEADINGS. Caption headings in this Agreement are for convenience purposes only and are not to be used to interpret or define the provisions of this Agreement. COMMERCIAL SECURITY AGREEMENT LOAN NO: 932900001-1 (CONTINUED) PAGE 5 ================================================================================ GOVERNING LAW. THIS AGREEMENT WILL BE GOVERNED BY, CONSTRUED AND ENFORCED IN ACCORDANCE WITH FEDERAL LAW AND THE LAWS OF THE STATE OF CALIFORNIA, EXCEPT AND ONLY TO THE EXTENT OF PROCEDURAL MATTERS RELATED TO THE PERFECTION AND ENFORCEMENT OF LENDER'S RIGHTS AND REMEDIES AGAINST THE COLLATERAL, WHICH MATTERS SHALL BE GOVERNED BY THE LAWS OF THE STATE OF DELAWARE. HOWEVER, IN THE EVENT THAT THE ENFORCEABILITY OR VALIDITY OF ANY PROVISION OF THIS AGREEMENT IS CHALLENGED OR QUESTIONED, SUCH PROVISION SHALL BE GOVERNED BY WHICHEVER APPLICABLE STATE OR FEDERAL LAW WOULD UPHOLD OR WOULD ENFORCE SUCH CHALLENGED OR QUESTIONED PROVISION. THE LOAN TRANSACTION WHICH IS EVIDENCED BY THE NOTE AND THIS AGREEMENT HAS BEEN APPLIED FOR, CONSIDERED, APPROVED AND MADE, AND ALL NECESSARY LOAN DOCUMENTS HAVE BEEN ACCEPTED BY LENDER IN THE STATE OF CALIFORNIA. CHOICE OF VENUE. If there is a lawsuit, Grantor agrees upon Lender's request to submit to the jurisdiction of the courts of Los Angeles County, State of California. NO WAIVER BY LENDER. Lender shall not be deemed to have waived any rights under this Agreement unless such waiver is given in writing and signed by Lender. No delay or omission on the part of Lender in exercising any right shall operate as a waiver of such right or any other right. A waiver by Lender of a provision of this Agreement shall not prejudice or constitute a waiver of Lender's right otherwise to demand strict compliance with that provision or any other provision of this Agreement. No prior waiver by Lender, nor any course of dealing between Lender and Grantor, shall constitute a waiver of any of Lender's rights or of any of Grantor's obligations as to any future transactions. Whenever the consent of Lender is required under this Agreement, the granting of such consent by Lender in any instance shall not constitute continuing consent to subsequent instances where such consent is required and in all cases such consent may be granted or withheld in the sole discretion of Lender. NOTICES. Any notice required to be given under this Agreement shall be given in writing, and shall be effective when actually delivered, when actually received by telefacsimile (unless otherwise required by law), when deposited with a nationally recognized overnight courier, or, if mailed, when deposited in the United States mail, as first class, certified or registered mail postage prepaid, directed to the addresses shown near the beginning of this Agreement. Any party may change its address for notices under this Agreement by giving formal written notice to the other parties, specifying that the purpose of the notice is to change the party's address. For notice purposes, Grantor agrees to keep Lender informed at all times of Grantor's current address. Unless otherwise provided or required by law, if there is more than one Grantor, any notice given by Lender to any Grantor is deemed to be notice given to all Grantors. POWER OF ATTORNEY. Grantor hereby appoints Lender as Grantor's irrevocable attorney-in-fact for the purpose of executing any documents necessary to perfect, amend, or to continue the security interest granted in this Agreement or to demand termination of filings of other secured parties. Lender may at any time, and without further authorization from Grantor, file a carbon, photographic or other reproduction of any financing statement or of this Agreement for use as a financing statement. Grantor will reimburse Lender for all expenses for the perfection and the continuation of the perfection of Lender's security interest in the Collateral. SEVERABILITY. If a court of competent jurisdiction finds any provision of this Agreement to be illegal, invalid, or unenforceable as to any circumstance, that finding shall not make the offending provision illegal, invalid, or unenforceable as to any other circumstance. If feasible, the offending provision shall be considered modified so that it becomes legal, valid and enforceable. If the offending provision cannot be so modified, it shall be considered deleted from this Agreement. Unless otherwise required by law, the illegality, invalidity, or unenforceability of any provision of this Agreement shall not affect the legality, validity or enforceability of any other provision of this Agreement. SUCCESSORS AND ASSIGNS. Subject to any limitations stated in this Agreement on transfer of Grantor's interest, this Agreement shall be binding upon and inure to the benefit of the parties, their successors and assigns. If ownership of the Collateral becomes vested in a person other than Grantor, Lender, without notice to Grantor, may deal with Grantor's successors with reference to this Agreement and the Indebtedness by way of forbearance or extension without releasing Grantor from the obligations of this Agreement or liability under the Indebtedness. SURVIVAL OF REPRESENTATIONS AND WARRANTIES. All representations, warranties, and agreements made by Grantor in this Agreement shall survive the execution and delivery of this Agreement, shall be continuing in nature, and shall remain in full force and effect until such time as Grantor's Indebtedness shall be paid in full. TIME IS OF THE ESSENCE. Time is of the essence in the performance of this Agreement. WAIVE JURY. ALL PARTIES TO THIS AGREEMENT HEREBY WAIVE THE RIGHT TO ANY JURY TRIAL IN ANY ACTION, PROCEEDING, OR COUNTERCLAIM BROUGHT BY ANY PARTY AGAINST ANY OTHER PARTY. DEFINITIONS. The following capitalized words and terms shall have the following meanings when used in this Agreement. Unless specifically stated to the contrary, all references to dollar amounts shall mean amounts in lawful money of the United States of America. Words and terms used in the singular shall include the plural, and the plural shall include the singular, as the context may require. Words and terms not otherwise defined in this Agreement shall have the meanings attributed to such terms in the Uniform Commercial Code: ACCOUNT. The word "Account" means a trade account, account receivable, other receivable, or other right to payment for goods sold or services rendered owing to Grantor (or to a third party grantor acceptable to Lender). AGREEMENT. The word "Agreement" means this Commercial Security Agreement, as this Commercial Security Agreement may be amended or modified from time to time, together with all exhibits and schedules attached to this Commercial Security Agreement from time to time. BORROWER. The word "Borrower" means International Remote Imaging Systems, Inc., and all other persons and entities signing the Note in whatever capacity. COLLATERAL. The word "Collateral" means all of Grantor's right, title and interest in and to all the Collateral as described in the Collateral Description section of this Agreement. DEFAULT. The word "Default" means the Default set forth in this Agreement in the section titled "Default". ENVIRONMENTAL LAWS. The words "Environmental Laws" mean any and all state, federal and local statutes, regulations and ordinances relating to the protection of human health or the environment, including without limitation the Comprehensive Environmental Response, Compensation, and Liability Act of 1980, as amended, 42 U.S.C. Section 9601, et seq. ("CERCLA"), the Superfund Amendments and Reauthorization Act of 1986, Pub. L. No. 99-499 ("SARA"), the Hazardous Materials Transportation Act, 49 U.S.C. Section 1801, et seq., the Resource Conservation and Recovery Act, 42 U.S.C. Section 6901, et seq., Chapters 6.5 through 7.7 of Division 20 of the California Health and Safety Code, Section 25100, et seq., or other applicable state or federal laws, rules, or regulations adopted pursuant thereto. EVENT OF DEFAULT. The words "Event of Default" mean any of the events of default set forth in this Agreement in the default section of this Agreement. GRANTOR. The word "Grantor" means International Remote Imaging Systems, Inc. GUARANTOR. The word "Guarantor" means any guarantor, surety, or accommodation party of any or all of the Indebtedness. GUARANTY. The word "Guaranty" means the guaranty from Guarantor to Lender, including without limitation a guaranty of all or part of the Note. COMMERCIAL SECURITY AGREEMENT LOAN NO: 932900001-1 (CONTINUED) PAGE 6 ================================================================================ HAZARDOUS SUBSTANCES. The words "Hazardous Substances" mean materials that, because of their quantity, concentration or physical, chemical or infectious characteristics, may cause or pose a present or potential hazard to human health or the environment when improperly used, treated, stored, disposed of, generated, manufactured, transported or otherwise handled. The words "Hazardous Substances" are used in their very broadest sense and include without limitation any and all hazardous or toxic substances, materials or waste as defined by or listed under the Environmental Laws. The term "Hazardous Substances" also includes, without limitation, petroleum and petroleum by-products or any fraction thereof and asbestos. INDEBTEDNESS. The word "Indebtedness" means the indebtedness evidenced by the Note or Related Documents, including all principal and interest together with all other indebtedness and costs and expenses for which Grantor is responsible under this Agreement or under any of the Related Documents. LENDER. The word "Lender" means California Bank & Trust, its successors and assigns. NOTE. The word "Note" means the Note executed by International Remote Imaging Systems, Inc. in the principal amount of $6,500,000.00 dated February 7, 2002, together with all renewals of, extensions of, modifications of, refinancings of, consolidations of, and substitutions for the note or credit agreement. PROPERTY. The word "Property" means all of Grantor's right, title and interest in and to all the Property as described in the "Collateral Description" section of this Agreement. RELATED DOCUMENTS. The words "Related Documents" mean all promissory notes, credit agreements, loan agreements, environmental agreements, guaranties, security agreements, mortgages, deeds of trust, security deeds, collateral mortgages, and all other instruments, agreements and documents, whether now or hereafter existing, executed in connection with the Indebtedness. GRANTOR HAS READ AND UNDERSTOOD ALL THE PROVISIONS OF THIS COMMERCIAL SECURITY AGREEMENT AND AGREES TO ITS TERMS. THIS AGREEMENT IS DATED FEBRUARY 7, 2002. THIS AGREEMENT IS GIVEN UNDER SEAL AND IT IS INTENDED THAT THIS AGREEMENT IS AND SHALL CONSTITUTE AND HAVE THE EFFECT OF A SEALED INSTRUMENT ACCORDING TO LAW. GRANTOR: INTERNATIONAL REMOTE IMAGING SYSTEMS, INC. BY: /s/ JOHN A. O'MALLEY (SEAL) BY: /s/ JOHN CALOZ (SEAL) ----------------------------- ----------------------------- DR. JOHN A. O'MALLEY CEO/CHAIRMAN JOHN CALOZ, CFO/SECRETARY OF OF INTERNATIONAL REMOTE IMAGING INTERNATIONAL REMOTE IMAGING SYSTEMS, INC. SYSTEMS, INC. COMMERCIAL SECURITY AGREEMENT

- ------------------------------------------------------------------------------------------------------------------- PRINCIPAL LOAN DATE MATURITY LOAN NO CALL/COLL ACCOUNT OFFICER INITIALS $6,500.000.00 02-07-2002 06-30-2004 932900001-1 932900001-1 22163 [INITIALS ILLEGIBLE] - ------------------------------------------------------------------------------------------------------------------- References in the shaded area are for Lender's use only and do not limit the applicability of this document to any particular loan or item. Any item above containing "***" has been omitted due to text length limitations. - -------------------------------------------------------------------------------------------------------------------

BORROWER: INTERNATIONAL REMOTE IMAGING SYSTEMS, INC. Lender: CALIFORNIA BANK & TRUST 9162 ETON AVENUE COMMERCIAL LOAN CENTER CHATSWORTH, CA 91311 550 SOUTH HOPE STREET, SUITE 300 LOS ANGELES, CA 90071 GRANTOR: ADVANCED DIGITAL IMAGING RESEARCH, LLC 2525 SOUTH SHORE BOULEVARD, SUITE 100 LEAGUE CITY, TX 77573 =============================================================================== THIS COMMERCIAL SECURITY AGREEMENT DATED FEBRUARY 7, 2002, IS MADE AND EXECUTED AMONG ADVANCED DIGITAL IMAGING RESEARCH, LLC ("GRANTOR"); INTERNATIONAL REMOTE IMAGING SYSTEMS, INC. ("BORROWER"); AND CALIFORNIA BANK & TRUST ("LENDER"). GRANT OF SECURITY INTEREST. FOR VALUABLE CONSIDERATION, GRANTOR GRANTS TO LENDER A SECURITY INTEREST IN THE COLLATERAL TO SECURE THE INDEBTEDNESS AND AGREES THAT LENDER SHALL HAVE THE RIGHTS STATED IN THIS AGREEMENT WITH RESPECT TO THE COLLATERAL, IN ADDITION TO ALL OTHER RIGHTS WHICH LENDER MAY HAVE BY LAW. COLLATERAL DESCRIPTION. The word "Collateral" as used in this Agreement means the following described property, whether now owned or hereafter acquired, whether now existing or hereafter arising, and wherever located, in which Grantor is giving to Lender a security interest for the payment of the Indebtedness and performance of all other obligations under the Note and this Agreement: ALL INVENTORY, EQUIPMENT, ACCOUNTS (INCLUDING BUT NOT LIMITED TO ALL HEALTH-CARE-INSURANCE RECEIVABLES), CHATTEL PAPER, INSTRUMENTS (INCLUDING BUT NOT LIMITED TO ALL PROMISSORY NOTES), LETTER-OF-CREDIT RIGHTS, LETTERS OF CREDIT, DOCUMENTS, DEPOSIT ACCOUNTS, INVESTMENT PROPERTY, MONEY, OTHER RIGHTS TO PAYMENT AND PERFORMANCE, AND GENERAL INTANGIBLES (INCLUDING BUT NOT LIMITED TO ALL SOFTWARE AND ALL PAYMENT INTANGIBLES); ALL FIXTURES; ALL ATTACHMENTS, ACCESSIONS, ACCESSORIES, FITTINGS, INCREASES, TOOLS, PARTS, REPAIRS, SUPPLIES, AND COMMINGLED GOODS RELATING TO THE FOREGOING PROPERTY, AND ALL ADDITIONS, REPLACEMENTS OF AND SUBSTITUTIONS FOR ALL OR ANY PART OF THE FOREGOING PROPERTY; ALL INSURANCE REFUNDS RELATING TO THE FOREGOING PROPERTY; ALL GOOD WILL RELATING TO THE FOREGOING PROPERTY; ALL RECORDS AND DATA AND EMBEDDED SOFTWARE RELATING TO THE FOREGOING PROPERTY, AND ALL EQUIPMENT, INVENTORY AND SOFTWARE TO UTILIZE, CREATE, MAINTAIN AND PROCESS ANY SUCH RECORDS AND DATA ON ELECTRONIC MEDIA; AND ALL SUPPORTING OBLIGATIONS RELATING TO THE FOREGOING PROPERTY; ALL WHETHER NOW EXISTING OR HEREAFTER ARISING, WHETHER NOW OWNED OR HEREAFTER ACQUIRED OR WHETHER NOW OR HEREAFTER SUBJECT TO ANY RIGHTS IN THE FOREGOING PROPERTY; AND ALL PRODUCTS AND PROCEEDS (INCLUDING BUT NOT LIMITED TO ALL INSURANCE PAYMENTS) OF OR RELATING TO THE FOREGOING PROPERTY. In addition, the word "Collateral" also includes all the following, whether now owned or hereafter acquired, whether now existing or hereafter arising, and wherever located: (A) All accessions, attachments, accessories, tools, parts, supplies, replacements of and additions to any of the collateral described herein, whether added now or later. (B) All products and produce of any of the property described in this Collateral section. (C) All accounts, general intangibles, instruments, rents, monies, payments, and all other rights, arising out of a sale, lease, or other disposition of any of the property described in this Collateral section. (D) All proceeds (including insurance proceeds) from the sale, destruction, loss, or other disposition of any of the property described in this Collateral section, and sums due from a third party who has damaged or destroyed the Collateral or from that party's insurer, whether due to judgment, settlement or other process. (E) All records and data relating to any of the property described in this Collateral section, whether in the form of a writing, photograph, microfilm, microfiche, or electronic media, together with all of Grantor's right, title, and interest in and to all computer software required to utilize, create, maintain, and process any such records or data on electronic media. Despite any other provision of this Agreement, Lender is not granted, and will not have, a nonpurchase money security interest in household goods, to the extent such a security interest would be prohibited by applicable law. In addition, if because of the type of any Property, Lender is required to give a notice of the right to cancel under Truth in Lending for the Indebtedness, then Lender will not have a security interest in such Collateral unless and until such a notice is given. CROSS-COLLATERALIZATION. In addition to the Note, this Agreement secures all obligations, debts and liabilities, plus interest thereon, of Borrower to Lender, or any one or more of them, as well as all claims by Lender against Borrower or any one or more of them, whether now existing or hereafter arising, whether related or unrelated to the purpose of the Note, whether voluntary or otherwise, whether due or not due, direct or indirect, determined or undetermined, absolute or contingent, liquidated or unliquidated whether Borrower or Grantor may be liable individually or jointly with others, whether obligated as guarantor, surety, accommodation party or otherwise, and whether recovery upon such amounts may be or hereafter may become barred by any statute of limitations, and whether the obligation to repay such amounts may be or hereafter may become otherwise unenforceable. BORROWER'S WAIVERS AND RESPONSIBILITIES. Except as otherwise required under this Agreement or by applicable law, (A) Borrower agrees that Lender need not tell Borrower about any action or inaction Lender takes in connection with this Agreement; (B) Borrower assumes the responsibility for being and keeping informed about the Collateral; and (C) Borrower waives any defenses that may arise because of any action or inaction of Lender, including without limitation any failure of Lender to realize upon the Collateral or any delay by Lender in realizing upon the Collateral; and Borrower agrees to remain liable under the Note no matter what action Lender takes or fails to take under this Agreement. GRANTOR'S REPRESENTATIONS AND WARRANTIES. Grantor warrants that: (A) this Agreement is executed at Borrower's request and not at the request of Lender; (B) Grantor has the full right, power and authority to enter into this Agreement and to pledge the Collateral to Lender; (C) Grantor has established adequate means of obtaining from Borrower on a continuing basis information about Borrower's financial condition; and (D) Lender has made no representation to Grantor about Borrower or Borrower's creditworthiness. GRANTOR'S WAIVERS. Grantor waives all requirements of presentment, protest, demand, and notice of dishonor or non-payment to Borrower or Grantor, or any other party to the Indebtedness or the Collateral. Lender may do any of the following with respect to any obligation of any Borrower, without first obtaining the consent of Grantor: (A) grant any extension of time for any payment, (B) grant any renewal, (C) permit any modification of payment terms or other terms, or (D) exchange or release any Collateral or other security. No such act or failure to act shall affect Lender's rights COMMERCIAL SECURITY AGREEMENT LOAN NO: 932900001-1 (CONTINUED) PAGE 2 ================================================================================ against Grantor or the Collateral. GRANTOR'S REPRESENTATIONS AND WARRANTIES WITH RESPECT TO THE COLLATERAL. With respect to the Collateral, Grantor represents and promises to Lender that: PERFECTION OF SECURITY INTEREST. Grantor agrees to execute financing statements and to take whatever other actions are requested by Lender to perfect and continue Lender's security interest in the Collateral. Upon request of Lender, Grantor will deliver to Lender any and all of the documents evidencing or constituting the Collateral, and Grantor will note Lender's interest upon any and all chattel paper if not delivered to Lender for possession by Lender. THIS IS A CONTINUING SECURITY AGREEMENT AND WILL CONTINUE IN EFFECT EVEN THOUGH ALL OR ANY PART OF THE INDEBTEDNESS IS PAID IN FULL AND EVEN THOUGH FOR A PERIOD OF TIME BORROWER MAY NOT BE INDEBTED TO LENDER. NOTICES TO LENDER. Grantor will promptly notify Lender in writing at Lender's address shown above (or such other addresses as Lender may designate from time to time) prior to any (1) change in Grantor's name; (2) change in Grantor's assumed business name(s); (3) change in the management or in the members or managers of the limited liability company Grantor; (4) change in the authorized signer(s); (5) change in Grantor's principal office address; (6) change in Grantor's state of organization; (7) conversion of Grantor to a new or different type of business entity; or (8) change in any other aspect of Grantor that directly or indirectly relates to any agreements between Grantor and Lender. No change in Grantor's name or state of organization will take effect until after Lender has received notice NO VIOLATION. The execution and delivery of this Agreement will not violate any law or agreement governing Grantor or to which Grantor is a party, and its membership agreement does not prohibit any term or condition of this Agreement. ENFORCEABILITY OF COLLATERAL. To the extent the Collateral consists of accounts, chattel paper, or general intangibles, as defined by the Uniform Commercial Code, the Collateral is enforceable in accordance with its terms, is genuine, and fully complies with all applicable laws and regulations concerning form, content and manner of preparation and execution, and all persons appearing to be obligated on the Collateral have authority and capacity to contract and are in fact obligated as they appear to be on the Collateral. At the time any Account becomes subject to a security interest in favor of Lender, the Account shall be a good and valid account representing an undisputed, bona fide indebtedness incurred by the account debtor, for merchandise held subject to delivery instructions or previously shipped or delivered pursuant to a contract of sale, or for services previously performed by Grantor with or for the account debtor. So long as this Agreement remains in effect, Grantor shall not, without Lender's prior written consent, compromise, settle, adjust, or extend payment under or with regard to any such Accounts. There shall be no setoffs or counterclaims against any of the Collateral, and no agreement shall have been made under which any deductions or discounts may be claimed concerning the Collateral except those disclosed to Lender in writing. LOCATION OF THE COLLATERAL. Except in the ordinary course of Grantor's business, Grantor agrees to keep the Collateral (or to the extent the Collateral consists of intangible property such as accounts or general intangibles, the records concerning the Collateral) at Grantor's address shown above or at such other locations as are acceptable to Lender. Upon Lender's request, Grantor will deliver to Lender in form satisfactory to Lender a schedule of real properties and Collateral locations relating to Grantor's operations, including without limitation the following: (1) all real property Grantor owns or is purchasing; (2) all real property Grantor is renting or leasing; (3) all storage facilities Grantor owns, rents, leases, or uses; and (4) all other properties where Collateral is or may be located. REMOVAL OF THE COLLATERAL. Except in the ordinary course of Grantor's business, including the sales of inventory, Grantor shall not remove the Collateral from its existing location without Lender's prior written consent. To the extent that the Collateral consists of vehicles, or other titled property, Grantor shall not take or permit any action which would require application for certificates of title for the vehicles outside the State of Delaware, without Lender's prior written consent. Grantor shall, whenever requested, advise Lender of the exact location of the Collateral. TRANSACTIONS INVOLVING COLLATERAL. Except for inventory sold or accounts collected in the ordinary course of Grantor's business, or as otherwise provided for in this Agreement, Grantor shall not sell, offer to sell, or otherwise transfer or dispose of the Collateral. While Grantor is not in default under this Agreement, Grantor may sell inventory, but only in the ordinary course of its business and only to buyers who qualify as a buyer in the ordinary course of business. A sale in the ordinary course of Grantor's business does not include a transfer in partial or total satisfaction of a debt or any bulk sale. Grantor shall not pledge, mortgage, encumber or otherwise permit the Collateral to be subject to any lien, security interest, encumbrance, or charge, other than the security interest provided for in this Agreement, without the prior written consent of Lender. This includes security interests even if junior in right to the security interests granted under this Agreement. Unless waived by Lender, all proceeds from any disposition of the Collateral (for whatever reason) shall be held in trust for Lender and shall not be commingled with any other funds; provided however, this requirement shall not constitute consent by Lender to any sale or other disposition. Upon receipt, Grantor shall immediately deliver any such proceeds to Lender. TITLE. Grantor represents and warrants to Lender that Grantor holds good and marketable title to the Collateral, free and clear of all liens and encumbrances except for the lien of this Agreement. No financing statement covering any of the Collateral is on file in any public office other than those which reflect the security interest created by this Agreement or to which Lender has specifically consented. Grantor shall defend Lender's rights in the Collateral against the claims and demands of all other persons. REPAIRS AND MAINTENANCE. Grantor agrees to keep and maintain, and to cause others to keep and maintain, the Collateral in good order, repair and condition at all times while this Agreement remains in effect. Grantor further agrees to pay when due all claims for work done on, or services rendered or material furnished in connection with the Collateral so that no lien or encumbrance may ever attach to or be filed against the Collateral. INSPECTION OF COLLATERAL. Lender and Lender's designated representatives and agents shall have the right at all reasonable times to examine and inspect the Collateral wherever located. TAXES, ASSESSMENTS AND LIENS. Grantor will pay when due all taxes, assessments and liens upon the Collateral, its use or operation, upon this Agreement, upon any promissory note or notes evidencing the Indebtedness, or upon any of the other Related Documents. Grantor may withhold any such payment or may elect to contest any lien if Grantor is in good faith conducting an appropriate proceeding to contest the obligation to pay and so long as Lender's interest in the Collateral is not jeopardized in Lender's sole opinion. If the Collateral is subjected to a lien which is not discharged within fifteen (15) days, Grantor shall deposit with Lender cash, a sufficient corporate surety bond or other security satisfactory to Lender in an amount adequate to provide for the discharge of the lien plus any interest, costs, reasonable attorneys' fees or other charges that could accrue as a result of foreclosure or sale of the Collateral. In any contest Grantor shall defend itself and Lender and shall satisfy any final adverse judgment before enforcement against the Collateral. Grantor shall name Lender as an additional obligee under any surety bond furnished in the contest proceedings. Grantor further agrees to furnish Lender with evidence that such taxes, assessments, and governmental and other charges have been paid in full and in a timely manner. Grantor may withhold any such payment or may elect to contest any lien if Grantor is in good faith conducting an appropriate proceeding to contest the obligation to pay and so long as Lender's interest in the Collateral is not jeopardized. COMPLIANCE WITH GOVERNMENTAL REQUIREMENTS. Grantor shall comply promptly with all laws, ordinances, rules and regulations of all governmental authorities, now or hereafter in effect, applicable to the ownership, production, disposition, or use of the Collateral, including all laws or regulations relating to the undue erosion of highly-erodible land or relating to the conversion of wetlands for the production of an agricultural product or commodity. Grantor may contest in good faith any such law, ordinance or regulation and withhold compliance during any proceeding, COMMERCIAL SECURITY AGREEMENT LOAN NO: 932900001-1 (CONTINUED) PAGE 3 ================================================================================ including appropriate appeals, so long as Lender's interest in the Collateral, in Lender's opinion, is not jeopardized. HAZARDOUS SUBSTANCES. Grantor represents and warrants that the Collateral never has been, and never will be so long as this Agreement remains a lien on the Collateral, used in violation of any Environmental Laws or for the generation, manufacture, storage, transportation, treatment, disposal, release or threatened release of any Hazardous Substance. The representations and warranties contained herein are based on Grantor's due diligence in investigating the Collateral for Hazardous Substances. Grantor hereby (1) releases and waives any future claims against Lender for indemnity or contribution in the event Grantor becomes liable for cleanup or other costs under any Environmental Laws, and (2) agrees to indemnify and hold harmless Lender against any and all claims and losses resulting from a breach of this provision of this Agreement. This obligation to indemnify shall survive the payment of the Indebtedness and the satisfaction of this Agreement. MAINTENANCE OF CASUALTY INSURANCE. Grantor shall procure and maintain all risks insurance, including without limitation fire, theft and liability coverage together with such other insurance as Lender may require with respect to the Collateral, in form, amounts, coverages and basis reasonably acceptable to Lender and issued by a company or companies reasonably acceptable to Lender. Grantor, upon request of Lender, will deliver to Lender from time to time the policies or certificates of insurance in form satisfactory to Lender, including stipulations that coverages will not be cancelled or diminished without at least ten (10) days' prior written notice to Lender and not including any disclaimer of the insurer's liability for failure to give such a notice. Each insurance policy also shall include an endorsement providing that coverage in favor of Lender will not be impaired in any way by any act, omission or default of Grantor or any other person. In connection with all policies covering assets in which Lender holds or is offered a security interest, Grantor will provide Lender with such loss payable or other endorsements as Lender may require. If Grantor at any time fails to obtain or maintain any insurance as required under this Agreement, Lender may (but shall not be obligated to) obtain such insurance as Lender deems appropriate, including if Lender so chooses "single interest insurance," which will cover only Lender's interest in the Collateral. APPLICATION OF INSURANCE PROCEEDS. Grantor shall promptly notify Lender of any loss or damage to the Collateral. Lender may make proof of loss if Grantor fails to do so within fifteen (15) days of the casualty. All proceeds of any insurance on the Collateral, including accrued proceeds thereon, shall be held by Lender as part of the Collateral. If Lender consents to repair or replacement of the damaged or destroyed Collateral, Lender shall, upon satisfactory proof of expenditure, pay or reimburse Grantor from the proceeds for the reasonable cost of repair or restoration. If Lender does not consent to repair or replacement of the Collateral, Lender shall retain a sufficient amount of the proceeds to pay all of the Indebtedness, and shall pay the balance to Grantor. Any proceeds which have not been disbursed within six (6) months after their receipt and which Grantor has not committed to the repair or restoration of the Collateral shall be used to prepay the Indebtedness. INSURANCE RESERVES. Lender may require Grantor to maintain with Lender reserves for payment of insurance premiums, which reserves shall be created by monthly payments from Grantor of a sum estimated by Lender to be sufficient to produce, at least fifteen (15) days before the premium due date, amounts at least equal to the insurance premiums to be paid. If fifteen (15) days before payment is due, the reserve funds are insufficient, Grantor shall upon demand pay any deficiency to Lender. The reserve funds shall be held by Lender as a general deposit and shall constitute a non-interest-bearing account which Lender may satisfy by payment of the insurance premiums required to be paid by Grantor as they become due. Lender does not hold the reserve funds in trust for Grantor, and Lender is not the agent of Grantor for payment of the insurance premiums required to be paid by Grantor. The responsibility for the payment of premiums shall remain Grantor's sole responsibility. INSURANCE REPORTS. Grantor, upon request of Lender, shall furnish to Lender reports on each existing policy of insurance showing such information as Lender may reasonably request including the following: (1) the name of the insurer; (2) the risks insured; (3) the amount of the policy; (4) the property insured; (5) the then current value on the basis of which insurance has been obtained and the manner of determining that value; and (6) the expiration date of the policy. In addition, Grantor shall upon request by Lender (however not more often than annually) have an independent appraiser satisfactory to Lender determine, as applicable, the cash value or replacement cost of the Collateral. FINANCING STATEMENTS. Grantor authorizes Lender to file a UCC-1 financing statement, or alternatively, a copy of this Agreement to perfect Lender's security interest. At Lender's request, Grantor additionally agrees to sign all other documents that are necessary to perfect, protect, and continue Lender's security interest in the Property. Grantor will pay all filing fees, title transfer fees, and other fees and costs involved unless prohibited by law or unless Lender is required by law to pay such fees and costs. Grantor irrevocably appoints Lender to execute financing statements and documents of title in Grantor's name and to execute all documents necessary to transfer title if there is a default. Lender may file a copy of this Agreement as a financing statement. If Grantor changes Grantor's name or address, or the name or address of any person granting a security interest under this Agreement changes, Grantor will promptly notify the Lender of such change. GRANTOR'S RIGHT TO POSSESSION AND TO COLLECT ACCOUNTS. Until default and except as otherwise provided below with respect to accounts, Grantor may have possession of the tangible personal property and beneficial use of all the Collateral and may use it in any lawful manner not inconsistent with this Agreement or the Related Documents, provided that Grantor's right to possession and beneficial use shall not apply to any Collateral where possession of the Collateral by Lender is required by law to perfect Lender's security interest in such Collateral. Until otherwise notified by Lender, Grantor may collect any of the Collateral consisting of accounts. At any time and even though no Event of Default exists, Lender may exercise its rights to collect the accounts and to notify account debtors to make payments directly to Lender for application to the Indebtedness. If Lender at any time has possession of any Collateral, whether before or after an Event of Default, Lender shall be deemed to have exercised reasonable care in the custody and preservation of the Collateral if Lender takes such action for that purpose as Grantor shall request or as Lender, in Lender's sole discretion, shall deem appropriate under the circumstances, but failure to honor any request by Grantor shall not of itself be deemed to be a failure to exercise reasonable care. Lender shall not be required to take any steps necessary to preserve any rights in the Collateral against prior parties, nor to protect, preserve or maintain any security interest given to secure the Indebtedness. LENDER'S EXPENDITURES. If any action or proceeding is commenced that would materially affect Lender's interest in the Collateral or if Grantor fails to comply with any provision of this Agreement or any Related Documents, including but not limited to Grantor's failure to discharge or pay when due any amounts Grantor is required to discharge or pay under this Agreement or any Related Documents, Lender on Grantor's behalf may (but shall not be obligated to) take any action that Lender deems appropriate, including but not limited to discharging or paying all taxes, liens, security interests, encumbrances and other claims, at any time levied or placed on the Collateral and paying all costs for insuring, maintaining and preserving the Collateral. All such expenditures incurred or paid by Lender for such purposes will then bear interest at the rate charged under the Note from the date incurred or paid by Lender to the date of repayment by Grantor. All such expenses will become a part of the Indebtedness and, at Lender's option, will (A) be payable on demand (B) be added to the balance of the Note and be apportioned among and be payable with any installment payments to become due during either (1) the term of any applicable insurance policy; or (2) the remaining term of the Note; or (C) be treated as a balloon payment which will be due and payable at the Note's maturity. The Agreement also will secure payment of these amounts. Such right shall be in addition to all other rights and remedies to which Lender may be entitled upon Default. DEFAULT. Each of the following shall constitute an Event of Default under this Agreement: PAYMENT DEFAULT. Borrower fails to make any payment when due under the Indebtedness. OTHER DEFAULTS. Borrower or Grantor fails to comply with or to perform any other term, obligation, covenant or condition contained in this Agreement or in any of the Related Documents or to comply with or to perform any term, obligation, covenant or condition contained in any other agreement between Lender and Borrower or Grantor. COMMERCIAL SECURITY AGREEMENT LOAN NO: 932900001-1 (Continued) PAGE 4 ================================================================================ DEFAULT IN FAVOR OF THIRD PARTIES. Should Borrower or any Grantor default under any loan, extension of credit, security agreement, purchase or sales agreement, or any other agreement, in favor of any other creditor or person that may materially affect any of Grantor's property or Borrower's or any Grantor's ability to repay the Indebtedness or perform their respective obligations under this Agreement or any of the Related Documents. FALSE STATEMENTS. Any warranty, representation or statement made or furnished to Lender by Borrower or Grantor or on Borrower's or Grantor's behalf under this Agreement or the Related Documents is false or misleading in any material respect, either now or at the time made or furnished or becomes false or misleading at any time thereafter. DEFECTIVE COLLATERALIZATION. This Agreement or any of the Related Documents ceases to be in full force and effect (including failure of any collateral document to create a valid and perfected security interest or lien) at any time and for any reason. INSOLVENCY. The dissolution or termination of Borrower's or Grantor's existence as a going business, the insolvency of Borrower or Grantor, the appointment of a receiver for any part of Borrower's or Grantor's property, any assignment for the benefit of creditors, any type of creditor workout, or the commencement of any proceeding under any bankruptcy or insolvency laws by or against Borrower or Grantor. CREDITOR OR FORFEITURE PROCEEDINGS. Commencement of foreclosure or forfeiture proceedings, whether by judicial proceeding, self-help, repossession or any other method, by any creditor of Borrower or Grantor or by any governmental agency against any collateral securing the Indebtedness. This includes a garnishment of any of Borrower's or Grantor's accounts, including deposit accounts, with Lender. However, this Event of Default shall not apply if there is a good faith dispute by Borrower or Grantor as to the validity or reasonableness of the claim which is the basis of the creditor or forfeiture proceeding and if Borrower or Grantor gives Lender written notice of the creditor or forfeiture proceeding and deposits with Lender monies or a surety bond for the creditor or forfeiture proceeding, in an amount determined by Lender, in its sole discretion, as being an adequate reserve or bond for the dispute. EVENTS AFFECTING GUARANTOR. Any of the preceding events occurs with respect to Guarantor of any of the Indebtedness or Guarantor dies or becomes incompetent or revokes or disputes the validity of, or liability under, any Guaranty of the Indebtedness. ADVERSE CHANGE. A material adverse change occurs in Borrower's or Grantor's financial condition, or Lender believes the prospect of payment or performance of the Indebtedness is impaired. INSECURITY. Lender in good faith believes itself insecure. CURE PROVISIONS. If any default, other than a default in payment is curable and if Grantor has not been given a notice of a breach of the same provision of this Agreement within the preceding twelve (12) months, it may be cured (and no event of default will have occurred) if Grantor, after receiving written notice from Lender demanding cure of such default: (1) cures the default within fifteen (15) days; or (2) if the cure requires more than fifteen (15) days, immediately initiates steps which Lender deems in Lender's sole discretion to be sufficient to cure the default and thereafter continues and completes all reasonable and necessary steps sufficient to produce compliance as soon as reasonably practical. RIGHTS AND REMEDIES ON DEFAULT. If an Event of Default occurs under this Agreement, at any time thereafter, Lender shall have all the rights of a secured party under the Delaware Uniform Commercial Code. In addition and without limitation, Lender may exercise any one or more of the following rights and remedies: ACCELERATE INDEBTEDNESS. Lender may declare the entire Indebtedness, including any prepayment penalty which Borrower would be required to pay, immediately due and payable, without notice of any kind to Borrower or Grantor. ASSEMBLE COLLATERAL. Lender may require Grantor to deliver to Lender all or any portion of the Collateral and any and all certificates of title and other documents relating to the Collateral. Lender may require Grantor to assemble the Collateral and make it available to Lender at a place to be designated by Lender. Lender also shall have full power to enter upon the property of Grantor to take possession of and remove the Collateral. If the Collateral contains other goods not covered by this Agreement at the time of repossession, Grantor agrees Lender may take such other goods, provided that Lender makes reasonable efforts to return them to Grantor after repossession. SELL THE COLLATERAL. Lender shall have full power to sell, lease, transfer, or otherwise deal with the Collateral or proceeds thereof in Lender's own name or that of Grantor. Lender may sell the Collateral at public auction or private sale. Unless the Collateral threatens to decline speedily in value or is of a type customarily sold on a recognized market, Lender will give Grantor, and other persons as required by law, reasonable notice of the time and place of any public sale, or the time after which any private sale or any other disposition of the Collateral is to be made. However, no notice need be provided to any person who, after Event of Default occurs, enters into and authenticates an agreement waiving that person's right to notification of sale. The requirements of reasonable notice shall be met if such notice is given at least ten (10) days before the time of the sale or disposition. All expenses relating to the disposition of the Collateral, including without limitation the expenses of retaking, holding, insuring, preparing for sale and selling the Collateral, shall become a part of the Indebtedness secured by this Agreement and shall be payable on demand, with interest at the Note rate from date of expenditure until repaid. APPOINT RECEIVER. Lender shall have the right to have a receiver appointed to take possession of all or any part of the Collateral, with the power to protect and preserve the Collateral, to operate the Collateral preceding foreclosure or sale, and to collect the Rents from the Collateral and apply the proceeds, over and above the cost of the receivership, against the Indebtedness. The receiver may serve without bond if permitted by law. Lender's right to the appointment of a receiver shall exist whether or not the apparent value of the Collateral exceeds the Indebtedness by a substantial amount. Employment by Lender shall not disqualify a person from serving as a receiver. COLLECT REVENUES, APPLY ACCOUNTS. Lender, either itself or through a receiver, may collect the payments, rents, income, and revenues from the Collateral. Lender may at any time in Lender's discretion transfer any Collateral into Lender's own name or that of Lender's nominee and receive the payments, rents, income, and revenues therefrom and hold the same as security for the Indebtedness or apply it to payment of the Indebtedness in such order of preference as Lender may determine. Insofar as the Collateral consists of accounts, general intangibles, insurance policies, instruments, chattel paper, choses in action, or similar property, Lender may demand, collect, receipt for, settle, compromise, adjust, sue for, foreclose, or realize on the Collateral as Lender may determine, whether or not Indebtedness or Collateral is then due. For these purposes, Lender may, on behalf of and in the name of Grantor, receive, open and dispose of mail addressed to Grantor; change any address to which mail and payments are to be sent; and endorse notes, checks, drafts, money orders, documents of title, instruments and items pertaining to payment, shipment, or storage of any Collateral. To facilitate collection, Lender may notify account debtors and obligors on any Collateral to make payments directly to Lender. OBTAIN DEFICIENCY. If Lender chooses to sell any or all of the Collateral, Lender may obtain a judgment against Borrower for any deficiency remaining on the Indebtedness due to Lender after application of all amounts received from the exercise of the rights provided in this Agreement. Borrower shall be liable for a deficiency even if the transaction described in this subsection is a sale of accounts or chattel paper. OTHER RIGHTS AND REMEDIES. Lender shall have all the rights and remedies of a secured creditor under the provisions of the Uniform Commercial Code, as may be amended from time to time. In addition, Lender shall have and may exercise any or all other rights and remedies it may have available at law, in equity, or otherwise. ELECTION OF REMEDIES. Except as may be prohibited by applicable law, all of Lender's rights and remedies, whether evidenced by this Agreement, the Related Documents, or by any other writing, shall be cumulative and may be exercised singularly or concurrently. Election by COMMERCIAL SECURITY AGREEMENT LOAN NO: 932900001-1 (Continued) PAGE 5 ================================================================================ Lender to pursue any remedy shall not exclude pursuit of any other remedy, and an election to make expenditures or to take action to perform an obligation of Grantor under this Agreement, after Grantor's failure to perform, shall not affect Lender's right to declare a default and exercise its remedies. DEPOSIT AGREEMENT SECURITY. Grantor hereby grants a security interest to Lender in any and all deposit accounts (checking, savings, money market or time) of Grantor at Lender, now existing or hereinafter opened, to secure the Indebtedness. This includes all deposit accounts Grantor holds jointly with someone else. MISCELLANEOUS PROVISIONS. The following miscellaneous provisions are a part of this Agreement: AMENDMENTS. This Agreement, together with any Related Documents, constitutes the entire understanding and agreement of the parties as to the matters set forth in this Agreement. No alteration of or amendment to this Agreement shall be effective unless given in writing and signed by the party or parties sought to be charged or bound by the alteration or amendment. ATTORNEYS' FEES; EXPENSES. Grantor agrees to pay upon demand all of Lender's costs and expenses, including Lender's reasonable attorneys' fees and Lender's legal expenses, incurred in connection with the enforcement of this Agreement. Lender may hire or pay someone else to help enforce this Agreement, and Grantor shall pay the costs and expenses of such enforcement. Costs and expenses include Lender's reasonable attorneys' fees and legal expenses whether or not there is a lawsuit, including reasonable attorneys' fees and legal expenses for bankruptcy proceedings (including efforts to modify or vacate any automatic stay or injunction), appeals, and any anticipated post-judgment collection services. Lender may also recover from Grantor all court, alternative dispute resolution or other collection costs (including, without limitation, fees and charges of collection agencies) actually incurred by Lender. CAPTION HEADINGS. Caption headings in this Agreement are for convenience purposes only and are not to be used to interpret or define the provisions of this Agreement. GOVERNING LAW. THIS AGREEMENT WILL BE GOVERNED BY, CONSTRUED AND ENFORCED IN ACCORDANCE WITH FEDERAL LAW AND THE LAWS OF THE STATE OF CALIFORNIA, EXCEPT AND ONLY TO THE EXTENT OF PROCEDURAL MATTERS RELATED TO THE PERFECTION AND ENFORCEMENT OF LENDER'S RIGHTS AND REMEDIES AGAINST THE COLLATERAL, WHICH MATTERS SHALL BE GOVERNED BY THE LAWS OF THE STATE OF DELAWARE. HOWEVER, IN THE EVENT THAT THE ENFORCEABILITY OR VALIDITY OF ANY PROVISION OF THIS AGREEMENT IS CHALLENGED OR QUESTIONED, SUCH PROVISION SHALL BE GOVERNED BY WHICHEVER APPLICABLE STATE OR FEDERAL LAW WOULD UPHOLD OR WOULD ENFORCE SUCH CHALLENGED OR QUESTIONED PROVISION. THE LOAN TRANSACTION WHICH IS EVIDENCED BY THE NOTE AND THIS AGREEMENT HAS BEEN APPLIED FOR, CONSIDERED, APPROVED AND MADE, AND ALL NECESSARY LOAN DOCUMENTS HAVE BEEN ACCEPTED BY LENDER IN THE STATE OF CALIFORNIA. CHOICE OF VENUE. If there is a lawsuit, Grantor agrees upon Lender's request to submit to the jurisdiction of the courts of Los Angeles County, State of California. JOINT AND SEVERAL LIABILITY. All obligations of Borrower and Grantor under this Agreement shall be joint and several, and all references to Grantor shall mean each and every Grantor, and all references to Borrower shall mean each and every Borrower. This means that each Borrower and Grantor signing below is responsible for all obligations in this Agreement. Where any one or more of the parties is a corporation, partnership, limited liability company or similar entity, it is not necessary for Lender to inquire into the powers of any of the officers, directors, partners, members, or other agents acting or purporting to act on the entity's behalf, and any obligations made or created in reliance upon the professed exercise of such powers shall be guaranteed under this Agreement. NO WAIVER BY LENDER. Lender shall not be deemed to have waived any rights under this Agreement unless such waiver is given in writing and signed by Lender. No delay or omission on the part of Lender in exercising any right shall operate as a waiver of such right or any other right. A waiver by Lender of a provision of this Agreement shall not prejudice or constitute a waiver of Lender's right otherwise to demand strict compliance with that provision or any other provision of this Agreement. No prior waiver by Lender, nor any course of dealing between Lender and Grantor, shall constitute a waiver of any of Lender's rights or of any of Grantor's obligations as to any future transactions. Whenever the consent of Lender is required under this Agreement, the granting of such consent by Lender in any instance shall not constitute continuing consent to subsequent instances where such consent is required and in all cases such consent may be granted or withheld in the sole discretion of Lender. NOTICES. Any notice required to be given under this Agreement shall be given in writing, and shall be effective when actually delivered, when actually received by telefacsimile (unless otherwise required by law), when deposited with a nationally recognized overnight courier, or, if mailed, when deposited in the United States mail, as first class, certified or registered mail postage prepaid, directed to the addresses shown near the beginning of this Agreement. Any party may change its address for notices under this Agreement by giving formal written notice to the other parties, specifying that the purpose of the notice is to change the party's address. For notice purposes, Grantor agrees to keep Lender informed at all times of Grantor's current address. Unless otherwise provided or required by law, if there is more than one Grantor, any notice given by Lender to any Grantor is deemed to be notice given to all Grantors. POWER OF ATTORNEY. Grantor hereby appoints Lender as Grantor's irrevocable attorney-in-fact for the purpose of executing any documents necessary to perfect, amend, or to continue the security interest granted in this Agreement or to demand termination of filings of other secured parties. Lender may at any time, and without further authorization from Grantor, file a carbon, photographic or other reproduction of any financing statement or of this Agreement for use as a financing statement. Grantor will reimburse Lender for all expenses for the perfection and the continuation of the perfection of Lender's security interest in the Collateral. SEVERABILITY. If a court of competent jurisdiction finds any provision of this Agreement to be illegal, invalid, or unenforceable as to any circumstance, that finding shall not make the offending provision illegal, invalid, or unenforceable as to any other circumstance. If feasible, the offending provision shall be considered modified so that it becomes legal, valid and enforceable. If the offending provision cannot be so modified, it shall be considered deleted from this Agreement. Unless otherwise required by law, the illegality, invalidity, or unenforceability of any provision of this Agreement shall not affect the legality, validity or enforceability of any other provision of this Agreement. SUCCESSORS AND ASSIGNS. Subject to any limitations stated in this Agreement on transfer of Grantor's interest, this Agreement shall be binding upon and inure to the benefit of the parties, their successors and assigns. If ownership of the Collateral becomes vested in a person other than Grantor, Lender, without notice to Grantor, may deal with Grantor's successors with reference to this Agreement and the Indebtedness by way of forbearance or extension without releasing Grantor from the obligations of this Agreement or liability under the Indebtedness. SURVIVAL OF REPRESENTATIONS AND WARRANTIES. All representations, warranties, and agreements made by Grantor in this Agreement shall survive the execution and delivery of this Agreement, shall be continuing in nature, and shall remain in full force and effect until such time as Borrower's Indebtedness shall be paid in full. TIME IS OF THE ESSENCE. Time is of the essence in the performance of this Agreement. WAIVE JURY. ALL PARTIES TO THIS AGREEMENT HEREBY WAIVE THE RIGHT TO ANY JURY TRIAL IN ANY ACTION, PROCEEDING, OR COUNTERCLAIM BROUGHT BY ANY PARTY AGAINST ANY OTHER PARTY. DEFINITIONS. The following capitalized words and terms shall have the following meanings when used in this Agreement. Unless specifically stated COMMERCIAL SECURITY AGREEMENT LOAN NO: 932900001-1 (Continued) PAGE 6 ================================================================================ to the contrary, all references to dollar amounts shall mean amounts in lawful money of the United States of America. Words and terms used in the singular shall include the plural, and the plural shall include the singular, as the context may require. Words and terms not otherwise defined in this Agreement shall have the meanings attributed to such terms in the Uniform Commercial Code: ACCOUNT. The word "Account" means a trade account, account receivable, other receivable, or other right to payment for goods sold or services rendered owing to Grantor (or to a third party grantor acceptable to Lender). AGREEMENT. The word "Agreement" means this Commercial Security Agreement, as this Commercial Security Agreement may be amended or modified from time to time, together with all exhibits and schedules attached to this Commercial Security Agreement from time to time. BORROWER. The word "Borrower" means International Remote Imaging Systems, Inc., and all other persons and entities signing the Note in whatever capacity. COLLATERAL. The word "Collateral" means all of Grantor's right, title and interest in and to all the Collateral as described in the Collateral Description section of this Agreement. DEFAULT. The word "Default" means the Default set forth in this Agreement in the section titled "Default". ENVIRONMENTAL LAWS. The words "Environmental Laws" mean any and all state, federal and local statutes, regulations and ordinances relating to the protection of human health or the environment, including without limitation the Comprehensive Environmental Response, Compensation, and Liability Act of 1980, as amended, 42 U.S.C. Section 9601, et seq. ("CERCLA"), the Superfund Amendments and Reauthorization Act of 1986, Pub. L. No. 99-499 ("SARA"), the Hazardous Materials Transportation Act, 49 U.S.C. Section 1801, et seq., the Resource Conservation and Recovery Act, 42 U.S.C. Section 6901, et seq., Chapters 6.5 through 7.7 of Division 20 of the California Health and Safety Code, Section 25100, et seq., or other applicable state or federal laws, rules, or regulations adopted pursuant thereto. EVENT OF DEFAULT. The words "Event of Default" mean any of the events of default set forth in this Agreement in the default section of this Agreement. GRANTOR. The word "Grantor" means Advanced Digital Imaging Research, LLC. GUARANTOR. The word "Guarantor" means any guarantor, surety, or accommodation party of any or all of the Indebtedness. GUARANTY. The word "Guaranty" means the guaranty from Guarantor to Lender, including without limitation a guaranty of all or part of the Note. HAZARDOUS SUBSTANCES. The words "Hazardous Substances" mean materials that, because of their quantity, concentration or physical, chemical or infectious characteristics, may cause or pose a present or potential hazard to human health or the environment when improperly used, treated, stored, disposed of, generated, manufactured, transported or otherwise handled. The words "Hazardous Substances" are used in their very broadest sense and include without limitation any and all hazardous or toxic substances, materials or waste as defined by or listed under the Environmental Laws. The term "Hazardous Substances" also includes, without limitation, petroleum and petroleum by-products or any fraction thereof and asbestos. INDEBTEDNESS. The word "Indebtedness" means the indebtedness evidenced by the Note or Related Documents, including all principal and interest together with all other indebtedness and costs and expenses for which Borrower is responsible under this Agreement or under any of the Related Documents. LENDER. The word "Lender" means California Bank & Trust, its successors and assigns. NOTE. The word "Note" means the Note executed by International Remote Imaging Systems, Inc. in the principal amount of $6,500,000.00 dated February 7, 2002, together with all renewals of, extensions of, modifications of, refinancings of, consolidations of, and substitutions for the note or credit agreement. PROPERTY. The word "Property" means all of Grantor's right, title and interest in and to all the Property as described in the "Collateral Description" section of this Agreement. RELATED DOCUMENTS. The words "Related Documents" mean all promissory notes, credit agreements, loan agreements, environmental agreements, guaranties, security agreements, mortgages, deeds of trust, security deeds, collateral mortgages, and all other instruments, agreements and documents, whether now or hereafter existing, executed in connection with the Indebtedness. BORROWER AND GRANTOR HAVE READ AND UNDERSTOOD ALL THE PROVISIONS OF THIS COMMERCIAL SECURITY AGREEMENT AND AGREE TO ITS TERMS. THIS AGREEMENT IS DATED FEBRUARY 7, 2002. THIS AGREEMENT IS GIVEN UNDER SEAL AND IT IS INTENDED THAT THIS AGREEMENT IS AND SHALL CONSTITUTE AND HAVE THE EFFECT OF A SEALED INSTRUMENT ACCORDING TO LAW. GRANTOR: ADVANCED DIGITAL IMAGING RESEARCH, LLC By: /s/ JOHN A. O'MALLEY (SEAL) By: /s/ DONALD HORACEK (SEAL) ----------------------------------------------------- ------------------------------------------ DR: JOHN A. O'MALLEY, MANAGER OF ADVANCED DIGITAL DONALD HORACEK, MANAGER OF ADVANCED DIGITAL IMAGING RESEARCH, LLC IMAGING RESEARCH, LLC BORROWWER INTERNATIONAL REMOTE IMAGING SYSTEMS, INC. BY: /s/ JOHN A. O'MALLEY (Seal) BY: /s/ JOHN CALOZ (SEAL) --------------------------------------------------- ---------------------------------------- DR: JOHN A. O'MALLEY, CEO/CHAIRMAN OF JOHN CALOZ, CFO/SECRETARY OF INTERNATIONAL REMOTE INTERNATIONAL REMOTE IMAGING SYSTEMS, INC. IMAGING SYSTEMS, INC. COMMERCIAL SECURITY AGREEMENT

- ------------------------------------------------------------------------------------------------------------------------------- PRINCIPAL LOAN DATE MATURITY LOAN NO CALL/COLL ACCOUNT OFFICER INITIALS $6,500,000.00 02-07-2002 06-30-2004 932900001-1 932900001-1 22163 [INITIALS ILLEGIBLE] - ------------------------------------------------------------------------------------------------------------------------------- References in the shaded area are for Lender's use only and do not limit the applicability of this document to any particular loan or Any item above containing "***" has been omitted due to text length limitations. - -------------------------------------------------------------------------------------------------------------------------------

BORROWER: INTERNATIONAL REMOTE LENDER: CALIFORNIA BANK & TRUST IMAGING SYSTEMS, INC. COMMERCIAL LOAN CENTER 9162 ETON AVENUE 550 SOUTH HOPE STREET, CHATSWORTH, CA 91311 SUITE 300 LOS ANGELES, CA 90071 GRANTOR: STATSPIN, INC. 85 MORSE STREET NORWOOD, MA 02062 THIS COMMERCIAL SECURITY AGREEMENT dated February 7, 2002, is made and executed among Statspin, Inc. ("Grantor"); International Remote Imaging Systems, Inc. ("Borrower"); and California Bank & Trust ("Lender"). GRANT OF SECURITY INTEREST. For valuable consideration, Grantor grants to Lender a security interest in the Collateral to secure the Indebtedness and agrees that Lender shall have the rights stated in this Agreement with respect to the Collateral, in addition to all other rights which Lender may have by law. COLLATERAL DESCRIPTION. The word "Collateral" as used in this Agreement means the following described property, whether now owned or hereafter acquired, whether now existing or hereafter arising, and wherever located, in which Grantor is giving to Lender a security interest for the payment of the Indebtedness and performance of all other obligations under the Note and this Agreement: ALL INVENTORY, EQUIPMENT, ACCOUNTS (INCLUDING BUT NOT LIMITED TO ALL HEALTH-CARE-INSURANCE RECEIVABLES), CHATTEL PAPER, INSTRUMENTS (INCLUDING BUT NOT LIMITED TO ALL PROMISSORY NOTES), LETTER-OF-CREDIT RIGHTS, LETTERS OF CREDIT, DOCUMENTS, DEPOSIT ACCOUNTS, INVESTMENT PROPERTY, MONEY, OTHER RIGHTS TO PAYMENT AND PERFORMANCE, AND GENERAL INTANGIBLES (INCLUDING BUT NOT LIMITED TO ALL SOFTWARE AND ALL PAYMENT INTANGIBLES); ALL FIXTURES; ALL ATTACHMENTS, ACCESSIONS, ACCESSORIES, FITTINGS, INCREASES, TOOLS, PARTS, REPAIRS, SUPPLIES, AND COMMINGLED GOODS RELATING TO THE FOREGOING PROPERTY, AND ALL ADDITIONS, REPLACEMENTS OF AND SUBSTITUTIONS FOR ALL OR ANY PART OF THE FOREGOING PROPERTY; ALL INSURANCE REFUNDS RELATING TO THE FOREGOING PROPERTY; ALL GOOD WILL RELATING TO THE FOREGOING PROPERTY; ALL RECORDS AND DATA AND EMBEDDED SOFTWARE RELATING TO THE FOREGOING PROPERTY, AND ALL EQUIPMENT, INVENTORY AND SOFTWARE TO UTILIZE, CREATE, MAINTAIN AND PROCESS ANY SUCH RECORDS AND DATA ON ELECTRONIC MEDIA; AND ALL SUPPORTING OBLIGATIONS RELATING TO THE FOREGOING PROPERTY; ALL WHETHER NOW EXISTING OR HEREAFTER ARISING, WHETHER NOW OWNED OR HEREAFTER ACQUIRED OR WHETHER NOW OR HEREAFTER SUBJECT TO ANY RIGHTS IN THE FOREGOING PROPERTY; AND ALL PRODUCTS AND PROCEEDS (INCLUDING BUT NOT LIMITED TO ALL INSURANCE PAYMENTS) OF OR RELATING TO THE FOREGOING PROPERTY. In addition, the word "Collateral" also includes all the following, whether now owned or hereafter acquired, whether now existing or hereafter arising, and wherever located: (A) All accessions, attachments, accessories, tools, parts, supplies, replacements of and additions to any of the collateral described herein, whether added now or later. (B) All products and produce of any of the property described in this Collateral section. (C) All accounts, general intangibles, instruments, rents, monies, payments, and all other rights, arising out of a sale, lease, or other disposition of any of the property described in this Collateral section. (D) All proceeds (including insurance proceeds) from the sale, destruction, loss, or other disposition of any of the property described in this Collateral section, and sums due from a third party who has damaged or destroyed the Collateral or from that party's insurer, whether due to judgment, settlement or other process. (E) All records and data relating to any of the property described in this Collateral section, whether in the form of a writing, photograph, microfilm, microfiche, or electronic media, together with all of Grantor's right, title, and interest in and to all computer software required to utilize, create, maintain, and process any such records or data on electronic media. Despite any other provision of this Agreement, Lender is not granted, and will not have, a nonpurchase money security interest in household goods, to the extent such a security interest would be prohibited by applicable law. In addition, if because of the type of any Property, Lender is required to give a notice of the right to cancel under Truth in Lending for the Indebtedness, then Lender will not have a security interest in such Collateral unless and until such a notice is given. CROSS-COLLATERALIZATION. In addition to the Note, this Agreement secures all obligations, debts and liabilities, plus interest thereon, of Borrower to Lender, or any one or more of them, as well as all claims by Lender against Borrower or any one or more of them, whether now existing or hereafter arising, whether related or unrelated to the purpose of the Note, whether voluntary or otherwise, whether due or not due, direct or indirect, determined or undetermined, absolute or contingent, liquidated or unliquidated whether Borrower or Grantor may be liable individually or jointly with others, whether obligated as guarantor, surety, accommodation party or otherwise, and whether recovery upon such amounts may be or hereafter may become barred by any statute of limitations, and whether the obligation to repay such amounts may be or hereafter may become otherwise unenforceable. BORROWER'S WAIVERS AND RESPONSIBILITIES. Except as otherwise required under this Agreement or by applicable law, (A) Borrower agrees that Lender need not tell Borrower about any action or inaction Lender takes in connection with this Agreement; (B) Borrower assumes the responsibility for being and keeping informed about the Collateral; and (C) Borrower waives any defenses that may arise because of any action or inaction of Lender, including without limitation any failure of Lender to realize upon the Collateral or any delay by Lender in realizing upon the Collateral; and Borrower agrees to remain liable under the Note no matter what action Lender takes or fails to take under this Agreement. GRANTOR'S REPRESENTATIONS AND WARRANTIES. Grantor warrants that: (A) this Agreement is executed at Borrower's request and not at the request of Lender; (B) Grantor has the full right, power and authority to enter into this Agreement and to pledge the Collateral to Lender; (C) Grantor has established adequate means of obtaining from Borrower on a continuing basis information about Borrower's financial condition; and (D) Lender has made no representation to Grantor about Borrower or Borrower's creditworthiness. GRANTOR'S WAIVERS. Grantor waives all requirements of presentment, protest, demand, and notice of dishonor or non-payment to Borrower or Grantor, or any other party to the Indebtedness or the Collateral. Lender may do any of the following with respect to any obligation of any Borrower, without first obtaining the consent of Grantor: (A) grant any extension of time for any payment, (B) grant any renewal, (C) permit any modification of payment terms or other terms, or (D) exchange or release any Collateral or other security. No such act or failure to act shall affect Lender's rights COMMERCIAL SECURITY AGREEMENT LOAN NO: 932900001-1 (CONTINUED) PAGE 2 ================================================================================ against Grantor or the Collateral. GRANTOR'S REPRESENTATIONS AND WARRANTIES WITH RESPECT TO THE COLLATERAL. With respect to the Collateral, Grantor represents and promises to Lender that: PERFECTION OF SECURITY INTEREST. Grantor agrees to execute financing statements and to take whatever other actions are requested by Lender to perfect and continue Lender's security interest in the Collateral. Upon request of Lender, Grantor will deliver to Lender any and all of the documents evidencing or constituting the Collateral, and Grantor will note Lender's interest upon any and all chattel paper if not delivered to Lender for possession by Lender. THIS IS A CONTINUING SECURITY AGREEMENT AND WILL CONTINUE IN EFFECT EVEN THOUGH ALL OR ANY PART OF THE INDEBTEDNESS IS PAID IN FULL AND EVEN THOUGH FOR A PERIOD OF TIME BORROWER MAY NOT BE INDEBTED TO LENDER. NOTICES TO LENDER. Grantor will promptly notify Lender in writing at Lender's address shown above (or such other addresses as Lender may designate from time to time) prior to any (1) change in Grantor's name; (2) change in Grantor's assumed business name(s); (3) change in the management of the Corporation Grantor; (4) change in the authorized signer(s); (5) change in Grantor's principal office address; (6) change in Grantor's state of organization; (7) conversion of Grantor to a new or different type of business entity; or (8) change in any other aspect of Grantor that directly or indirectly relates to any agreements between Grantor and Lender. No change in Grantor's name or state of organization will take effect until after Lender has received notice. NO VIOLATION. The execution and delivery of this Agreement will not violate any law or agreement governing Grantor or to which Grantor is a party, and its certificate or articles of incorporation and bylaws do not prohibit any term or condition of this Agreement. ENFORCEABILITY OF COLLATERAL. To the extent the Collateral consists of accounts, chattel paper, or general intangibles, as defined by the Uniform Commercial Code, the Collateral is enforceable in accordance with its terms, is genuine, and fully complies with all applicable laws and regulations concerning form, content and manner of preparation and execution, and all persons appearing to be obligated on the Collateral have authority and capacity to contract and are in fact obligated as they appear to be on the Collateral. At the time any Account becomes subject to a security interest in favor of Lender, the Account shall be a good and valid account representing an undisputed, bona fide indebtedness incurred by the account debtor, for merchandise held subject to delivery instructions or previously shipped or delivered pursuant to a contract of sale, or for services previously performed by Grantor with or for the account debtor. So long as this Agreement remains in effect, Grantor shall not, without Lender's prior written consent, compromise, settle, adjust, or extend payment under or with regard to any such Accounts. There shall be no setoffs or counterclaims against any of the Collateral, and no agreement shall have been made under which any deductions or discounts may be claimed concerning the Collateral except those disclosed to Lender in writing. LOCATION OF THE COLLATERAL. Except in the ordinary course of Grantor's business, Grantor agrees to keep the Collateral (or to the extent the Collateral consists of intangible property such as accounts or general intangibles, the records concerning the Collateral) at Grantor's address shown above or at such other locations as are acceptable to Lender. Upon Lender's request, Grantor will deliver to Lender in form satisfactory to Lender a schedule of real properties and Collateral locations relating to Grantor's operations, including without limitation the following: (1) all real property Grantor owns or is purchasing; (2) all real property Grantor is renting or leasing; (3) all storage facilities Grantor owns, rents, leases, or uses; and (4) all other properties where Collateral is or may be located. REMOVAL OF THE COLLATERAL. Except in the ordinary course of Grantor's business, including the sales of inventory, Grantor shall not remove the Collateral from its existing location without Lender's prior written consent. To the extent that the Collateral consists of vehicles, or other titled property, Grantor shall not take or permit any action which would require application for certificates of title for the vehicles outside the Commonwealth of Massachusetts, without Lender's prior written consent. Grantor shall, whenever requested, advise Lender of the exact location of the Collateral. TRANSACTIONS INVOLVING COLLATERAL. Except for inventory sold or accounts collected in the ordinary course of Grantor's business, or as otherwise provided for in this Agreement, Grantor shall not sell, offer to sell, or otherwise transfer or dispose of the Collateral. While Grantor is not in default under this Agreement, Grantor may sell inventory, but only in the ordinary course of its business and only to buyers who qualify as a buyer in the ordinary course of business. A sale in the ordinary course of Grantor's business does not include a transfer in partial or total satisfaction of a debt or any bulk sale. Grantor shall not pledge, mortgage, encumber or otherwise permit the Collateral to be subject to any lien, security interest, encumbrance, or charge, other than the security interest provided for in this Agreement, without the prior written consent of Lender. This includes security interests even if junior in right to the security interests granted under this Agreement. Unless waived by Lender, all proceeds from any disposition of the Collateral (for whatever reason) shall be held in trust for Lender and shall not be commingled with any other funds; provided however, this requirement shall not constitute consent by Lender to any sale or other disposition. Upon receipt, Grantor shall immediately deliver any such proceeds to Lender. TITLE. Grantor represents and warrants to Lender that Grantor holds good and marketable title to the Collateral, free and clear of all liens and encumbrances except for the lien of this Agreement. No financing statement covering any of the Collateral is on file in any public office other than those which reflect the security interest created by this Agreement or to which Lender has specifically consented. Grantor shall defend Lender's rights in the Collateral against the claims and demands of all other persons. REPAIRS AND MAINTENANCE. Grantor agrees to keep and maintain, and to cause others to keep and maintain, the Collateral in good order, repair and condition at all times while this Agreement remains in effect. Grantor further agrees to pay when due all claims for work done on, or services rendered or material furnished in connection with the Collateral so that no lien or encumbrance may ever attach to or be filed against the Collateral. INSPECTION OF COLLATERAL. Lender and Lender's designated representatives and agents shall have the right at all reasonable times to examine and inspect the Collateral wherever located. TAXES, ASSESSMENTS AND LIENS. Grantor will pay when due all taxes, assessments and liens upon the Collateral, its use or operation, upon this Agreement, upon any promissory note or notes evidencing the Indebtedness, or upon any of the other Related Documents. Grantor may withhold any such payment or may elect to contest any lien if Grantor is in good faith conducting an appropriate proceeding to contest the obligation to pay and so long as Lender's interest in the Collateral is not jeopardized in Lender's sole opinion. If the Collateral is subjected to a lien which is not discharged within fifteen (15) days, Grantor shall deposit with Lender cash, a sufficient corporate surety bond or other security satisfactory to Lender in an amount adequate to provide for the discharge of the lien plus any interest, costs, attorneys' fees or other charges that could accrue as a result of foreclosure or sale of the Collateral. In any contest Grantor shall defend itself and Lender and shall satisfy any final adverse judgment before enforcement against the Collateral. Grantor shall name Lender as an additional obligee under any surety bond furnished in the contest proceedings. Grantor further agrees to furnish Lender with evidence that such taxes, assessments, and governmental and other charges have been paid in full and in a timely manner. Grantor may withhold any such payment or may elect to contest any lien if Grantor is in good faith conducting an appropriate proceeding to contest the obligation to pay and so long as Lender's interest in the Collateral is not jeopardized. COMPLIANCE WITH GOVERNMENTAL REQUIREMENTS. Grantor shall comply promptly with all laws, ordinances, rules and regulations of all governmental authorities, now or hereafter in effect, applicable to the ownership, production, disposition, or use of the Collateral, including all laws or regulations relating to the undue erosion of highly-erodible land or relating to the conversion of wetlands for the production of an agricultural product or commodity. Grantor may contest in good faith any such law, ordinance or regulation and withhold compliance during any proceeding, COMMERCIAL SECURITY AGREEMENT LOAN NO: 932900001-1 (CONTINUED) PAGE 3 ================================================================================ including appropriate appeals, so long as Lender's interest in the Collateral, in Lender's opinion, is not jeopardized. HAZARDOUS SUBSTANCES. Grantor represents and warrants that the Collateral never has been, and never will be so long as this Agreement remains a lien on the Collateral, used in violation of any Environmental Laws or for the generation, manufacture, storage, transportation, treatment, disposal, release or threatened release of any Hazardous Substance. In addition, Grantor represents and warrants that the Collateral does not contain urea formaldehyde foam insulation or urea formaldehyde resin in violation of any Massachusetts state laws. The representations and warranties contained herein are based on Grantor's due diligence in investigating the Collateral for Hazardous Substances. Grantor hereby (1) releases and waives any future claims against Lender for indemnity or contribution in the event Grantor becomes liable for cleanup or other costs under any Environmental Laws, and (2) agrees to indemnify and hold harmless Lender against any and all claims and losses resulting from a breach of this provision of this Agreement. This obligation to indemnify shall survive the payment of the Indebtedness and the satisfaction of this Agreement. MAINTENANCE OF CASUALTY INSURANCE. Grantor shall procure and maintain all risks insurance, including without limitation fire, theft and liability coverage together with such other insurance as Lender may require with respect to the Collateral, in form, amounts, coverages and basis reasonably acceptable to Lender and issued by a company or companies reasonably acceptable to Lender. Grantor, upon request of Lender, will deliver to Lender from time to time the policies or certificates of insurance in form satisfactory to Lender, including stipulations that coverages will not be cancelled or diminished without at least ten (10) days' prior written notice to Lender and not including any disclaimer of the insurer's liability for failure to give such a notice. Each insurance policy also shall include an endorsement providing that coverage in favor of Lender will not be impaired in any way by any act, omission or default of Grantor or any other person. In connection with all policies covering assets in which Lender holds or is offered a security interest, Grantor will provide Lender with such loss payable or other endorsements as Lender may require. If Grantor at any time fails to obtain or maintain any insurance as required under this Agreement, Lender may (but shall not be obligated to) obtain such insurance as Lender deems appropriate, including if Lender so chooses "single interest insurance," which will cover only Lender's interest in the Collateral. APPLICATION OF INSURANCE PROCEEDS. Grantor shall promptly notify Lender of any loss or damage to the Collateral. Lender may make proof of loss if Grantor fails to do so within fifteen (15) days of the casualty. All proceeds of any insurance on the Collateral, including accrued proceeds thereon, shall be held by Lender as part of the Collateral. If Lender consents to repair or replacement of the damaged or destroyed Collateral, Lender shall, upon satisfactory proof of expenditure, pay or reimburse Grantor from the proceeds for the reasonable cost of repair or restoration. If Lender does not consent to repair or replacement of the Collateral, Lender shall retain a sufficient amount of the proceeds to pay all of the Indebtedness, and shall pay the balance to Grantor. Any proceeds which have not been disbursed within six (6) months after their receipt and which Grantor has not committed to the repair or restoration of the Collateral shall be used to prepay the Indebtedness. INSURANCE RESERVES. Lender may require Grantor to maintain with Lender reserves for payment of insurance premiums, which reserves shall be created by monthly payments from Grantor of a sum estimated by Lender to be sufficient to produce, at least fifteen (15) days before the premium due date, amounts at least equal to the insurance premiums to be paid. If fifteen (15) days before payment is due, the reserve funds are insufficient, Grantor shall upon demand pay any deficiency to Lender. The reserve funds shall be held by Lender as a general deposit and shall constitute a non-interest-bearing account which Lender may satisfy by payment of the insurance premiums required to be paid by Grantor as they become due. Lender does not hold the reserve funds in trust for Grantor, and Lender is not the agent of Grantor for payment of the insurance premiums required to be paid by Grantor. The responsibility for the payment of premiums shall remain Grantor's sole responsibility. INSURANCE REPORTS. Grantor, upon request of Lender, shall furnish to Lender reports on each existing policy of insurance showing such information as Lender may reasonably request including the following: (1) the name of the insurer; (2) the risks insured; (3) the amount of the policy; (4) the property insured; (5) the then current value on the basis of which insurance has been obtained and the manner of determining that value; and (6) the expiration date of the policy. In addition, Grantor shall upon request by Lender (however not more often than annually) have an independent appraiser satisfactory to Lender determine, as applicable, the cash value or replacement cost of the Collateral. FINANCING STATEMENTS. Grantor authorizes Lender to file a UCC-1 financing statement, or alternatively, a copy of this Agreement to perfect Lender's security interest. At Lender's request, Grantor additionally agrees to sign all other documents that are necessary to perfect, protect, and continue Lender's security interest in the Property. Grantor will pay all filing fees, title transfer fees, and other fees and costs involved unless prohibited by law or unless Lender is required by law to pay such fees and costs. Grantor irrevocably appoints Lender to execute financing statements and documents of title in Grantor's name and to execute all documents necessary to transfer title if there is a default. Lender may file a copy of this Agreement as a financing statement. If Grantor changes Grantor's name or address, or the name or address of any person granting a security interest under this Agreement changes, Grantor will promptly notify the Lender of such change. GRANTOR'S RIGHT TO POSSESSION AND TO COLLECT ACCOUNTS. Until default and except as otherwise provided below with respect to accounts, Grantor may have possession of the tangible personal property and beneficial use of all the Collateral and may use it in any lawful manner not inconsistent with this Agreement or the Related Documents, provided that Grantor's right to possession and beneficial use shall not apply to any Collateral where possession of the Collateral by Lender is required by law to perfect Lender's security interest in such Collateral. Until otherwise notified by Lender, Grantor may collect any of the Collateral consisting of accounts. At any time and even though no Event of Default exists, Lender may exercise its rights to collect the accounts and to notify account debtors to make payments directly to Lender for application to the Indebtedness. If Lender at any time has possession of any Collateral, whether before or after an Event of Default, Lender shall be deemed to have exercised reasonable care in the custody and preservation of the Collateral if Lender takes such action for that purpose as Grantor shall request or as Lender, in Lender's sole discretion, shall deem appropriate under the circumstances, but failure to honor any request by Grantor shall not of itself be deemed to be a failure to exercise reasonable care. Lender shall not be required to take any steps necessary to preserve any rights in the Collateral against prior parties, nor to protect, preserve or maintain any security interest given to secure the Indebtedness. LENDER'S EXPENDITURES. If any action or proceeding is commenced that would materially affect Lender's interest in the Collateral or if Grantor fails to comply with any provision of this Agreement or any Related Documents, including but not limited to Grantor's failure to discharge or pay when due any amounts Grantor is required to discharge or pay under this Agreement or any Related Documents, Lender on Grantor's behalf may (but shall not be obligated to) take any action that Lender deems appropriate, including but not limited to discharging or paying all taxes, liens, security interests, encumbrances and other claims, at any time levied or placed on the Collateral and paying all costs for insuring, maintaining and preserving the Collateral. All such expenditures incurred or paid by Lender for such purposes will then bear interest at the rate charged under the Note from the date incurred or paid by Lender to the date of repayment by Grantor. All such expenses will become a part of the Indebtedness and, at Lender's option, will (A) be payable on demand; (B) be added to the balance of the Note and be apportioned among and be payable with any installment payments to become due during either (1) the term of any applicable insurance policy; or (2) the remaining term of the Note; or (C) be treated as a balloon payment which will be due and payable at the Note's maturity. The Agreement also will secure payment of these amounts. Such right shall be in, addition to all other rights and remedies to which Lender may be entitled upon Default. DEFAULT. Each of the following shall constitute an Event of Default under this Agreement: PAYMENT DEFAULT. Borrower fails to make any payment when due under the Indebtedness. OTHER DEFAULTS. Borrower or Grantor fails to comply with or to perform any other term, obligation, covenant or condition contained in this Agreement or in any of the Related Documents or to comply with or to perform any term, obligation, covenant or condition contained in any other COMMERCIAL SECURITY AGREEMENT LOAN NO: 932900001-1 (CONTINUED) PAGE 4 ================================================================================ agreement between Lender and Borrower or Grantor. Default in Favor of Third Parties. Should Borrower or any Grantor default under any loan, extension of credit, security agreement, purchase or sales agreement, or any other agreement, in favor of any other creditor or person that may materially affect any of Grantor's property or Borrower's or any Grantor's ability to repay the Indebtedness or perform their respective obligations under this Agreement or any of the Related Documents. FALSE STATEMENTS. Any warranty, representation or statement made or furnished to Lender by Borrower or Grantor or on Borrower's or Grantor's behalf under this Agreement or the Related Documents is false or misleading in any material respect, either now or at the time made or furnished or becomes false or misleading at any time thereafter. DEFECTIVE COLLATERALIZATION. This Agreement or any of the Related Documents ceases to be in full force and effect (including failure of any collateral document to create a valid and perfected security interest or lien) at any time and for any reason. INSOLVENCY. The dissolution or termination of Borrower's or Grantor's existence as a going business, the insolvency of Borrower or Grantor, the appointment of a receiver for any part of Borrower's or Grantor's property, any assignment for the benefit of creditors, any type of creditor workout, or the commencement of any proceeding under any bankruptcy or insolvency laws by or against Borrower or Grantor. CREDITOR OR FORFEITURE PROCEEDINGS. Commencement of foreclosure or forfeiture proceedings, whether by judicial proceeding, self-help, repossession or any other method, by any creditor of Borrower or Grantor or by any governmental agency against any collateral securing the Indebtedness. This includes a garnishment of any of Borrower's or Grantor's accounts, including deposit accounts, with Lender. However, this Event of Default shall not apply if there is a good faith dispute by Borrower or Grantor as to the validity or reasonableness of the claim which is the basis of the creditor or forfeiture proceeding and if Borrower or Grantor gives Lender written notice of the creditor or forfeiture proceeding and deposits with Lender monies or a surety bond for the creditor or forfeiture proceeding, in an amount determined by Lender, in its sole discretion, as being an adequate reserve or bond for the dispute. EVENTS AFFECTING GUARANTOR. Any of the preceding events occurs with respect to Guarantor of any of the Indebtedness or Guarantor dies or becomes incompetent or revokes or disputes the validity of, or liability under, any Guaranty of the Indebtedness. Adverse Change. A material adverse change occurs in Borrower's or Grantor's financial condition, or Lender believes the prospect of payment or performance of the Indebtedness is impaired. INSECURITY. Lender in good faith believes itself insecure. CURE PROVISIONS. If any default, other than a default in payment is curable and if Grantor has not been given a notice of a breach of the same provision of this Agreement within the preceding twelve (12) months, it may be cured (and no event of default will have occurred) if Grantor, after receiving written notice from Lender demanding cure of such default: (1) cures the default within fifteen (15) days; or (2) if the cure requires more than fifteen (15) days, immediately initiates steps which Lender deems in Lender's sole discretion to be sufficient to cure the default and thereafter continues and completes all reasonable and necessary steps sufficient to produce compliance as soon as reasonably practical. RIGHTS AND REMEDIES ON DEFAULT. If an Event of Default occurs under this Agreement, at any time thereafter, Lender shall have all the rights of a secured party under the Massachusetts Uniform Commercial Code. In addition and without limitation, Lender may exercise any one or more of the following rights and remedies: ACCELERATE INDEBTEDNESS. Lender may declare the entire Indebtedness, including any prepayment penalty which Borrower would be required to pay, immediately due and payable, without notice of any kind to Borrower or Grantor. ASSEMBLE COLLATERAL. Lender may require Grantor to deliver to Lender all or any portion of the Collateral and any and all certificates of title and other documents relating to the Collateral. Lender may require Grantor to assemble the Collateral and make it available to Lender at a place to be designated by Lender. Lender also shall have full power to enter upon the property of Grantor to take possession of and remove the Collateral. If the Collateral contains other goods not covered by this Agreement at the time of repossession, Grantor agrees Lender may take such other goods, provided that Lender makes reasonable efforts to return them to Grantor after repossession. SELL THE COLLATERAL. Lender shall have full power to sell, lease, transfer, or otherwise deal with the Collateral or proceeds thereof in Lender's own name or that of Grantor. Lender may sell the Collateral at public auction or private sale. Unless the Collateral threatens to decline speedily in value or is of a type customarily sold on a recognized market, Lender will give Grantor, and other persons as required by law, reasonable notice of the time and place of any public sale, or the time after which any private sale or any other disposition of the Collateral is to be made. However, no notice need be provided to any person who, after Event of Default occurs, enters into and authenticates an agreement waiving that person's right to notification of sale. The requirements of reasonable notice shall be met if such notice is given at least ten (10) days before the time of the sale or disposition. All expenses relating to the disposition of the Collateral, including without limitation the expenses of retaking, holding, insuring, preparing for sale and selling the Collateral, shall become a part of the Indebtedness secured by this Agreement and shall be payable on demand, with interest at the Note rate from date of expenditure until repaid. APPOINT RECEIVER. Lender shall have the right to have a receiver appointed to take possession of all or any part of the Collateral, with the power to protect and preserve the Collateral, to operate the Collateral preceding foreclosure or sale, and to collect the Rents from the Collateral and apply the proceeds, over and above the cost of the receivership, against the Indebtedness. The receiver may serve without bond if permitted by law. Lender's right to the appointment of a receiver shall exist whether or not the apparent value of the Collateral exceeds the Indebtedness by a substantial amount. Employment by Lender shall not disqualify a person from serving as a receiver. COLLECT REVENUES, APPLY ACCOUNTS. Lender, either itself or through a receiver, may collect the payments, rents, income, and revenues from the Collateral. Lender may at any time in Lender's discretion transfer any Collateral into Lender's own name or that of Lender's nominee and receive the payments, rents, income, and revenues therefrom and hold the same as security for the Indebtedness or apply it to payment of the Indebtedness in such order of preference as Lender may determine. Insofar as the Collateral consists of accounts, general intangibles, insurance policies, instruments, chattel paper, chooses in action, or similar property, Lender may demand, collect, receipt for, settle, compromise, adjust, sue for, foreclose, or realize on the Collateral as Lender may determine, whether or not Indebtedness or Collateral is then due. For these purposes, Lender may, on behalf of and in the name of Grantor, receive, open and dispose of mail addressed to Grantor; change any address to which mail and payments are to be sent; and endorse notes, checks, drafts, money orders, documents of title, instruments and items pertaining to payment, shipment, or storage of any Collateral. To facilitate collection, Lender may notify account debtors and obligors on any Collateral to make payments directly to Lender. OBTAIN DEFICIENCY. If Lender chooses to sell any or all of the Collateral, Lender may obtain a judgment against Borrower for any deficiency co remaining on the Indebtedness due to Lender after application of all amounts received from the exercise of the rights provided in this Agreement. Borrower shall be liable for a deficiency even if the transaction described in this subsection is a sale of accounts or chattel paper. OTHER RIGHTS AND REMEDIES. Lender shall have all the rights and remedies of a secured creditor under the provisions of the Uniform Commercial Code, as may be amended from time to time. In addition, Lender shall have and may exercise any or all other rights and remedies it may have available at law, in equity, or otherwise. COMMERCIAL SECURITY AGREEMENT LOAN NO: 932900001-1 (CONTINUED) PAGE 5 ================================================================================ ELECTION OF REMEDIES. Except as may be prohibited by applicable law, all of Lender's rights and remedies, whether evidenced by this Agreement, the Related Documents, or by any other writing, shall be cumulative and may be exercised singularly or concurrently. Election by Lender to pursue any remedy shall not exclude pursuit of any other remedy, and an election to make expenditures or to take action to perform an obligation of Grantor under this Agreement, after Grantor's failure to perform, shall not affect Lender's right to declare a default and exercise its remedies. DEPOSIT AGREEMENT SECURITY. Grantor hereby grants a security interest to Lender in any and all deposit accounts (checking, savings, money market or time) of Grantor at Lender, now existing or hereinafter opened, to secure the Indebtedness. This includes all deposit accounts Grantor holds jointly with someone else. WAIVERS AND MISCELLANEOUS PROVISIONS. The following miscellaneous provisions are a part of this Agreement: AMENDMENTS. This Agreement, together with any Related Documents, constitutes the entire understanding and agreement of the parties as to the matters set forth in this Agreement. No alteration of or amendment to this Agreement shall be effective unless given in writing and signed by the party or parties sought to be charged or bound by the alteration or amendment. ATTORNEYS' FEES; EXPENSES. Grantor agrees to pay upon demand all of Lender's costs and expenses, including Lender's attorneys' fees and Lender's legal expenses, incurred in connection with the enforcement of this Agreement. Lender may hire or pay someone else to help enforce this Agreement, and Grantor shall pay the costs and expenses of such enforcement. Costs and expenses include Lender's attorneys' fees and legal expenses whether or not there is a lawsuit, including attorneys' fees and legal expenses for bankruptcy proceedings (including efforts to modify or vacate any automatic stay or injunction), appeals, and any anticipated post-judgment collection services. Grantor also shall pay all court costs and such additional fees as may be directed by the court. CAPTION HEADINGS. Caption headings in this Agreement are for convenience purposes only and are not to be used to interpret or define the provisions of this Agreement. GOVERNING LAW. THIS AGREEMENT WILL BE GOVERNED BY, CONSTRUED AND ENFORCED IN ACCORDANCE WITH FEDERAL LAW AND THE LAWS OF THE STATE OF CALIFORNIA, EXCEPT AND ONLY TO THE EXTENT OF PROCEDURAL MATTERS RELATED TO THE PERFECTION AND ENFORCEMENT OF LENDER'S RIGHTS AND REMEDIES AGAINST THE COLLATERAL, WHICH MATTERS SHALL BE GOVERNED BY THE LAWS OF THE COMMONWEALTH OF MASSACHUSETTS. HOWEVER, IN THE EVENT THAT THE ENFORCEABILITY OR VALIDITY OF ANY PROVISION OF THIS AGREEMENT IS CHALLENGED OR QUESTIONED, SUCH PROVISION SHALL BE GOVERNED BY WHICHEVER APPLICABLE STATE OR FEDERAL LAW WOULD UPHOLD OR WOULD ENFORCE SUCH CHALLENGED OR QUESTIONED PROVISION. THE LOAN TRANSACTION WHICH IS EVIDENCED BY THE NOTE AND THIS AGREEMENT HAS BEEN APPLIED FOR, CONSIDERED, APPROVED AND MADE, AND ALL NECESSARY LOAN DOCUMENTS HAVE BEEN ACCEPTED BY LENDER IN THE STATE OF CALIFORNIA. CHOICE OF VENUE. If there is a lawsuit, Grantor agrees upon Lender's request to submit to the jurisdiction of the courts of Los Angeles County, State of California. JOINT AND SEVERAL LIABILITY. All obligations of Borrower and Grantor under this Agreement shall be joint and several, and all references to Grantor shall mean each and every Grantor, and all references to Borrower shall mean each and every Borrower. This means that each Borrower and Grantor signing below is responsible for all obligations in this Agreement. Where any one or more of the parties is a corporation, partnership, limited liability company or similar entity, it is not necessary for Lender to inquire into the powers of any of the officers, directors, partners, members, or other agents acting or purporting to act on the entity's behalf, and any obligations made or created in reliance upon the professed exercise of such powers shall be guaranteed under this Agreement. NO WAIVER BY LENDER. Lender shall not be deemed to have waived any rights under this Agreement unless such waiver is given in writing and signed by Lender. No delay or omission on the part of Lender in exercising any right shall operate as a waiver of such right or any other right. A waiver by Lender of a provision of this Agreement shall not prejudice or constitute a waiver of Lender's right otherwise to demand strict compliance with that provision or any other provision of this Agreement. No prior waiver by Lender, nor any course of dealing between Lender and Grantor, shall constitute a waiver of any of Lender's rights or of any of Grantor's obligations as to any future transactions. Whenever the consent of Lender is required under this Agreement, the granting of such consent by Lender in any instance shall not constitute continuing consent to subsequent instances where such consent is required and in all cases such consent may be granted or withheld in the sole discretion of Lender. NOTICES. Any notice required to be given under this Agreement shall be given in writing, and shall be effective when actually delivered, when actually received by telefacsimile (unless otherwise required by law), when deposited with a nationally recognized overnight courier, or, if mailed, when deposited in the United States mail, as first class, certified or registered mail postage prepaid, directed to the addresses shown near the beginning of this Agreement. Any party may change its address for notices under this Agreement by giving formal written notice to the other parties, specifying that the purpose of the notice is to change the party's address. For notice purposes, Grantor agrees to keep Lender informed at all times of Grantor's current address. Unless otherwise provided or required by law, if there is more than one Grantor, any notice given by Lender to any Grantor is deemed to be notice given to all Grantors. POWER OF ATTORNEY. Grantor hereby appoints Lender as Grantor's irrevocable attorney-in-fact for the purpose of executing any documents necessary to perfect, amend, or to continue the security interest granted in this Agreement or to demand termination of filings of other secured parties. Lender may at any time, and without further authorization from Grantor, file a carbon, photographic or other reproduction of any financing statement or of this Agreement for use as a financing statement. Grantor will reimburse Lender for all expenses for the perfection and the continuation of the perfection of Lender's security interest in the Collateral. SEVERABILITY. If a court of competent jurisdiction finds any provision of this Agreement to be illegal, invalid, or unenforceable as to any circumstance, that finding shall not make the offending provision illegal, invalid, or unenforceable as to any other circumstance. If feasible, the offending provision shall be considered modified so that it becomes legal, valid and enforceable. If the offending provision cannot be so modified, it shall be considered deleted from this Agreement. Unless otherwise required by law, the illegality, invalidity, or unenforceability of any provision of this Agreement shall not affect the legality, validity or enforceability of any other provision of this Agreement. SUCCESSORS AND ASSIGNS. Subject to any limitations stated in this Agreement on transfer of Grantor's interest, this Agreement shall be binding upon and inure to the benefit of the parties, their successors and assigns. If ownership of the Collateral becomes vested in a person other than Grantor, Lender, without notice to Grantor, may deal with Grantor's successors with reference to this Agreement and the Indebtedness by way of forbearance or extension without releasing Grantor from the obligations of this Agreement or liability under the Indebtedness. SURVIVAL OF REPRESENTATIONS AND WARRANTIES. All representations, warranties, and agreements made by Grantor in this Agreement shall survive the execution and delivery of this Agreement, shall be continuing in nature, and shall remain in full force and effect until such time as Borrower's Indebtedness shall be paid in full. TIME IS OF THE ESSENCE. Time is of the essence in the performance of this Agreement. WAIVE JURY. ALL PARTIES TO THIS AGREEMENT HEREBY WAIVE THE RIGHT TO ANY JURY TRIAL IN ANY ACTION, PROCEEDING, OR COUNTERCLAIM BROUGHT BY ANY PARTY AGAINST ANY OTHER PARTY. COMMERCIAL SECURITY AGREEMENT LOAN NO: 932900001-1 (CONTINUED) PAGE 6 ================================================================================ DEFINITIONS. The following capitalized words and terms shall have the following meanings when used in this Agreement. Unless specifically stated to the contrary, all references to dollar amounts shall mean amounts in lawful money of the United States of America. Words and terms used in the singular shall include the plural, and the plural shall include the singular, as the context may require. Words and terms not otherwise defined in this Agreement shall have the meanings attributed to such terms in the Uniform Commercial Code: ACCOUNT. The word "Account" means a trade account, account receivable, other receivable, or other right to payment for goods sold or services rendered owing to Grantor (or to a third party grantor acceptable to Lender). AGREEMENT. The word "Agreement" means this Commercial Security Agreement, as this Commercial Security Agreement may be amended or modified from time to time, together with all exhibits and schedules attached to this Commercial Security Agreement from time to time. BORROWER. The word "Borrower" means International Remote Imaging Systems, Inc., and all other persons and entities signing the Note in whatever capacity. COLLATERAL. The word "Collateral" means all of Grantor's right, title and interest in and to all the Collateral as described in the Collateral Description section of this Agreement. DEFAULT. The word "Default" means the Default set forth in this Agreement in the section titled "Default". ENVIRONMENTAL LAWS. The words "Environmental Laws" mean any and all state, federal and local statutes, regulations and ordinances relating to the protection of human health or the environment, including without limitation the Comprehensive Environmental Response, Compensation, and Liability Act of 1980, as amended, 42 U.S.C. Section 9601, et seq. ("CERCLA"), the Superfund Amendments and Reauthorization Act of 1986, Pub. L. No. 99-499 ("SARA"), the Hazardous Materials Transportation Act, 49 U.S.C. Section 1801, et seq., the Resource Conservation and Recovery Act, 42 U.S.C. Section 6901, et seq., Chapters 6.5 through 7.7 of Division 20 of the California Health and Safety Code, Section 25100, et sec., or other applicable state or federal laws, rules, or regulations adopted pursuant thereto. EVENT OF DEFAULT. The words "Event of Default" mean any of the events of default set forth in this Agreement in the default section of this Agreement. GRANTOR. The word "Grantor" means Statspin, Inc.. GUARANTOR. The word "Guarantor" means any guarantor, surety, or accommodation party of any or all of the Indebtedness. GUARANTY. The word "Guaranty" means the guaranty from Guarantor to Lender, including without limitation a guaranty of all or part of the Note. HAZARDOUS SUBSTANCES. The words "Hazardous Substances" mean materials that, because of their quantity, concentration or physical, chemical or infectious characteristics, may cause or pose a present or potential hazard to human health or the environment when improperly used, treated, stored, disposed of, generated, manufactured, transported or otherwise handled. The words "Hazardous Substances" are used in their very broadest sense and include without limitation any and all hazardous or toxic substances, materials or waste as defined by or listed under the Environmental Laws. The term "Hazardous Substances" also includes, without limitation, petroleum and petroleum by-products or any fraction thereof and asbestos. INDEBTEDNESS. The word "Indebtedness" means the indebtedness evidenced by the Note or Related Documents, including all principal and interest together with all other indebtedness and costs and expenses for which Borrower is responsible under this Agreement or under any of the Related Documents. LENDER. The word "Lender" means California Bank & Trust, its successors and assigns. NOTE. The word "Note" means the Note executed by International Remote Imaging Systems, Inc. in the principal amount of $6,500,000.00 dated February 7, 2002, together with all renewals of, extensions of, modifications of, refinancings of, consolidations of, and substitutions for the note or credit agreement. PROPERTY. The word "Property" means all of Grantor's right, title and interest in and to all the Property as described in the "Collateral Description" section of this Agreement. RELATED DOCUMENTS. The words "Related Documents" mean all promissory notes, credit agreements, loan agreements, environmental agreements, guaranties, security agreements, mortgages, deeds of trust, security deeds, collateral mortgages, and all other instruments, agreements and documents, whether now or hereafter existing, executed in connection with the Indebtedness. BORROWER AND GRANTOR HAVE READ AND UNDERSTOOD ALL THE PROVISIONS OF THIS COMMERCIAL SECURITY AGREEMENT AND AGREE TO ITS TERMS. THIS AGREEMENT IS DATED FEBRUARY 7, 2002. THIS AGREEMENT IS GIVEN UNDER SEAL AND IT IS INTENDED THAT THIS AGREEMENT IS AND SHALL CONSTITUTE AND HAVE THE EFFECT OF A SEALED INSTRUMENT ACCORDING TO LAW. GRANTOR: STATSPIN, INC. BY: /S/ DR. JOHN A. O'MALLEY (SEAL) BY: /S/ DONALD HORACEK (SEAL) --------------------------- --------------------------- DR. JOHN A. O'MALLEY, DONALD HORACEK, CEO OF STATPIN, INC. SECRETARY OF STATSPIN, INC. INTERNATIONAL REMOTE IMAGING SYSTEMS, INC.; BY: /S/ DR. JOHN A. O'MALLEY, (SEAL) BY: /S/ JOHN CALOZ (SEAL) --------------------------- --------------------------- DR. JOHN A. O'MALLEY, JOHN CALOZ, CEO/CHAIRMAN OF SECRETARY OF INTERNATIONAL REMOTE INTERNATIONAL REMOTE IMAGING SYSTEMS, INC. IMAGING SYSTEMS, INC. EX-11.1(D) 8 v80280ex11-1d.txt EXHIBIT 11.1(D) EXHIBIT 11.1(d)

=============================================================================================================== LANDLORD'S CONSENT PRINCIPAL LOAN DATE MATURITY LOAN NO CALL/COLL ACCOUNT OFFICER INITIALS 02-07-2002 02-28-2007 932900001-4 932900001-4 22163 [INITIALS ILLEGIBLE] ================================================================================================================ References in the shaded area are for Lender's use only and do not limit the applicability of this document to any particular loan or item. Any item above containing "***" has been omitted due to text length limitations.

BORROWER: INTERNATIONAL REMOTE LENDER: CALIFORNIA BANK & TRUST IMAGING SYSTEMS, INC. COMMERCIAL LOAN CENTER 9162 ETON AVENUE 550 SOUTH HOPE STREET, SUITE 300 CHATSWORTH, CA 91311 LOS ANGELES, CA 90071

================================================================================ THIS LANDLORD'S CONSENT IS ENTERED INTO AMONG INTERNATIONAL REMOTE IMAGING SYSTEMS, INC. ("BORROWER"), WHOSE ADDRESS IS 9162 ETON AVENUE, CHATSWORTH, CA 91311; CALIFORNIA BANK & TRUST ("LENDER"), WHOSE ADDRESS IS COMMERCIAL LOAN CENTER, 550 SOUTH HOPE STREET, SUITE 300, LOS ANGELES, CA 90071; AND NORTH PARK INDUSTRIAL CENTER ("LANDLORD"), WHOSE ADDRESS IS C/O WEST AMERICAN CONSTRUCTION, CORPORATION, 8929 WILSHIRE BLVD., #400, BEVERLY HILLS, CA 90211. Borrower and Lender have entered into, or are about to enter into, an agreement whereby Lender has acquired or will acquire a security interest or other interest in the Collateral. Some or all of the Collateral may be affixed or otherwise become located on the Premises. To induce Lender to extend the Loan to Borrower against such security interest in the Collateral and for other valuable consideration, Landlord hereby agrees with Lender and Borrower as follows. COLLATERAL DESCRIPTION. The word "Collateral" means certain of Borrower's personal property in which Lender has acquired or will acquire a security interest, including without limitation the following specific property: ALL INVENTORY, EQUIPMENT, ACCOUNTS (INCLUDING BUT NOT LIMITED TO ALL HEALTH-CARE-INSURANCE RECEIVABLES), CHATTEL PAPER, INSTRUMENTS (INCLUDING BUT NOT LIMITED TO ALL PROMISSORY NOTES), LETTER-OF-CREDIT RIGHTS, LETTERS OF CREDIT, DOCUMENTS, DEPOSIT ACCOUNTS, INVESTMENT PROPERTY, MONEY, OTHER RIGHTS TO PAYMENT AND PERFORMANCE, AND GENERAL INTANGIBLES (INCLUDING BUT NOT LIMITED TO ALL SOFTWARE AND ALL PAYMENT INTANGIBLES); ALL FIXTURES; ALL ATTACHMENTS, ACCESSIONS, ACCESSORIES, FITTINGS, INCREASES, TOOLS, PARTS, REPAIRS, SUPPLIES, AND COMMINGLED GOODS RELATING TO THE FOREGOING PROPERTY, AND ALL ADDITIONS, REPLACEMENTS OF AND SUBSTITUTIONS FOR ALL OR ANY PART OF THE FOREGOING PROPERTY; ALL INSURANCE REFUNDS RELATING TO THE FOREGOING PROPERTY; ALL GOOD WILL RELATING TO THE FOREGOING PROPERTY; ALL RECORDS AND DATA AND EMBEDDED SOFTWARE RELATING TO THE FOREGOING PROPERTY, AND ALL EQUIPMENT, INVENTORY AND SOFTWARE TO UTILIZE, CREATE, MAINTAIN AND PROCESS ANY SUCH RECORDS AND DATA ON ELECTRONIC MEDIA; AND ALL SUPPORTING OBLIGATIONS RELATING TO THE FOREGOING PROPERTY; ALL WHETHER NOW EXISTING OR HEREAFTER ARISING, WHETHER NOW OWNED OR HEREAFTER ACQUIRED OR WHETHER NOW OR HEREAFTER SUBJECT TO ANY RIGHTS IN THE FOREGOING PROPERTY; AND ALL PRODUCTS AND PROCEEDS (INCLUDING BUT NOT LIMITED TO ALL INSURANCE PAYMENTS) OF OR RELATING TO THE FOREGOING PROPERTY. DISCLAIMER OF INTEREST. Landlord hereby consents to Lender's security interest (or other interest) in the Collateral and disclaims all interests, liens and claims which Landlord now has or may hereafter acquire in the Collateral. Landlord agrees that any lien or claim it may now have or may hereafter have in the Collateral will be subject at all times to Lender's security interest (or other present or future interest) in the Collateral and will be subject to the rights granted by Landlord to Lender in this Agreement. ENTRY ONTO PREMISES. Landlord and Borrower grant to Lender the right to enter upon the Premises for the purpose of removing the Collateral from the Premises or conducting sales of the Collateral on the Premises. The rights granted to Lender in this Agreement will continue until a reasonable time after Lender receives notice in writing from Landlord that Borrower no longer is in lawful possession of the Premises. If Lender enters onto the Premises and removes the Collateral, Lender agrees with Landlord not to remove any Collateral in such a way that the Premises are damaged, without either repairing any such damage or reimbursing Landlord for the cost of repair. MISCELLANEOUS PROVISIONS. The following miscellaneous provisions are a part of this Agreement: This Agreement shall extend to and bind the respective heirs, personal representatives, successors and assigns of the parties to this Agreement. The covenants of Borrower and Landlord respecting subordination of the claim or claims of Landlord in favor of Lender shall extend to, include, and be enforceable by any transferee or endorsee to whom Lender may transfer any claim or claims to which this Agreement shall apply. Lender need not accept this Agreement in writing or otherwise to make it effective. This Agreement shall be governed by and construed in accordance with the laws of the State of California. If Landlord is other than an individual, any agent or other person executing this Agreement on behalf of Landlord represents and warrants to Lender that he or she has full power and authority to execute this Agreement on Landlord's behalf. Lender shall not be deemed to have waived any rights under this Agreement unless such waiver is in writing and signed by Lender. Without notice to Landlord and without affecting the validity of this Consent, Lender may do or not do anything it deems appropriate or necessary with respect to the Loan, any obligors on the Loan, or any Collateral for the Loan; including without limitation extending, renewing, rearranging, or accelerating any of the Loan indebtedness. AMENDMENTS. This Agreement, together with any Related Documents, constitutes the entire understanding and agreement of the parties as to the matters set forth in this Agreement. No alteration of or amendment to this Agreement shall be effective unless given in writing and signed by the party or parties sought to be charged or bound by the alteration or amendment. NO WAIVER BY LENDER. Lender shall not be deemed to have waived any rights under this Agreement unless such waiver is given in writing and signed by Lender. No delay or omission on the part of Lender in exercising any right shall operate as a waiver of such right or any other right. A waiver by Lender of a provision of this Agreement shall not prejudice or constitute a waiver of Lender's right otherwise to demand strict compliance with that provision or any other provision of this Agreement. No prior waiver by Lender, nor any course of dealing between Lender and Landlord, shall constitute a waiver of any of Lender's rights or of any of Landlord's obligations as to any future transactions. Whenever the consent of Lender is required under this Agreement, the granting of such consent by Lender in any instance shall not constitute continuing consent to subsequent instances where such consent is required and in all cases such consent may be granted or withheld in the sole discretion of Lender. SEVERABILITY. If a court of competent jurisdiction finds any provision of this Agreement to be illegal, invalid, or unenforceable as to any circumstance, that finding shall not make the offending provision illegal, invalid, or unenforceable as to any other circumstance. If feasible, the offending provision shall be considered modified so that it becomes legal, valid and enforceable. If the offending provision cannot be so modified, it shall be considered deleted from this Agreement. Unless otherwise required by law, the illegality, invalidity, or unenforceability of any provision of this Agreement shall not affect the legality, validity or enforceability of any other provision of this Agreement. DEFINITIONS. The following capitalized words and terms shall have the following meanings when used in this Agreement. Unless specifically stated to the contrary, all references to dollar amounts shall mean amounts in lawful money of the United States of America. Words and terms used in the singular shall include the plural, and the plural shall include the singular, as the context may require. Words and terms not otherwise defined in this Agreement shall have the meanings attributed to such terms in the Uniform Commercial Code: AGREEMENT. The word "Agreement" means this Landlord's Consent, as this Landlord's Consent may be amended or modified from time to time, together with all exhibits and schedules attached to this Landlord's Consent from time to time. BORROWER. The word "Borrower" means International Remote Imaging Systems, Inc., and all other persons and entities signing the Note in whatever capacity. LANDLORD'S CONSENT LOAN NO: 932900001-4 (CONTINUED) PAGE 2 ================================================================================ COLLATERAL. The word "Collateral" means all of Borrower's right, title and interest in and to all the Collateral as described in the Collateral Description section of this Agreement. LANDLORD. The word "Landlord" means North Park Industrial Center, and is used for convenience purposes only. Landlord's interest in the Premises may be that of a fee owner, lessor, sublessor or lienholder, or that of any other holder of an interest in the Premises which may be, or may become, prior to the interest of Lender. LENDER. The word "Lender" means California Bank & Trust, its successors and assigns. LOAN. The word "Loan" means any and all loans and financial accommodations from Lender to Borrower whether now or hereafter existing, and however evidenced. PREMISES. The word "Premises" means the real property. RELATED DOCUMENTS. The words "Related Documents" mean all promissory notes, credit agreements, loan agreements, environmental agreements, guaranties, security agreements, mortgages, deeds of trust, security deeds, collateral mortgages, and all other instruments, agreements and documents, whether now or hereafter existing, executed in connection with the Loan. BORROWER AND LANDLORD ACKNOWLEDGE HAVING READ ALL THE PROVISIONS OF THIS LANDLORD'S CONSENT, AND BORROWER AND LANDLORD AGREE TO ITS TERMS. THIS AGREEMENT IS DATED FEBRUARY 7, 2002. BORROWER: INTERNATIONAL REMOTE IMAGING SYSTEMS, INC. BY: /s/ JOHN A. O'MALLEY ------------------------------------------- DR. JOHN A. O'MALLEY, CEO/CHAIRMAN OF INTERNATIONAL REMOTE IMAGING SYSTEMS, INC. BY: /s/ JOHN CALOZ ------------------------------------------- JOHN CALOZ, CFO/SECRETARY OF INTERNATIONAL REMOTE IMAGING SYSTEMS, INC. LANDLORD: LENDER: NORTH PARK INDUSTRIAL CENTER CALIFORNIA BANK & TRUST BY: /s/ [SIGNATURE ILLEGIBLE] X /s/ [SIGNATURE ILLEGIBLE] ------------------------------------------- ---------------------------- AUTHORIZED SIGNER FOR NORTH PARK INDUSTRIAL AUTHORIZED OFFICER CENTER BY: ------------------------------------------- AUTHORIZED SIGNER FOR NORTH PARK INDUSTRIAL CENTER ================================================================================ LASER PRO Lending, Ver. 5.19.00.08 Copr. Harland Financial Solutions, Inc. 1997, 2002. All Rights Reserved. - CA M:\WINAPPS\CFI\LPL\E45.FC TR-5164 PR-1 The signature of the lessor hereon is not binding upon the Lessor until the Rider attached hereto contains the signature and, if necessary, a notarization of the signature, of the Lender or Secured Party. RIDER TO SECURED LOAN DOCUMENT This Agreement is a Rider to and is hereby made a part of the particular secured loan document ("Secured Loan Document") to which it is attached, whether such document be entitled a Consent to Removal of Personal Property Affixed to Real Property, an Easement and Subordination or other title providing for the rights of the undersigned Secured Party, Lender, or Bank ("Secured Party") to enter upon the real property ("Premises") described in the Secured Loan Document and owned by the Lessor identified in the Secured Loan Document ("Lessor"), to remove certain personal property described in the Secured Loan Document and, if applicable, to occupy the Premises for the purpose of carrying out Secured Party's rights under the Secured Loan Document: WITNESSETH: In consideration of the Lessor entering into the Secured Loan Document to which this Rider is attached, Secured Party hereby agrees as follows, in addition to any and all agreements of Secured Party contained in the Secured Loan Document and notwithstanding anything to the contrary contained in the Secured Loan Document: 1 . In the event that the Premises are damaged by the removal of any personal property from the Premises, Secured Party shall repair any and all such damage or shall reimburse Lessor for the cost thereof within five (5) business days after receipt of an itemized statement from Lessor as to the cost of repair of such damage. 2. In the event that the Lessee which is Secured Party's debtor has failed to make any payment of rent or other charges to Lessor, and Secured Party occupies the Premises for any period of time in order to carry out its rights under the Secured Loan Document, Secured Party shall pay to Lessor the rent and other charges, including but not limited to taxes and insurance, provided in the lease agreement between Lessor and Lessee attributable to the period commencing upon Secured Party's entering into occupation of the Premises and ending upon Secured Party's vacating the Premises. 3. If the Secured Loan Document and/or this Rider is recorded, Secured Party agrees that it shall, at its sole expense, remove the lien of the Secured Loan Document from the Premises on the earlier of (i) repayment of the secured indebtedness or (ii) expiration of the lease between Lessor and Lessee. In the event that Secured Party fails to remove such lien and Lessor is required to remove such lien, at its expense, Secured Party hereby agrees to reimburse Lessor, within five (5) business days of receipt of a statement therefore, for all expenses incurred by Lessor, including but not limited to recording fees and attorneys' fees, incurred by Lessor in removing said lien from the Premises. 4. Lessor's signature on the Secured Loan Document is not valid unless Secured Party has signed this Rider and, if signatures on the Secured Loan Document are notarized, unless Secured Party's signature on this Rider is notarized. Date: 2/8/02 ---------------- SECURED PARTY /s/ [SIGNATURE ILLEGIBLE] ------------------------- /s/ [SIGNATURE ILLEGIBLE] ------------------------- EX-11.1(E) 9 v80280ex11-1e.txt EXHIBIT 11.1(E) EXHIBIT 11.1(e) SUBORDINATION AGREEMENT

- --------------------------------------------------------------------------------------------------------------------------------- PRINCIPAL LOAN DATE MATURITY LOAN NO CALL/COLL ACCOUNT OFFICER INITIALS $6,500,000.00 02-07-2002 06-30-2004 932900001-1 932900001-1 22163 [INITIALS ILLEGIBLE] - --------------------------------------------------------------------------------------------------------------------------------- References in the shaded area are for Lender's use only and do not limit the applicability of this document to any particular loan or item. Any item above containing "***" has been omitted due to text length limitations. - ---------------------------------------------------------------------------------------------------------------------------------

BORROWER: INTERNATIONAL REMOTE LENDER: CALIFORNIA BANK & TRUST IMAGING SYSTEMS, INC. COMMERCIAL LOAN CENTER 9162 ETON AVENUE 550 SOUTH HOPE STREET, SUITE 300 CHATSWORTH, CA 91311 LOS ANGELES, CA 90071 CREDITOR: DIGITAL IMAGING TECHNOLOGIES, INC. 1900 ST. JAMES PLACE, #700 HOUSTON, TX 77056 ================================================================================ THIS SUBORDINATION AGREEMENT DATED FEBRUARY 7, 2002, IS MADE AND EXECUTED AMONG INTERNATIONAL REMOTE IMAGING SYSTEMS, INC., 9162 ETON AVENUE; CHATSWORTH, CA 91311 ("BORROWER"); DIGITAL IMAGING TECHNOLOGIES, INC.; 1900 ST. JAMES PLACE, #700; HOUSTON, TX 77056 ("CREDITOR"); AND CALIFORNIA BANK & TRUST, COMMERCIAL LOAN CENTER, 550 SOUTH HOPE STREET, SUITE 300, LOS ANGELES, CA 90071 ("LENDER"). CURRENT INDEBTEDNESS OWING TO CREDITOR. As of the date of this Agreement, Borrower is indebted to Creditor in the AGGREGATE AMOUNT OF $7,000,000.00. This amount is the total indebtedness of every kind from Borrower to Creditor. REQUESTED FINANCIAL ACCOMMODATIONS. Borrower and Creditor each want Lender to provide financial accommodations to Borrower in the form of (A) new credit or loan advances, (B) an extension of time to pay or other compromises regarding all or part of Borrower's present indebtedness to Lender, or (C) other benefits to Borrower. Borrower and Creditor each represent and acknowledge to Lender that Creditor will benefit as a result of these financial accommodations from Lender to Borrower, and Creditor acknowledges receipt of valuable consideration for entering into this Agreement. BASED ON THE REPRESENTATIONS AND ACKNOWLEDGMENTS CONTAINED IN THIS AGREEMENT, BORROWER AND CREDITOR AGREE WITH LENDER AS FOLLOWS: SUBORDINATED INDEBTEDNESS. The words "Subordinated Indebtedness" as used in this agreement mean the following specific indebtedness from BORROWER TO CREDITOR, including all renewals, extensions, modifications and substitutions for the indebtedness, including principal, interest, and all costs and attorneys' fees, relating to the indebtedness: $7,000,000.00. SUPERIOR INDEBTEDNESS. The words "Superior Indebtedness" as used in this Agreement mean and include all present and future indebtedness, obligations, liabilities, claims, rights, and demands of any kind which may be now or hereafter owing from BORROWER TO LENDER. The term "Superior Indebtedness" is used in its broadest sense and includes without limitation all principal, all interest, all costs, attorneys' fees, all sums paid for the purpose of protecting Lender's rights in security (such as paying for insurance on collateral if the owner fails to do so), all contingent obligations of Borrower (such as a guaranty), all obligations arising by reason of Borrower's accounts with Lender (such as an overdraft on a checking account), and all other obligations of Borrower to Lender, secured or unsecured, of any nature whatsoever. SUBORDINATION. All Subordinated Indebtedness of Borrower to Creditor is and shall be subordinated in all respects to all Superior Indebtedness of Borrower to Lender. If Creditor holds one or more Security Interests, whether now existing or hereafter acquired, in any of Borrower's real property or personal property, Creditor also subordinates all Creditor's Security Interests to all Security Interests held by Lender, whether now existing or hereafter acquired. PAYMENTS TO CREDITOR. Except as provided below, Borrower will not make and Creditor will not accept, at any time while any Superior Indebtedness is owing to Lender, (A) any payment upon any Subordinated Indebtedness, (B) any advance, transfer, or assignment of assets to Creditor in any form whatsoever that would reduce at any time or in any way the amount of Subordinated Indebtedness, or (C) any transfer of any assets as security for the Subordinated Indebtedness. Notwithstanding the foregoing, Borrower may make regularly scheduled payments of interest only to Creditor so long as Borrower is not in default under any written agreement between Lender and Borrower. Creditor may not accelerate any amounts owed to Creditor without Lender's prior written consent. Notwithstanding the foregoing, Borrower may make regularly scheduled payments of $97,250.00 EACH MONTH (PRINCIPAL PAYMENT) to Creditor in accordance with the terms of the Subordinated Indebtedness so long as Borrower is not in default under any written agreement between Lender and Borrower. Creditor may not accelerate any amounts owed to Creditor without Lender's prior written consent. In the event of any distribution, division, or application, whether partial or complete, voluntary or involuntary, by operation of law or otherwise, of all or any part of Borrower's assets, or the proceeds of Borrower's assets, in whatever form, to creditors of Borrower or upon any indebtedness of Borrower, whether by reason of the liquidation, dissolution or other winding-up of Borrower, or by reason of any execution sale, receivership, insolvency, or bankruptcy proceeding, assignment for the benefit of creditors, proceedings for reorganization, or readjustment of Borrower or Borrower's properties, then and in such event, (A) the Superior Indebtedness shall be paid in full before any payment is made upon the Subordinated Indebtedness, and (B) all payments and distributions, of any kind or character and whether in cash, property, or securities, which shall be payable or deliverable upon or in respect of the Subordinated Indebtedness shall be paid or delivered directly to Lender for application in payment of the amounts then due on the Superior Indebtedness until the Superior Indebtedness shall have been paid in full. Should any payment, distribution, security or proceeds thereof be received by Creditor at any time on the Subordinated Indebtedness contrary to the terms of this Agreement, Creditor immediately will deliver the same to Lender in precisely the form received (except for the endorsement or assignment of Creditor if necessary), for application on or to secure the Superior Indebtedness, whether it is due or not due, and until so delivered the same shall be held in trust by Creditor as property of Lender. In the event Creditor fails to make any such endorsement or assignment, Lender, or any of its officers on behalf of Lender, is hereby irrevocably authorized by Creditor to make the same. CREDITOR'S NOTES. Creditor agrees to deliver to Lender, at Lender's request, copies of all notes of Borrower to Creditor, or other evidence of the Subordinated Indebtedness, now held or hereafter acquired by Creditor, while this Agreement remains in effect. At Lender's request, Borrower also will execute and deliver to Creditor a promissory note evidencing any book account or claim now or hereafter owed by Borrower to Creditor, which not also shall be delivered by Creditor to Lender. Creditor agrees not to sell, assign, pledge or otherwise transfer any of such notes except subject to all the terms and conditions of this Agreement. **not outlined under this agreement. SUBORDINATION AGREEMENT LOAN NO: 932900001-1 (CONTINUED) PAGE 2 PAGE 2 ================================================================================ CREDITOR'S REPRESENTATIONS AND WARRANTIES. Creditor represents and warrants to Lender that: (A) no representations or agreements of any kind have been made to Creditor which would limit or qualify in any way the terms of this Agreement; (B) this Agreement is executed at Borrower's request and not at the request of Lender; (C) Lender has made no representation to Creditor as to the creditworthiness of Borrower; and (D) Creditor has established adequate means of obtaining from Borrower on a continuing basis information regarding Borrower's financial condition. Creditor agrees to keep adequately informed from such means of any facts, events, or circumstances which might in any way affect Creditor's risks under this Agreement, and Creditor further agrees that Lender shall have no obligation to disclose to Creditor information or material acquired by Lender in the course of its relationship with Borrower. CREDITOR'S WAIVERS. Creditor waives any right to require Lender: (A) to make, extend, renew, or modify any loan to Borrower or to grant any other financial accommodations to Borrower whatsoever; (B) to make any presentment, protest, demand, or notice of any kind, including notice of any nonpayment of the Superior Indebtedness or of any nonpayment related to any Security Interests, or notice of any action or nonaction on the part of Borrower, Lender, any surety, endorser, or other guarantor in connection with the Superior Indebtedness, or in connection with the creation of new or additional Superior Indebtedness; (C) to resort for payment or to proceed directly or at once against any person, including Borrower; (D) to proceed directly against or exhaust any Security Interests held by Lender from Borrower, any other guarantor, or any other person (E) to pursue any other remedy within Lender's power; or (F) to commit any act or omission of any kind, at any time, with respect to any matter whatsoever.?? LENDER'S RIGHTS. Lender may take or omit any and all actions with respect to the Superior Indebtedness or any Security Interests for the SUPERIOR Indebtedness without affecting whatsoever any of Lender's rights under this Agreement. In particular, without limitation, Lender may, without notice of any kind to Creditor, (A) make one or more additional secured or unsecured loans to Borrower; (B) repeatedly alter, compromise, renew, extend, accelerate, or otherwise change the time for payment or other terms of the Superior Indebtedness or any part thereof, including increases and decreases of the rate of interest on the Superior Indebtedness; extensions may be repeated and may be for longer than the original loan term; (C) take and hold Security Interests for the payment of the Superior Indebtedness, and exchange, enforce, waive, and release any such Security Interests, with or without the substitution of new collateral; (D) release, substitute, agree not to sue, or deal with any one or more of Borrower's sureties, endorsers, or guarantors on any terms or manner Lender chooses; (E) determine how, when and what application of payments and credits, shall be made on the Superior Indebtedness; (F) apply such security and direct the order or manner of sale thereof, as Lender in its discretion may determine; and (G) assign this Agreement in whole or in part. DEFAULT BY BORROWER. If Borrower becomes insolvent or bankrupt, this Agreement shall remain in full force and effect. In the event of a corporate reorganization or corporate arrangement of Borrower under the provisions of the Bankruptcy Code, as amended, this Agreement shall remain in full force and effect and the court having jurisdiction over the reorganization or arrangement is hereby authorized to preserve such priority and subordination provided under this Agreement in approving any such plan of reorganization or arrangement. DURATION AND TERMINATION. This Agreement will take effect when received by Lender, without the necessity of any acceptance by Lender, in writing or otherwise, and will remain in full force and effect until Creditor shall notify Lender in writing at the address shown above to the contrary. Any such notice shall not affect the Superior Indebtedness owed Lender by Borrower at the time of such notice, nor shall such notice affect Superior Indebtedness thereafter granted in compliance with a commitment made by Lender to Borrower prior to receipt of such notice, nor shall such notice affect any renewals of or substitutions for any of the foregoing. Such notice shall affect only indebtedness of Borrower to Lender arising after receipt of such notice and not arising from financial assistance granted by Lender to Borrower in compliance with Lender's obligations under a commitment. Any notes lodged with Lender pursuant to the section titled "Creditor's Notes" above need not be returned until this Agreement has no further force or effect. MISCELLANEOUS PROVISIONS. The following miscellaneous provisions are a part of this Agreement: AMENDMENTS. This Agreement, together with any Related Documents, constitutes the entire understanding and agreement of the parties as to the matters set forth in this Agreement. No alteration of or amendment to this Agreement shall be effective unless given in writing and signed by the party or parties sought to be charged or bound by the alteration or amendment. ATTORNEYS' FEES; EXPENSES. Creditor agrees to pay upon demand all of Lender's costs and expenses, including Lender's attorneys' fees and Lender's legal expenses, incurred in connection with the enforcement of this Agreement. Lender may hire or pay someone else to help enforce this Agreement, and Creditor shall pay the costs and expenses of such enforcement. Costs and expenses include Lender's attorneys' fees and legal expenses whether or not there is a lawsuit, including attorneys' fees and legal expenses for bankruptcy proceedings (including efforts to modify or vacate any automatic stay or injunction), appeals, and any anticipated post-judgment collection services. Creditor also shall pay all court costs and such additional fees as may be directed by the court. AUTHORITY. The person who signs this Agreement as or on behalf of Creditor represents and warrants that he or she has authority to execute this Agreement and to subordinate the Subordinated Indebtedness and the Creditor's security interests in Borrower's property, if any. CAPTION HEADINGS. Caption headings in this Agreement are for convenience purposes only and are not to be used to interpret or define the provisions of this Agreement. GOVERNING LAW. THIS AGREEMENT WILL BE GOVERNED BY, CONSTRUED AND ENFORCED IN ACCORDANCE WITH FEDERAL LAW AND THE LAWS OF THE STATE OF CALIFORNIA. THIS AGREEMENT HAS BEEN ACCEPTED BY LENDER IN THE STATE OF CALIFORNIA. CHOICE OF VENUE. If there is a lawsuit, Creditor agrees upon Lender's request to submit to the jurisdiction of the courts of Los Angeles County, State of California. INTERPRETATION. In all cases where there is more than one Creditor, then all words used in this Agreement in the singular shall be deemed to have been used in the plural where the context and construction so require; and where there is more than one Creditor named in this Agreement or when this Agreement is executed by more than one , the words "Creditor" shall mean all and any one or more of them. Reference to the phrase "Creditor" includes the heirs, successors, assigns, and transferees of each of them. SUCCESSORS AND ASSIGNS. This Agreement shall be understood to be for the benefit of Lender and for such other person or persons as may from time to time become or be the holder or owner of any of the Indebtedness or any interest therein, and this Agreement shall be transferable to the same extent and with the same force and effect as any such Indebtedness may be transferable. NO WAIVER BY LENDER. Lender shall not be deemed to have waived any rights under this Agreement unless such waiver is given in writing and signed by Lender. No delay or omission on the part of Lender in exercising any right shall operate as a waiver of such right or any other right. A waiver by Lender of a provision of this Agreement shall not prejudice or constitute a waiver of Lender's right otherwise to demand strict compliance with that provision or any other provision of this Agreement. No prior waiver by Lender, nor any course of dealing between Lender and Creditor, shall constitute a waiver of any of Lender's rights or of any of Creditor's obligations as to any future transactions. Whenever the consent of Lender is required under this Agreement, the granting of such consent by Lender in any instance shall not constitute continuing consent to subsequent instances where such consent is required and in all cases such consent may be granted or withheld in the sole discretion of Lender. WAIVE JURY. ALL PARTIES TO THIS AGREEMENT HEREBY WAIVE THE RIGHT TO ANY JURY TRIAL IN ANY ACTION, PROCEEDING, OR COUNTERCLAIM BROUGHT BY ANY PARTY AGAINST ANY OTHER PARTY. SUBORDINATION AGREEMENT LOAN NO: 932900001-1 (CONTINUED) PAGE 3 ============================================================================== DEFINITIONS. The following capitalized words and terms shall have the following meanings when used in this Agreement. Unless specifically stated to the contrary, all references to dollar amounts shall mean amounts in lawful money of the United States of America. Words and terms used in the singular shall include the plural, and the plural shall include the singular, as the context may require. Words and terms not otherwise defined in this Agreement shall have the meanings attributed to such terms in the Uniform Commercial Code: AGREEMENT. The word "Agreement" means this Subordination Agreement, as this Subordination Agreement may be amended or modified from time to time, together with all exhibits and schedules attached to this Subordination Agreement from time to time. BORROWER. the word "Borrower" means International Remote Imaging Systems, Inc., and all other persons and entities signing the Note in whatever capacity. CREDITOR. The word "Creditor" means Digital Imaging Technologies, Inc. INDEBTEDNESS. The word "Indebtedness" means the Indebtedness evidenced by the Note or Related Documents, including all principal and interest together with all other indebtedness and costs and expenses for which Borrower is responsible under this Agreement or under any of the Related Documents. The word note shall mean that certain Subordinated Note dated 3/14/01 by and between Creditor and Borrower in the amount of $7,000,000.00. LENDER. The word "Lender" means California Bank & Trust, its successors and assigns. RELATED DOCUMENTS. The words "Related Documents" mean all promissory notes, credit agreements, loan agreements, environmental agreements, guaranties, security agreements, mortgages, deeds of trust, security deeds, collateral mortgages, and all other instruments, agreements and documents, whether now or hereafter existing, executed in connection with the Indebtedness. SECURITY INTEREST. The words "Security Interest" mean, without limitation, any and all types of collateral security, present and future, whether in the form of a lien, charge, encumbrance, mortgage, deed of trust, security deed, assignment, pledge, crop pledge, chattel mortgage, collateral chattel mortgage, chattel trust, factor's lien, equipment trust, conditional sale, trust receipt, lien or title retention contract, lease or consignment intended as a security device, or any other security or lien interest whatsoever whether created by law, contract, or otherwise. SUBORDINATED INDEBTEDNESS. The words "Subordinated Indebtedness" mean the indebtedness described in the section of this Agreement titled "Subordinated Indebtedness". SUPERIOR INDEBTEDNESS. The words "Superior Indebtedness" mean the indebtedness described in the section of this Agreement titled "Superior Indebtedness". BORROWER AND CREDITOR EACH ACKNOWLEDGE HAVING READ ALL THE PROVISIONS OF THIS SUBORDINATION AGREEMENT, AND BORROWER AND CREDITOR EACH AGREE TO ITS TERMS. THIS AGREEMENT IS DATED FEBRUARY 7, 2002. BORROWER: INTERNATIONAL REMOTE IMAGING SYSTEMS, INC. BY: /s/ John A. O'Malley BY: /s/ John Caloz ------------------------------------ ---------------------------------- DR. JOHN A. O'MALLEY JOHN CALOZ CEO/CHAIRMAN OF INTERNATIONAL REMOTE CFO/SECRETARY OF INTERNATIONAL IMAGING SYSTEMS, INC. REMOTE IMAGING SYSTEMS, INC. CREDITOR: DIGITAL IMAGING TECHNOLOGIES, INC. BY: /s/ [SIGNATURE ILLEGIBLE] ------------------------------------ AUTHORIZED SIGNER FOR DIGITAL IMAGING TECHNOLOGIES, INC. BY: ------------------------------------ AUTHORIZED SIGNER FOR DIGITAL IMAGING TECHNOLOGIES, INC. EX-11.1(F) 10 v80280ex11-1f.txt EXHIBIT 11.1(F) EXHIBIT 11.1(f) COMMERCIAL GUARANTY

- ------------------------------------------------------------------------------------------------------------------------------ PRINCIPAL LOAN DATE MATURITY LOAN NO CALL/COLL ACCOUNT OFFICER INTIALS 22163 [INITIALS ILLEGIBLE] - ------------------------------------------------------------------------------------------------------------------------------ References in the shaded area are for Lender's use only and do not limit the applicability of this document to any particular loan or item. Any item above containing "***" has been omitted due to text length limitations. - ------------------------------------------------------------------------------------------------------------------------------

BORROWER: INTERNATIONAL REMOTE LENDER: CALIFORNIA BANK & TRUST IMAGING SYSTEMS, INC. COMMERCIAL LOAN CENTER 9162 ETON AVENUE 550 SOUTH HOPE STREET, CHATSWORTH, CA 91311 SUITE 300 LOS ANGELES, CA 90071 GRANTOR: STATSPIN, INC. 85 MORSE STREET NORWOOD, MA 02062 ================================================================================ AMOUNT OF GUARANTY. THE PRINCIPAL AMOUNT OF THIS GUARANTY IS EIGHT MILLION & 00/100 DOLLARS ($8,000,000.00). CONTINUING GUARANTY. FOR GOOD AND VALUABLE CONSIDERATION, STATSPIN, INC. ("GUARANTOR") ABSOLUTELY AND UNCONDITIONALLY GUARANTEES AND PROMISES TO PAY TO CALIFORNIA BANK & TRUST ("LENDER") OR ITS ORDER, IN LEGAL TENDER OF THE UNITED STATES OF AMERICA, THE INDEBTEDNESS (AS THAT TERM IS DEFINED BELOW) OF INTERNATIONAL REMOTE IMAGING SYSTEMS, INC. ("BORROWER") TO LENDER ON THE TERMS AND CONDITIONS SET FORTH IN THIS GUARANTY. THE OBLIGATIONS OF GUARANTOR UNDER THIS GUARANTY ARE CONTINUING. MAXIMUM LIABILITY. The maximum liability of Guarantor under this Guaranty shall not exceed at any one time the sum of the principal amount of $8,000,000.00, plus all interest thereon, plus all of Lender's costs, expenses, and attorneys' fees incurred in connection with or relating to (A) the collection of the Indebtedness, (B) the collection and sale of any collateral for the Indebtedness or this Guaranty, or (C) the enforcement of this Guaranty. Attorneys' fees include, without limitation, attorneys' fees whether or not there is a lawsuit, and if there is a lawsuit, any fees and costs for trial and appeals. The above limitation on liability is not a restriction on the amount of the Indebtedness of Borrower to Lender either in the aggregate or at any one time. If Lender presently holds one or more guaranties, or hereafter receives additional guaranties from Guarantor, Lender's rights under all guaranties shall be cumulative. This Guaranty shall not (unless specifically provided below to the contrary) affect or invalidate any such other guaranties. Guarantor's liability will be Guarantor's aggregate liability under the terms of this Guaranty and any such other unterminated guaranties. INDEBTEDNESS GUARANTEED. The Indebtedness guaranteed by this Guaranty includes any and all of Borrower's indebtedness to Lender and is used in the most comprehensive sense and means and includes any and all of Borrower's liabilities, obligations and debts to Lender, now existing or hereinafter incurred or created, including, without limitation, all loans, advances, interest, costs, debts, overdraft indebtedness, credit card indebtedness, lease obligations, other obligations, and liabilities of Borrower, or any of them, and any present or future judgments against Borrower, or any of them; and whether any such Indebtedness is voluntarily or involuntarily incurred, due or not due, absolute or contingent, liquidated or unliquidated, determined or undetermined; whether Borrower may be liable individually or jointly with others, or primarily or secondarily, or as guarantor or surety; whether recovery on the Indebtedness may be or may become barred or unenforceable against Borrower for any reason whatsoever; and whether the Indebtedness arises from transactions which may be voidable on account of infancy, insanity, ultra vires, or otherwise. DURATION OF GUARANTY. This Guaranty will take effect when received by Lender without the necessity of any acceptance by Lender, or any notice to Guarantor or to Borrower, and will continue in full force until all Indebtedness incurred or contracted before receipt by Lender of any notice of revocation shall have been fully and finally paid and satisfied and all of Guarantor's other obligations under this Guaranty shall have been performed in full. If Guarantor elects to revoke this Guaranty, Guarantor may only do so in writing. Guarantor's written notice of revocation must be mailed to Lender, by certified mail, at Lender's address listed above or such other place as Lender may designate in writing. Written revocation of this Guaranty will apply only to advances or new Indebtedness created after actual receipt by Lender of Guarantor's written revocation. For this purpose and without limitation, the term "new Indebtedness" does not include Indebtedness which at the time of notice of revocation is contingent, unliquidated, undetermined or not due and which later becomes absolute, liquidated, determined or due. This Guaranty will continue to bind Guarantor for all Indebtedness incurred by Borrower or committed by Lender prior to receipt of Guarantor's written notice of revocation, including any extensions, renewals, substitutions or modifications of the Indebtedness. All renewals, extensions, substitutions, and modifications of the Indebtedness granted - after Guarantor's revocation, are contemplated under this Guaranty and, specifically will not be considered to be new Indebtedness. This Guaranty shall bind Guarantor's estate as to Indebtedness created both before and after Guarantor's death or incapacity, regardless of Lender's actual notice of Guarantor's death. Subject to the foregoing, Guarantor's executor or administrator or other legal representative may terminate this Guaranty in the same manner in which Guarantor might have terminated it and with the same effect. Release of any other guarantor or termination of any other guaranty of the Indebtedness shall not affect the liability of Guarantor under this Guaranty. A revocation Lender receives from any one or more Guarantors shall not affect the liability of any remaining Guarantors under this Guaranty. IT IS ANTICIPATED THAT FLUCTUATIONS MAY OCCUR IN THE AGGREGATE AMOUNT OF INDEBTEDNESS COVERED BY THIS GUARANTY, AND GUARANTOR SPECIFICALLY ACKNOWLEDGES AND AGREES THAT REDUCTIONS IN THE AMOUNT OF INDEBTEDNESS, EVEN TO ZERO DOLLARS ($0.00), PRIOR TO GUARANTOR'S WRITTEN REVOCATION OF THIS GUARANTY SHALL NOT CONSTITUTE A TERMINATION OF THIS GUARANTY. THIS GUARANTY IS BINDING UPON GUARANTOR AND GUARANTOR'S HEIRS, SUCCESSORS AND ASSIGNS SO LONG AS ANY OF THE GUARANTEED INDEBTEDNESS REMAINS UNPAID AND EVEN THOUGH THE INDEBTEDNESS GUARANTEED MAY FROM TIME TO TIME BE ZERO DOLLARS ($0.00). GUARANTOR'S AUTHORIZATION TO LENDER. Guarantor authorizes Lender, either before or after any revocation hereof, WITHOUT NOTICE OR DEMAND AND WITHOUT LESSENING GUARANTOR'S LIABILITY UNDER THIS GUARANTY, FROM TIME TO TIME: (A) prior to revocation as set forth above, to make one or more additional secured or unsecured loans to Borrower, to lease equipment or other goods to Borrower, or otherwise to extend additional credit to Borrower; (B) to alter, compromise, renew, extend, accelerate, or otherwise change one or more times the time for payment or other terms of the Indebtedness or any part of the Indebtedness, including increases and decreases of the rate of interest on the Indebtedness; extensions may be repeated and may be for longer than the original loan term; (C) to take and hold security for the payment of this Guaranty or the Indebtedness, and exchange, enforce, waive, subordinate, fail or decide not to perfect, and release any such security, with or without the substitution of new collateral; (D) to release, substitute, agree not to sue, or deal with any one or more of Borrower's sureties, endorsers, or other guarantors on any terms or in any manner Lender may choose; (E) to determine how, when and what application of payments and credits shall be made on the Indebtedness (F) to apply such security and direct the order or manner of sale thereof, including without limitation, any nonjudicial sale permitted by the terms of the controlling security agreement or deed of trust, as Lender in its discretion may determine; (G) to sell, transfer, assign or grant participations in all or any part of the Indebtedness; and (H) to assign or transfer this Guaranty in whole or in part. GUARANTOR'S REPRESENTATIONS AND WARRANTIES. Guarantor represents and warrants to Lender that (A) no representations or agreements of any kind have been made to Guarantor which would limit or qualify in any way the terms of this Guaranty; (B) this Guaranty is executed at Borrower's request and not at the request of Lender; (C) Guarantor has full power, right and authority to enter into this Guaranty; (D) the provisions of this Guaranty do not conflict with or result in a default under any agreement or other instrument binding upon Guarantor and do not result in a violation of any law, regulation, court decree or order applicable to Guarantor; (E) Guarantor has not and will not, without the prior written consent of Lender, sell, lease, assign, encumber, hypothecate, transfer, or otherwise dispose of all or substantially all of Guarantor's assets, or any interest therein; (F) upon Lender's request, Guarantor will provide to Lender financial and credit information in form acceptable to Lender, and all such financial COMMERCIAL GUARANTY LOAN NO: 932900001-1 (CONTINUED) PAGE 2 ================================================================================ information which currently has been, and all future financial information which will be provided to Lender is and will be true and correct in all material respects and fairly present Guarantor's financial condition as of the dates the financial information is provided; (G) no material adverse change has occurred in Guarantor's financial condition since the date of the most recent financial statements provided to Lender and no event has occurred which may materially adversely affect Guarantor's financial condition; (H) no litigation, claim, investigation, administrative proceeding or similar action (including those for unpaid taxes) against Guarantor is pending or threatened; (I) Lender has made no representation to Guarantor as to the creditworthiness of Borrower; and (J) Guarantor has established adequate means of obtaining from Borrower on a continuing basis information regarding Borrower's financial condition. Guarantor agrees to keep adequately informed from such means of any facts, events, or circumstances which might in any way affect Guarantor's risks under this Guaranty, and Guarantor further agrees that, absent a request for information, Lender shall have no obligation to disclose to Guarantor any information or documents acquired by Lender in the course of its relationship with Borrower. GUARANTOR'S WAIVERS. Except as prohibited by applicable law, Guarantor waives any right to require Lender to (A) make any presentment, protest, demand, or notice of any kind, including notice of change of any terms of repayment of the Indebtedness, default by Borrower or any other guarantor or surety, any action or nonaction taken by Borrower, Lender, or any other guarantor or surety of Borrower, or the creation of new or additional Indebtedness; (B) proceed against any person, including Borrower, before proceeding against Guarantor; (C) proceed against any collateral for the Indebtedness, including Borrower's collateral, before proceeding against Guarantor; (D) apply any payments or proceeds received against the Indebtedness in any order; (E) give notice of the terms, time, and place of any sale of the collateral pursuant to the Uniform Commercial Code or any other law governing such sale; (F) disclose any information about the Indebtedness, the Borrower, the collateral, or any other guarantor or surety, or about any action or nonaction of Lender; or (G) pursue any remedy or course of action in Lender's power whatsoever. Guarantor also waives any and all rights or defenses arising by reason of (H) any disability or other defense of Borrower, any other guarantor or surety or any other person; (I) the cessation from any cause whatsoever, other than payment in full, of the Indebtedness; (J) the application of proceeds of the Indebtedness by Borrower for purposes other than the purposes understood and intended by Guarantor and Lender; (K) any act of omission or commission by Lender which directly or indirectly results in or contributes to the discharge of Borrower or any other guarantor or surety, or the Indebtedness, or the loss or release of any collateral by operation of law or otherwise; (L) any statute of limitations in any action under this Guaranty or on the Indebtedness; or (M) any modification or change in terms of the Indebtedness, whatsoever, including without limitation, the renewal, extension, acceleration, or other change in the time payment of the Indebtedness is due and any change in the interest rate, and including any such modification or change in terms after revocation of this Guaranty on Indebtedness incurred prior to such revocation. Guarantor waives all rights and any defenses arising out of an election of remedies by Lender even though that the election of remedies, such as a non-judicial foreclosure with respect to security for a guaranteed obligation, has destroyed Guarantor's rights of subrogation and reimbursement against Borrower by operation of Section 580d of the California Code of Civil Procedure or otherwise. Guarantor waives all rights and defenses that Guarantor may have because Borrower's obligation is secured by real property. This means among other things: (1) Lender may collect from Guarantor without first foreclosing on any real or personal property collateral pledged by Borrower. (2) If Lender forecloses on any real property collateral pledged by Borrower: (a) the amount of Borrower's obligation may be reduced only by the price for which the collateral is sold at the foreclosure sale, even if the collateral is worth more than the sale price. (b) Lender may collect from Guarantor even if Lender, by forclosing on the real property collateral, has destroyed any right Guarantor may have to collect from Borrower. This is an unconditional and irrevocable waiver of any rights and defenses Guarantor may have because Borrower's obligation is secured by real property. These rights and defenses include, but are not limited to, any rights and defenses based upon Section 580a, 580b, 580d, or 726 of the Code of Civil Procedure. Guarantor understands and agrees that the foregoing waivers are unconditional and irrevocable waivers of substantive rights and defenses to which Guarantor might otherwise be entitled under state and federal law. Guarantor acknowledges that Guarantor has provided these waivers of rights and defenses with the intention that they be fully relied upon by Lender. Guarantor further understands and agrees that this Guaranty is a separate and independent contract between Guarantor and Lender, given for full and ample consideration, and is enforceable on its own terms. Until all Indebtedness is paid in full, Guarantor waives any right to enforce any remedy Guarantor may have against the Borrower or any other guarantor, surety, or other person, and further, Guarantor waives any right to participate in any collateral for the Indebtedness now or hereafter held by Lender. In addition to the waivers set forth herein, if now or hereafter Borrower is or shall become insolvent and the Indebtedness shall not at all times until paid be fully secured by collateral pledged by Borrower, Guarantor hereby forever waives and gives up in favor of Lender and Borrower, and Lender's and Borrower's respective successors, any claim or right to payment Guarantor may now have or hereafter have or acquire against Borrower, by subrogation or otherwise, so that at no time shall Guarantor be or become a "creditor" of Borrower within the meaning of 11 U.S.C. section 547(b), or any successor provision of the Federal bankruptcy laws. GUARANTOR'S UNDERSTANDING WITH RESPECT TO WAIVERS. Guarantor warrants and agrees that each of the waivers set forth above is made with Guarantor's full knowledge of its significance and consequences and that, under the circumstances, the waivers are reasonable and not contrary to public policy or law. If any such waiver is determined to be contrary to any applicable law or public policy, such waiver shall be effective only to the extent permitted by law or public policy. SUBORDINATION OF BORROWER'S DEBTS TO GUARANTOR. Guarantor agrees that the Indebtedness of Borrower to Lender, whether now existing or hereafter created, shall be superior to any claim that Guarantor may now have or hereafter acquire against Borrower, whether or not Borrower becomes insolvent. Guarantor hereby expressly subordinates any claim Guarantor may have against Borrower, upon any account whatsoever, to any claim that Lender may now or hereafter have against Borrower. In the event of insolvency and consequent liquidation of the assets of Borrower, through bankruptcy, by an assignment for the benefit of creditors, by voluntary liquidation, or otherwise, the assets of Borrower applicable to the payment of the claims of both Lender and Guarantor shall be paid to Lender and shall be first applied by Lender to the Indebtedness of Borrower to Lender. Guarantor does hereby assign to Lender all claims which it may have or acquire against Borrower or against any assignee or trustee in bankruptcy of Borrower; provided however, that such assignment shall be effective only for the purpose of assuring to Lender full payment in legal tender of the Indebtedness. If Lender so requests, any notes or credit agreements now or hereafter evidencing any debts or obligations of Borrower to Guarantor shall be marked with a legend that the same are subject to this Guaranty and shall be delivered to Lender. Guarantor agrees, and Lender is hereby authorized, in the name of Guarantor, from time to time to execute and file financing statements and continuation statements and to execute such other documents and to take such other actions as Lender deems necessary or appropriate to perfect, preserve and enforce its rights under this Guaranty. MISCELLANEOUS PROVISIONS. The following miscellaneous provisions are a part of this Guaranty: AMENDMENTS. This Guaranty, together with any Related Documents, constitutes the entire understanding and agreement of the parties as to the matters set forth in this Guaranty. No alteration of or amendment to this Guaranty shall be effective unless given in writing and signed by the party or parties sought to be charged or bound by the alteration or amendment. ATTORNEYS' FEES; EXPENSES. Guarantor agrees to pay upon demand all of Lender's costs and expenses, including Lender's attorneys' fees and Lender's legal expenses, incurred in connection with the enforcement of this Guaranty. Lender may hire or pay someone else to help enforce this Guaranty, and Guarantor shall pay the costs and expenses of such enforcement. Costs and expenses include Lender's attorneys' fees and legal expenses whether or not there is a lawsuit, including attorneys' fees and legal expenses for bankruptcy proceedings (including efforts to modify or vacate any automatic stay or injunction), appeals, and any anticipated post-judgment collection services. Guarantor also shall pay all court costs and such additional fees as may be directed by the court. COMMERCIAL GUARANTY LOAN NO: 932900001-1 (CONTINUED) PAGE 3 =============================================================================== CAPTION HEADINGS. Caption headings in this Guaranty are for convenience purposes only and are not to be used to interpret or define the provisions of this Guaranty. GOVERNING LAW. THIS GUARANTY WILL BE GOVERNED BY, CONSTRUED AND ENFORCED IN ACCORDANCE WITH FEDERAL LAW AND THE LAWS OF THE STATE OF CALIFORNIA. THIS GUARANTY HAS BEEN ACCEPTED BY LENDER IN THE STATE OF CALIFORNIA. CHOICE OF VENUE. If there is a lawsuit, Guarantor agrees upon Lender's request to submit to the jurisdiction of the courts of Los Angeles County, State of California. INTEGRATION. Guarantor further agrees that Guarantor has read and fully understands the terms of this Guaranty; Guarantor has had the opportunity to be advised by Guarantor's attorney with respect to this Guaranty; the Guaranty fully reflects Guarantor's intentions and parol evidence is not required to interpret the terms of this Guaranty. Guarantor hereby indemnifies and holds Lender harmless from all losses, claims, damages, and costs (including Lender's attorneys' fees) suffered or incurred by Lender as a result of any breach by Guarantor of the warranties, representations and agreements of this paragraph. INTERPRETATION. In all cases where there is more than one Borrower or Guarantor, then all words used in this Guaranty in the singular shall be deemed to have been used in the plural where the context and construction so require; and where there is more than one Borrower named in this Guaranty or when this Guaranty is executed by more than one Guarantor, the words "Borrower" and "Guarantor" respectively shall mean all and any one or more of them. The words "Guarantor," "Borrower," and "Lender" include the heirs, successors, assigns, and transferees of each of them. If a court finds that any provision of this Guaranty is not valid or should not be enforced, that fact by itself will not mean that the rest of this Guaranty will not be valid or enforced. Therefore, a court will enforce the rest of the provisions of this Guaranty even if a provision of this Guaranty may be found to be invalid or unenforceable. If any one or more of Borrower or Guarantor are corporations, partnerships, limited liability companies, or similar entities, it is not necessary for Lender to inquire into the powers of Borrower or Guarantor or of the officers, directors, partners, managers, or other agents acting or purporting to act on their behalf, and any Loan indebtedness made or created in reliance upon the professed exercise of such powers shall be guaranteed under this Guaranty. NOTICES. Any notice required to be given under this Guaranty shall be given in writing, and, except for revocation notices by Guarantor, shall be effective when actually delivered, when actually received by telefacsimile (unless otherwise required by law), when deposited with a nationally recognized overnight courier, or, if mailed, when deposited in the United States mail, as first class, certified or registered mail postage prepaid, directed to the addresses shown near the beginning of this Guaranty. All revocation notices by Guarantor shall be in writing and shall be effective upon delivery to Lender as provided in the section of this Guaranty entitled "DURATION OF GUARANTY." Any party may change its address for notices under this Guaranty by giving formal written notice to the other parties, specifying that the purpose of the notice is to change the party's address. For notice purposes, Guarantor agrees to keep Lender informed at all times of Guarantor's current address. Unless otherwise provided or required by law, if there is more than one Guarantor, any notice given by Lender to any Guarantor is deemed to be notice given to all Guarantors. NO WAIVER BY LENDER. Lender shall not be deemed to have waived any rights under this Guaranty unless such waiver is given in writing and signed by Lender. No delay or omission on the part of Lender in exercising any right shall operate as a waiver of such right or any other right. A waiver by Lender of a provision of this Guaranty shall not prejudice or constitute a waiver of Lender's right otherwise to demand strict compliance with that provision or any other provision of this Guaranty. No prior waiver by Lender, nor any course of dealing between Lender and Guarantor, shall constitute a waiver of any of Lender's rights or of any of Guarantor's obligations as to any future transactions. Whenever the consent of Lender is required under this Guaranty, the granting of such consent by Lender in any instance shall not constitute continuing consent to subsequent instances where such consent is required and in all cases such consent may be granted or withheld in the sole discretion of Lender. SUCCESSORS AND ASSIGNS. Subject to any limitations stated in this Guaranty on transfer of Guarantor's interest, this Guaranty shall be binding upon and inure to the benefit of the parties, their successors and assigns. WAIVE JURY. LENDER AND GUARANTOR HEREBY WAIVE THE RIGHT TO ANY JURY TRIAL IN ANY ACTION, PROCEEDING, OR COUNTERCLAIM BROUGHT BY EITHER LENDER OR BORROWER AGAINST THE OTHER. DEPOSIT AGREEMENT SECURITY. Guarantor hereby grants a security interest to Lender in any and all deposit accounts (checking, savings, money market or time) of Guarantor at Lender, now existing or hereinafter opened, to secure its obligations hereunder. This includes all deposit accounts Guarantor holds jointly with someone else. FINANCIAL STATEMENT CERTIFICATIONS. The undersigned hereby certifies to California Bank & Trust ("Bank") that all financial information ("Information") submitted to Bank now and at all times during the terms of this loan does, and will, fairly and accurately represent the financial condition of the undersigned, all Borrowers and Guarantors. Financial Information includes, but is not limited to all Business Financial Statements (including Interim and Year-End financial statements that are company prepared and/or CPA-prepared), Business Income Tax Returns, Borrowing Base Certificates, Accounts Receivable and Accounts Payable Agings, Personal Financial Statements and Personal Income Tax Returns. The undersigned understands that the Bank will rely on all financial information, whenever provided, and that such information is a material inducement to Bank to make, to continue to make, or otherwise extend credit accommodations to the undersigned. The undersigned covenants and agrees to notify Bank of any adverse material changes in her/his/its financial condition in the future. The undersigned further understands and acknowledges that there are criminal penalties for giving false financial information to federally insured financial institutions. DEFINITIONS. The following capitalized words and terms shall have the following meanings when used in this Guaranty. Unless specifically stated to the contrary, all references to dollar amounts shall mean amounts in lawful money of the United States of America. Words and terms used in the singular shall include the plural, and the plural shall include the singular, as the context may require. Words and terms not otherwise defined in this Guaranty shall have the meanings attributed to such terms in the Uniform Commercial Code: BORROWER. The word "Borrower" means International Remote Imaging Systems, Inc., and all other persons and entities signing the Note in whatever capacity. GUARANTOR. The word "Guarantor" means each and every person or entity signing this Guaranty, including without limitation Statspin, Inc.. GUARANTY. The word "Guaranty" means the guaranty from Guarantor to Lender, including without limitation a guaranty of all or part of the Note. INDEBTEDNESS. The word "Indebtedness" means Borrower's indebtedness to Lender as more particularly described in this Guaranty. LENDER. The word "Lender" means California Bank & Trust, its successors and assigns. NOTE. The word "Note" means the promissory note dated February 7, 2002, IN THE ORIGINAL PRINCIPAL AMOUNT OF $6,500,000.00 from Borrower to Lender, together with all renewals of, extensions of, modifications of, refinancings of, consolidations of, and substitutions for the promissory note or agreement. RELATED DOCUMENTS. The words "Related Documents" mean all promissory notes, credit agreements, loan agreements, environmental agreements, guaranties, security agreements, mortgages, deeds of trust, security deeds, collateral mortgages, and all other instruments, agreements and documents, whether now or hereafter existing, executed in connection with the Indebtedness. COMMERCIAL GUARANTY LOAN NO: 932900001-1 (CONTINUED) PAGE 4 ================================================================================ EACH UNDERSIGNED GUARANTOR ACKNOWLEDGES HAVING READ ALL THE PROVISIONS OF THIS GUARANTY AND AGREES TO ITS TERMS. IN ADDITION, EACH GUARANTOR UNDERSTANDS THAT THIS GUARANTY IS EFFECTIVE UPON GUARANTOR'S EXECUTION AND DELIVERY OF THIS GUARANTY TO LENDER AND THAT THE GUARANTY WILL CONTINUE UNTIL TERMINATED IN THE MANNER SET FORTH IN THE SECTION TITLED "DURATION OF GUARANTY". NO FORMAL ACCEPTANCE BY LENDER IS NECESSARY TO MAKE THIS GUARANTY EFFECTIVE. THIS GUARANTY IS DATED FEBRUARY 7, 2002. GUARANTOR: STATSPIN, INC. BY: /S/ DR. JOHN A. O'MALLEY, (SEAL) BY: /S/ DONALD HORACEK --------------------------- --------------------------- DR. JOHN A. O'MALLEY, DONALD HORACEK CEO OF STATSPIN, INC. SECRETARY OF STATSPIN, INC. EX-11.1(G) 11 v80280ex11-1g.txt EXHIBIT 11.1(G) EXHIBIT 11.1(g) COMMERCIAL GUARANTY

- ------------------------------------------------------------------------------------------------------------------- PRINCIPAL LOAN DATE MATURITY LOAN NO CALL/COLL ACCOUNT OFFICER INITIALS 22163 [INITIAL ILLEGIBLE] - ------------------------------------------------------------------------------------------------------------------- References in the shaded area are for Lender's use only and do not limit the applicability of this document to any particular loan or Any item above containing "***" has been omitted due to text length limitations. - -------------------------------------------------------------------------------------------------------------------

BORROWER: INTERNATIONAL REMOTE IMAGING SYSTEMS, INC. LENDER: CALIFORNIA BANK & TRUST 9162 ETON AVENUE COMMERCIAL LOAN CENTER CHATSWORTH, CA 91311 550 SOUTH HOPE STREET, SUITE 300 LOS ANGELES, CA 90071 GUARANTOR: ADVANCED DIGITAL IMAGING RESEARCH, LLC 2525 SOUTH SHORE BOULEVARD, SUITE 100 LEAGUE CITY, TX 77573 AMOUNT OF GUARANTY. THE PRINCIPAL AMOUNT OF THIS GUARANTY IS EIGHT MILLION & 00/100 DOLLARS ($8,000,000.00). CONTINUING GUARANTY. FOR GOOD AND VALUABLE CONSIDERATION, ADVANCED DIGITAL IMAGING RESEARCH, LLC ("GUARANTOR") ABSOLUTELY AND UNCONDITIONALLY GUARANTEES AND PROMISES TO PAY TO CALIFORNIA BANK & TRUST ("LENDER") OR ITS ORDER, IN LEGAL TENDER OF THE UNITED STATES OF AMERICA, THE INDEBTEDNESS (AS THAT TERM IS DEFINED BELOW) OF INTERNATIONAL REMOTE IMAGING SYSTEMS, INC. ("BORROWER") TO LENDER ON THE TERMS AND CONDITIONS SET FORTH IN THIS GUARANTY. THE OBLIGATIONS OF GUARANTOR UNDER THIS GUARANTY ARE CONTINUING. MAXIMUM LIABILITY. The maximum liability of Guarantor under this Guaranty shall not exceed at any one time the sum of the principal amount of $8,000,000.00, plus all interest thereon, plus all of Lender's costs, expenses, and attorneys' fees incurred in connection with or relating to (A) the collection of the Indebtedness, (B) the collection and sale of any collateral for the Indebtedness or this Guaranty, or (C) the enforcement of this Guaranty. Attorneys' fees include, without limitation, attorneys' fees whether or not there is a lawsuit, and if there is a lawsuit, any fees and costs for trial and appeals. The above limitation on liability is not a restriction on the amount of the Indebtedness of Borrower to Lender either in the aggregate or at any one time. If Lender presently holds one or more guaranties, or hereafter receives additional guaranties from Guarantor, Lender's rights under all guaranties shall be cumulative. This Guaranty shall not (unless specifically provided below to the contrary) affect or invalidate any such other guaranties. Guarantor's liability will be Guarantor's aggregate liability under the terms of this Guaranty and any such other unterminated guaranties. INDEBTEDNESS GUARANTEED. The Indebtedness guaranteed by this Guaranty includes any and all of Borrower's indebtedness to Lender and is used in the most comprehensive sense and means and includes any and all of Borrower's liabilities, obligations and debts to Lender, now existing or hereinafter incurred or created, including, without limitation, all loans, advances, interest, costs, debts, overdraft indebtedness, credit card indebtedness, lease obligations, other obligations, and liabilities of Borrower, or any of them, and any present or future judgments against Borrower, or any of them; and whether any such Indebtedness is voluntarily or involuntarily incurred, due or not due, absolute or contingent, liquidated or unliquidated, determined or undetermined; whether Borrower may be liable individually or jointly with others, or primarily or secondarily, or as guarantor or surety; whether recovery on the Indebtedness may be or may become barred or unenforceable against Borrower for any reason whatsoever; and whether the Indebtedness arises from transactions which may be voidable on account of infancy, insanity, ultra vires, or otherwise. DURATION OF GUARANTY. This Guaranty will take effect when received by Lender without the necessity of any acceptance by Lender, or any notice to Guarantor or to Borrower, and will continue in full force until all Indebtedness incurred or contracted before receipt by Lender of any notice of revocation shall have been fully and finally paid and satisfied and all of Guarantor's other obligations under this Guaranty shall have been performed in full. If Guarantor elects to revoke this Guaranty, Guarantor may only do so in writing. Guarantor's written notice of revocation must be mailed to Lender, by certified mail, at Lender's address listed above or such other place as Lender may designate in writing. Written revocation of this Guaranty will apply only to advances or new Indebtedness created after actual receipt by Lender of Guarantor's written revocation. For this purpose and without limitation, the term "new Indebtedness" does not include Indebtedness which at the time of notice of revocation is contingent, unliquidated, undetermined or not due and which later becomes absolute, liquidated, determined or due. This Guaranty will continue to bind Guarantor for all Indebtedness incurred by Borrower or committed by Lender prior to receipt of Guarantor's written notice of revocation, including any extensions, renewals, substitutions or modifications of the Indebtedness. All renewals, extensions, substitutions, and modifications of the Indebtedness granted after Guarantor's revocation, are contemplated under this Guaranty and, specifically will not be considered to be new Indebtedness. This Guaranty shall bind Guarantor's estate as to Indebtedness created both before and after Guarantor's death or incapacity, regardless of Lender's actual notice of Guarantor's death. Subject to the foregoing, Guarantor's executor or administrator or other legal representative may terminate this Guaranty in the same manner in which Guarantor might have terminated it and with the same effect. Release of any other guarantor or termination of any other guaranty of the Indebtedness shall not affect the liability of Guarantor under this Guaranty. A revocation Lender receives from any one or more Guarantors shall not affect the liability of any remaining Guarantors under this Guaranty. IT IS ANTICIPATED THAT FLUCTUATIONS MAY OCCUR IN THE AGGREGATE AMOUNT OF INDEBTEDNESS COVERED BY THIS GUARANTY, AND GUARANTOR SPECIFICALLY ACKNOWLEDGES AND AGREES THAT REDUCTIONS IN THE AMOUNT OF INDEBTEDNESS, EVEN TO ZERO DOLLARS ($0.00), PRIOR TO GUARANTOR'S WRITTEN REVOCATION OF THIS GUARANTY SHALL NOT CONSTITUTE A TERMINATION OF THIS GUARANTY. THIS GUARANTY IS BINDING UPON GUARANTOR AND GUARANTOR'S HEIRS, SUCCESSORS AND ASSIGNS SO LONG AS ANY OF THE GUARANTEED INDEBTEDNESS REMAINS UNPAID AND EVEN THOUGH THE INDEBTEDNESS GUARANTEED MAY FROM TIME TO TIME BE ZERO DOLLARS ($0.00). GUARANTOR'S AUTHORIZATION TO LENDER. Guarantor authorizes Lender, either before or after any revocation hereof, WITHOUT NOTICE OR DEMAND AND WITHOUT LESSENING GUARANTOR'S LIABILITY UNDER THIS GUARANTY, FROM TIME TO TIME: (A) prior to revocation as set forth above, to make one or more additional secured or unsecured loans to Borrower, to lease equipment or other goods to Borrower, or otherwise to extend additional credit to Borrower; (B) to alter, compromise, renew, extend, accelerate, or otherwise change one or more times the time for payment or other terms of the Indebtedness or any part of the Indebtedness, including increases and decreases of the rate of interest on the Indebtedness; extensions may be repeated and may be for longer than the original loan term; (C) to take and hold security for the payment of this Guaranty or the Indebtedness, and exchange, enforce, waive, subordinate, fail or decide not to perfect, and release any such security, with or without the substitution of new collateral; (D) to release, substitute, agree not to sue, or deal with any one or more of Borrower's sureties, endorsers, or other guarantors on any terms or in any manner Lender may choose; (E) to determine how, when and what application of payments and credits shall be made on the Indebtedness (F) to apply such security and direct the order or manner of sale thereof, including without limitation, any nonjudicial sale permitted by the terms of the controlling security agreement or deed of trust, as Lender in its discretion may determine; (G) to sell, transfer, assign or grant participations in all or any part of the Indebtedness; and (H) to assign or transfer this Guaranty in whole or in part. GUARANTOR'S REPRESENTATIONS AND WARRANTIES. Guarantor represents and warrants to Lender that (A) no representations or agreements of any kind have been made to Guarantor which would limit or qualify in any way the terms of this Guaranty; (B) this Guaranty is executed at Borrower's request and not at the request of Lender; (C) Guarantor has full power, right and authority to enter into this Guaranty; (D) the provisions of this Guaranty do not conflict with or result in a default under any agreement or other instrument binding upon Guarantor and do not result in a violation of any law, regulation, court decree or order applicable to Guarantor; (E) Guarantor has not and will not, without the prior written consent of Lender, sell, lease, assign, encumber, hypothecate, transfer, or otherwise dispose of all or substantially all of Guarantor's assets, or any interest therein; (F) upon Lender's request, Guarantor will provide to Lender financial and credit information in form acceptable to Lender, and all such financial COMMERCIAL GUARANTY LOAN NO: 932900001-1 (CONTINUED) PAGE 2 ================================================================================ information which currently has been, and all future financial information which will be provided to Lender is and will be true and correct in all material respects and fairly present Guarantor's financial condition as of the dates the financial information is provided; (G) no material adverse change has occurred in Guarantor's financial condition since the date of the most recent financial statements provided to Lender and no event has occurred which may materially adversely affect Guarantor's financial condition; (H) no litigation, claim, investigation, administrative proceeding or similar action (including those for unpaid taxes) against Guarantor is pending or threatened; (I) Lender has made no representation to Guarantor as to the creditworthiness of Borrower; and (J) Guarantor has established adequate means of obtaining from Borrower on a continuing basis information regarding Borrower's financial condition. Guarantor agrees to keep adequately informed from such means of any facts, events, or circumstances which might in any way affect Guarantor's risks under this Guaranty, and Guarantor further agrees that, absent a request for information, Lender shall have no obligation to disclose to Guarantor any information or documents acquired by Lender in the course of its relationship with Borrower. GUARANTOR'S WAIVERS. Except as prohibited by applicable law, Guarantor waives any right to require Lender to (A) make any presentment, protest, demand, or notice of any kind, including notice of change of any terms of repayment of the Indebtedness, default by Borrower or any other guarantor or surety, any action or nonaction taken by Borrower, Lender, or any other guarantor or surety of Borrower, or the creation of new or additional Indebtedness; (B) proceed against any person, including Borrower, before proceeding against Guarantor; (C) proceed against any collateral for the Indebtedness, including Borrower's collateral, before proceeding against Guarantor; (D) apply any payments or proceeds received against the Indebtedness in any order; (E) give notice of the terms, time, and place of any sale of the collateral pursuant to the Uniform Commercial Code or any other law governing such sale; (F) disclose any information about the Indebtedness, the Borrower, the collateral, or any other guarantor or surety, or about any action or nonaction of Lender; or (G) pursue any remedy or course of action in Lender's power whatsoever. Guarantor also waives any and all rights or defenses arising by reason of (H) any disability or other defense of Borrower, any other guarantor or surety or any other person; (I) the cessation from any cause whatsoever, other than payment in full, of the Indebtedness; (J) the application of proceeds of the Indebtedness by Borrower for purposes other than the purposes understood and intended by Guarantor and Lender; (K) any act of omission or commission by Lender which directly or indirectly results in or contributes to the discharge of Borrower or any other guarantor or surety, or the Indebtedness, or the loss or release of any collateral by operation of law or otherwise; (L) any statute of limitations in any action under this Guaranty or on the Indebtedness; or (M) any modification or change in terms of the Indebtedness, whatsoever, including without limitation, the renewal, extension, acceleration, or other change in the time payment of the Indebtedness is due and any change in the interest rate, and including any such modification or change in terms after revocation of this Guaranty on Indebtedness incurred prior to such revocation. Guarantor waives all rights and any defenses arising out of an election of remedies by Lender even though that the election of remedies, such as a non-judicial foreclosure with respect to security for a guaranteed obligation, has destroyed Guarantor's rights of subrogation and reimbursement against Borrower by operation of Section 580d of the California Code of Civil Procedure or otherwise. Guarantor waives all rights and defenses that Guarantor may have because Borrower's obligation is secured by real property. This means among other things: (1) Lender may collect from Guarantor without first foreclosing on any real or personal property collateral pledged by Borrower. (2) If Lender forecloses on any real property collateral pledged by Borrower: (a) the amount of Borrower's obligation may be reduced only by the price for which the collateral is sold at the foreclosure sale, even if the collateral is worth more than the sale price. (b) Lender may collect from Guarantor even if Lender, by foreclosing on the real property collateral, has destroyed any right Guarantor may have to collect from Borrower. This is an unconditional and irrevocable waiver of any rights and defenses Guarantor may have because Borrower's obligation is secured by real property. These rights and defenses include, but are not limited to, any rights and defenses based upon Section 580a, 580b, 580d, or 726 of the Code of Civil Procedure. Guarantor understands and agrees that the foregoing waivers are unconditional and irrevocable waivers of substantive rights and defenses to which Guarantor might otherwise be entitled under state and federal law. Guarantor acknowledges that Guarantor has provided these waivers of rights and defenses with the intention that they be fully relied upon by Lender. Guarantor further understands and agrees that this Guaranty is a separate and independent contract between Guarantor and Lender, given for full and ample consideration, and is enforceable on its own terms. Until all Indebtedness is paid in full, Guarantor waives any right to enforce any remedy Guarantor may have against the Borrower or any other guarantor, surety, or other person, and further, Guarantor waives any right to participate in any collateral for the Indebtedness now or hereafter held by Lender. In addition to the waivers set forth herein, if now or hereafter Borrower is or shall become insolvent and the Indebtedness shall not at all times until paid be fully secured by collateral pledged by Borrower, Guarantor hereby forever waives and gives up in favor of Lender and Borrower, and Lender's and Borrower's respective successors, any claim or right to payment Guarantor may now have or hereafter have or acquire against Borrower, by subrogation or otherwise, so that at no time shall Guarantor be or become a "creditor" of Borrower within the meaning of 11 U.S.C. section 547(b), or any successor provision of the Federal bankruptcy laws. GUARANTOR'S UNDERSTANDING WITH RESPECT TO WAIVERS. Guarantor warrants and agrees that each of the waivers set forth above is made with Guarantor's full knowledge of its significance and consequences and that, under the circumstances, the waivers are reasonable and not contrary to public policy or law. If any such waiver is determined to be contrary to any applicable law or public policy, such waiver shall be effective only to the extent permitted by law or public policy. SUBORDINATION OF BORROWER'S DEBTS TO GUARANTOR. Guarantor agrees that the Indebtedness of Borrower to Lender, whether now existing or hereafter created, shall be superior to any claim that Guarantor may now have or hereafter acquire against Borrower, whether or not Borrower becomes insolvent. Guarantor hereby expressly subordinates any claim Guarantor may have against Borrower, upon any account whatsoever, to any claim that Lender may now or hereafter have against Borrower. In the event of insolvency and consequent liquidation of the assets of Borrower, through bankruptcy, by an assignment for the benefit of creditors, by voluntary liquidation, or otherwise, the assets of Borrower applicable to the payment of the claims of both Lender and Guarantor shall be paid to Lender and shall be first applied by Lender to the Indebtedness of Borrower to Lender. Guarantor does hereby assign to Lender all claims which it may have or acquire against Borrower or against any assignee or trustee in bankruptcy of Borrower; provided however, that such assignment shall be effective only for the purpose of assuring to Lender full payment in legal tender of the Indebtedness. If Lender so requests, any notes or credit agreements now or hereafter evidencing any debts or obligations of Borrower to Guarantor shall be marked with a legend that the same are subject to this Guaranty and shall be delivered to Lender. Guarantor agrees, and Lender is hereby authorized, in the name of Guarantor, from time to time to execute and file financing statements and continuation statements and to execute such other documents and to take such other actions as Lender deems necessary or appropriate to perfect, preserve and enforce its rights under this Guaranty. MISCELLANEOUS PROVISIONS. The following miscellaneous provisions are a part of this Guaranty: AMENDMENTS. This Guaranty, together with any Related Documents, constitutes the entire understanding and agreement of the parties as to the matters set forth in this Guaranty. No alteration of or amendment to this Guaranty shall be effective unless given in writing and signed by the party or parties sought to be charged or bound by the alteration or amendment. ATTORNEYS' FEES; EXPENSES. Guarantor agrees to pay upon demand all of Lender's costs and expenses, including Lender's attorneys' fees and Lender's legal expenses, incurred in connection with the enforcement of this Guaranty. Lender may hire or pay someone else to help enforce this Guaranty, and Guarantor shall pay the costs and expenses of such enforcement. Costs and expenses include Lender's attorneys' fees and legal expenses whether or not there is a lawsuit, including attorneys' fees and legal expenses for bankruptcy proceedings (including efforts to modify or vacate any automatic stay or injunction), appeals, and any anticipated post-judgment collection services. Guarantor also shall pay all court costs and such additional fees as may be directed by the court. COMMERCIAL GUARANTY LOAN NO: 932900001-1 (CONTINUED) PAGE 3 ================================================================================ CAPTION HEADINGS. Caption headings in this Guaranty are for convenience purposes only and are not to be used to interpret or define the provisions of this Guaranty. GOVERNING LAW. THIS GUARANTY WILL BE GOVERNED BY, CONSTRUED AND ENFORCED IN ACCORDANCE WITH FEDERAL LAW AND THE LAWS OF THE STATE OF CALIFORNIA. This GUARANTY HAS BEEN ACCEPTED BY LENDER IN THE STATE OF CALIFORNIA. CHOICE OF VENUE. If there is a lawsuit, Guarantor agrees upon Lender's request to submit to the jurisdiction of the courts of Los Angeles County, State of California. INTEGRATION. Guarantor further agrees that Guarantor has read and fully understands the terms of this Guaranty; Guarantor has had the opportunity to be advised by Guarantor's attorney with respect to this Guaranty; the Guaranty fully reflects Guarantor's intentions and parol evidence is not required to interpret the terms of this Guaranty. Guarantor hereby indemnifies and holds Lender harmless from all losses, claims, damages, and costs (including Lender's attorneys' fees) suffered or incurred by Lender as a result of any breach by Guarantor of the warranties, representations and agreements of this paragraph. INTERPRETATION. In all cases where there is more than one Borrower or Guarantor, then all words used in this Guaranty in the singular shall be deemed to have been used in the plural where the context and construction so require; and where there is more than one Borrower named in this Guaranty or when this Guaranty is executed by more than one Guarantor, the words "Borrower" and "Guarantor" respectively shall mean all and any one or more of them. The words "Guarantor," "Borrower," and "Lender" include the heirs, successors, assigns, and transferees of each of them. If a court finds that any provision of this Guaranty is not valid or should not be enforced, that fact by itself will not mean that the rest of this Guaranty will not be valid or enforced. Therefore, a court will enforce the rest of the provisions of this Guaranty even if a provision of this Guaranty may be found to be invalid or unenforceable. If any one or more of Borrower or Guarantor are corporations, partnerships, limited liability companies, or similar entities, it is not necessary for Lender to inquire into the powers of Borrower or Guarantor or of the officers, directors, partners, managers, or other agents acting or purporting to act on their behalf, and any Loan indebtedness made or created in reliance upon the professed exercise of such powers shall be guaranteed under this Guaranty. NOTICES. Any notice required to be given under this Guaranty shall be given in writing, and, except for revocation notices by Guarantor, shall be effective when actually delivered, when actually received by telefacsimile (unless otherwise required by law), when deposited with a nationally recognized overnight courier, or, if mailed, when deposited in the United States mail, as first class, certified or registered mail postage prepaid, directed to the addresses shown near the beginning of this Guaranty. All revocation notices by Guarantor shall be in writing and shall be effective upon delivery to Lender as provided in the section of this Guaranty entitled "DURATION OF GUARANTY." Any party may change its address for notices under this Guaranty by giving formal written notice to the other parties, specifying that the purpose of the notice is to change the party's address. For notice purposes, Guarantor agrees to keep Lender informed at all times of Guarantor's current address. Unless otherwise provided or required by law, if there is more than one Guarantor, any notice given by Lender to any Guarantor is deemed to be notice given to all Guarantors. NO WAIVER BY LENDER. Lender shall not be deemed to have waived any rights under this Guaranty unless such waiver is given in writing and signed by Lender. No delay or omission on the part of Lender in exercising any right shall operate as a waiver of such right or any other right. A waiver by Lender of a provision of this Guaranty shall not prejudice or constitute a waiver of Lender's right otherwise to demand strict compliance with that provision or any other provision of this Guaranty. No prior waiver by Lender, nor any course of dealing between Lender and Guarantor, shall constitute a waiver of any of Lender's rights or of any of Guarantor's obligations as to any future transactions. Whenever the consent of Lender is required under this Guaranty, the granting of such consent by Lender in any instance shall not constitute continuing consent to subsequent instances where such consent is required and in all cases such consent may be granted or withheld in the sole discretion of Lender. SUCCESSORS AND ASSIGNS. Subject to any limitations stated in this Guaranty on transfer of Guarantor's interest, this Guaranty shall be binding upon and inure to the benefit of the parties, their successors and assigns. WAIVE JURY. LENDER AND GUARANTOR HEREBY WAIVE THE RIGHT TO ANY JURY TRIAL IN ANY ACTION, PROCEEDING, OR COUNTERCLAIM BROUGHT BY EITHER LENDER OR BORROWER AGAINST THE OTHER. DEPOSIT AGREEMENT SECURITY. Guarantor hereby grants a security interest to Lender in any and all deposit accounts (checking, savings, money market or time) of Guarantor at Lender, now existing or hereinafter opened, to secure its obligations hereunder, This includes all deposit accounts Guarantor holds jointly with someone else. FINANCIAL STATEMENT CERTIFICATIONS. The undersigned hereby certifies to California Bank & Trust ("Bank") that all financial information ("Information") submitted to Bank now and at all times during the terms of this loan does, and will, fairly and accurately represent the financial condition of the undersigned, all Borrowers and Guarantors. Financial Information includes, but is not limited to all Business Financial Statements (including Interim and Year-End financial statements that are company prepared and/or CPA-prepared), Business Income Tax Returns, Borrowing Base Certificates, Accounts Receivable and Accounts Payable Agings, Personal Financial Statements and Personal Income Tax Returns. The undersigned understands that the Bank will rely on all financial information, whenever provided, and that such information is a material inducement to Bank to make, to continue to make, or otherwise extend credit accommodations to the undersigned. The undersigned covenants and agrees to notify Bank of any adverse material changes in her/his/its financial condition in the future. The undersigned further understands and acknowledges that there are criminal penalties for giving false financial information to federally insured financial institutions. DEFINITIONS. The following capitalized words and terms shall have the following meanings when used in this Guaranty. Unless specifically stated to the contrary, all references to dollar amounts shall mean amounts in lawful money of the United States of America. Words and terms used in the singular shall include the plural, and the plural shall include the singular, as the context may require. Words and terms not otherwise defined in this Guaranty shall have the meanings attributed to such terms in the Uniform Commercial Code: BORROWER. The word "Borrower" means International Remote Imaging Systems, Inc., and all other persons and entities signing the Note in whatever capacity. GUARANTOR. The word "Guarantor" means each and every person or entity signing this Guaranty, including without limitation Advanced Digital Imaging Research, LLC. GUARANTY. The word "Guaranty" means the guaranty from Guarantor to Lender, including without limitation a guaranty of all or part of the Note. INDEBTEDNESS. The word "Indebtedness" means Borrower's indebtedness to Lender as more particularly described in this Guaranty. LENDER. The word "Lender" means California Bank & Trust, its successors and assigns. NOTE. The word "Note" means the promissory note dated February 7, 2002, IN THE ORIGINAL PRINCIPAL AMOUNT OF $6,500,000.00 from Borrower to Lender, together with all renewals of, extensions of, modifications of, refinancings of, consolidations of, and substitutions for the promissory note or agreement. RELATED DOCUMENTS. The words "Related Documents" mean all promissory notes, credit agreements, loan agreements, environmental agreements, guaranties, security agreements, mortgages, deeds of trust, security deeds, collateral mortgages, and all other instruments. COMMERCIAL GUARANTY LOAN NO: 932900001-1 (CONTINUED) PAGE 4 ================================================================================ agreements and documents, whether now or hereafter existing, executed in connection with the Indebtedness. EACH UNDERSIGNED GUARANTOR ACKNOWLEDGES HAVING READ ALL THE PROVISIONS OF THIS GUARANTY AND AGREES TO ITS TERMS. IN ADDITION, EACH GUARANTOR UNDERSTANDS THAT THIS GUARANTY IS EFFECTIVE UPON GUARANTOR'S EXECUTION AND DELIVERY OF THIS GUARANTY TO LENDER AND THAT THE GUARANTY WILL CONTINUE UNTIL TERMINATED IN THE MANNER SET FORTH IN THE SECTION TITLED "DURATION OF GUARANTY". NO FORMAL ACCEPTANCE BY LENDER IS NECESSARY TO MAKE THIS GUARANTY EFFECTIVE. THIS GUARANTY IS DATED FEBRUARY 7, 2002. GUARANTOR: ADVANCED DIGITAL IMAGING RESEARCH, LLC BY: /S/ DR. JOHN A. O'MALLEY (SEAL) BY: /S/ DONALD HORACEK (SEAL) --------------------------- --------------------------- DR. JOHN A. O'MALLEY, DONALD HORACEK, MANAGER OF ADVANCED DIGITAL MANAGER OF ADVANCED DIGITAL IMAGING RESEARCH, LLC IMAGING RESEARCH, LLC LIMITED LIABILITY COMPANY RESOLUTION TO GRANT COLLATERAL / GUARANTEE

- ------------------------------------------------------------------------------------------------------------------------------------ PRINCIPAL LOAN DATE MATURITY LOAN NO CALL/COLL ACCOUNT OFFICER INITIALS $6,500,000.00 02-07-2002 06-30-2004 932900001-1 22163 [INITIALS ILLEGIBLE] - ------------------------------------------------------------------------------------------------------------------------------------ References in the shaded area are for Lender's use only and do not limit the applicability of this document to any particular loan or item. Any item above containing "***" has been omitted due to text length limitations. - ------------------------------------------------------------------------------------------------------------------------------------

BORROWER: INTERNATIONAL REMOTE IMAGING SYSTEMS, INC. LENDER: CALIFORNIA BANK & TRUST 9162 ETON AVENUE COMMERCIAL LOAN CENTER CHATSWORTH, CA 91311 550 SOUTH HOPE STREET, SUITE 300 LOS ANGELES, CA 90071 COMPANY: ADVANCED DIGITAL IMAGING RESEARCH, LLC 2525 SOUTH SHORE BOULEVARD, SUITE 100 LEAGUE CITY, TX 77573

================================================================================ WE, THE UNDERSIGNED, DO HEREBY CERTIFY THAT: THE COMPANY'S EXISTENCE. The complete and correct name of the Company is Advanced Digital Imaging Research, LLC ("Company"). The Company is a limited liability company which is, and at all times shall be, duly organized, validly existing, and in standing under and by virtue of the laws of the State of Delaware. The Company is duly authorized to transact business in the State of Texas and all other states in which the Company is doing business, having obtained all necessary filings, governmental licenses and approvals for each state in which the Company is doing business. Specifically, the Company is, and at all times shall be, duly qualified as a foreign limited liability company in all states in which the failure to so qualify would have a material adverse effect on its business or financial condition. The Company has the full power and authority to own its properties and to transact the business in which it is presently engaged or presently proposes to engage. The Company maintains an office at 2525 South Shore Boulevard, Suite 100, League City, TX 77573. Unless the Company has designated otherwise in writing, the principal office is the office at which the Company keeps its books and records. The Company will notify Lender prior to any change in the location of the Company's state of organization or any change in the Company's name. The Company shall do all things necessary to preserve and to keep in full force and effect its existence, rights and privileges, and shall comply with all regulations, rules, ordinances, statutes, orders and decrees of any governmental or quasi-governmental authority or court applicable to the Company and the Company's business activities. RESOLUTIONS ADOPTED. At a meeting of the members of the Company, duly called and held on _________________, at which a quorum was present and voting, or by other duly authorized action in lieu of a meeting, the resolutions set forth in this Resolution were adopted. MANAGERS. The following named persons are managers of Advanced Digital Imaging Research, LLC:

NAMES TITLES AUTHORIZED ACTUAL SIGNATURES ----- ------ ---------- ----------------- DR. JOHN A. O'MALLEY MANAGER Y X /s/ JOHN A. O'MALLEY ----------------------- DONALD HORACEK MANAGER Y X /s/ DONALD HORACEK -----------------------

ACTIONS AUTHORIZED. Any one (1) of the authorized persons listed above may enter in o any agreements of any nature with Lender, and those agreements will bind the Company. Specifically, but without limitation, any one (1) of such authorized persons are authorized, empowered, and directed to do the following for and on behalf of the Company: GUARANTY. To guarantee or act as surety for loans or other financial accommodations to Borrower from Lender on such guarantee or surety terms as may be agreed upon between the managers of the Company and Lender and in such sum or sums of money as in their judgment should be guaranteed or assured, (the "Guaranty"). GRANT SECURITY. To mortgage, pledge, transfer, endorse, hypothecate, or otherwise encumber and deliver to Lender any property now or hereafter belonging to the Company or in which the Company now or hereafter may have an interest, including without limitation all real property and all personal property (tangible or intangible) of the Company, as security for the Guaranty, and as a security for the payment of any loans, any promissory notes, or any other or further indebtedness of International Remote Imaging Systems, Inc. to Lender at any time owing, however the same may be evidenced. Such property may be mortgaged, pledged, transferred, endorsed, hypothecated or encumbered at the time such loans are obtained or such indebtedness is incurred, or at any other time or times, and may be either in addition to or in lieu of any property theretofore mortgaged, pledged, transferred, endorsed, hypothecated or encumbered. The provisions of this Resolution authorizing or relating to the pledge, mortgage, transfer, endorsement, hypothecation, granting of a security interest in, or in any way encumbering, the assets of the Company shall include, without limitation, doing so in order to lend collateral security for the indebtedness, now or hereafter existing, and of any nature whatsoever, of International Remote Imaging Systems, Inc. to Lender. The Company has considered the value to itself of lending collateral in support of such indebtedness, and the Company represents to Lender that the Company is benefited by doing so. EXECUTE SECURITY DOCUMENTS. To execute and deliver to Lender the forms of mortgage, deed of trust, pledge agreement, hypothecation agreement, and other security agreements and financing statements which Lender may require and which shall evidence the terms and conditions under and pursuant to which such liens and encumbrances, or any of them, are given; and also to execute and deliver to Lender any other written instruments, any chattel paper, or any other collateral, of any kind or nature, which Lender may deem necessary or proper in connection with or pertaining to the giving of the liens and encumbrances. Notwithstanding the foregoing, any one of the above authorized persons may execute, deliver, or record financing statements. FURTHER ACTS. To do and perform such other acts and things and to execute and deliver such other documents and agreements, INCLUDING AGREEMENTS WAIVING THE RIGHT TO A TRIAL BY JURY, as the managers may in their discretion deem reasonably necessary or proper in order to carry into effect the provisions of this Resolution. ASSUMED BUSINESS NAMES. The Company has filed or recorded all documents or filings required by law relating to all assumed business names used by the Company. Excluding the name of the Company, the following is a complete list of all assumed business names under which the Company does business: NONE. NOTICES TO LENDER. The Company will promptly notify Lender in writing at Lender's address shown above (or such other addresses as Lender may designate from time to time) prior to any (A) change in the Company's name; (B) change in the Company's assumed business name(s); (C) change in the management or in the Managers of the Company; (D) change in the authorized signer(s); (E) change in the Company's principal office address; (F) change in the Company's state of organization; (G) conversion of the Company to a new or different type of business entity; or (H) change in any other aspect of the Company that directly or indirectly relates to any agreements between the Company and Lender. No change in the Company's name or state of organization will take effect until after Lender has received notice CERTIFICATION CONCERNING MANAGERS AND RESOLUTIONS. The managers named above are duly elected, appointed, or employed by or for LIMITED LIABILITY COMPANY RESOLUTION TO GRANT COLLATERAL / GUARANTEE LOAN NO: 932900001-1 (CONTINUED) PAGE 2 ================================================================================ the Company, as the case may be, and occupy the positions set opposite their respective names. This Resolution now stands of record on the books of the Company, is in full force and effect, and has not been modified or revoked in any manner whatsoever. CONTINUING VALIDITY. Any and all acts authorized pursuant to this Resolution and performed prior to the passage of this Resolution are hereby ratified and approved. This Resolution shall be continuing, shall remain in full force and effect and Lender may rely on it until written notice of its revocation shall have been delivered to and received by Lender at Lender's address shown above (or such addresses as Lender may designate from time to time). Any such notice shall not affect any of the Company's agreements or commitments in effect at the time notice is given. IN TESTIMONY WHEREOF, WE HAVE HEREUNTO SET OUR HAND AND ATTEST THAT THE SIGNATURES SET OPPOSITE THE NAMES LISTED ABOVE ARE THEIR GENUINE SIGNATURES. WE EACH HAVE READ ALL THE PROVISIONS OF THIS RESOLUTION, AND WE EACH PERSONALLY AND ON BEHALF OF THE COMPANY CERTIFY THAT ALL STATEMENTS AND REPRESENTATIONS MADE IN THIS RESOLUTION ARE TRUE AND CORRECT. THIS LIMITED LIABILITY COMPANY RESOLUTION TO GRANT COLLATERAL/GUARANTEE IS DATED _________________. THIS RESOLUTION IS GIVEN UNDER SEAL AND IT IS INTENDED THAT THIS RESOLUTION IS AND SHALL CONSTITUTE AND HAVE THE EFFECT OF A SEALED INSTRUMENT ACCORDING TO LAW. CERTIFIED TO AND ATTESTED BY: BY: /s/ DONALD HORACEK (SEAL) ------------------------------- AUTHORIZED SIGNER FOR ADVANCED DIGITAL IMAGING RESEARCH, LLC NOTE: If the managers signing this Resolution are designated by the foregoing document as one of the managers authorized to act on the Company's behalf, it is advisable to have this Resolution signed by at least one non-authorized manager of the Company. ================================================================================ LASER PRO Lending, Ver. 5.19.00.08 Capr. Harland Financial Solutions, Inc. 1997, 2002. All Rights Reserved. - DE/CA M:\WINAPPS\CFI\LPL\C15.FC TR-5152 PR-5 EX-23 12 v80280ex23.htm EXHIBIT 23

EXHIBIT 23

CONSENT OF INDEPENDENT ACCOUNTANTS

      We hereby consent to the inclusion in this Annual Report on Form 10-K for the period ended December 31, 2001, and to the incorporation by reference in the Registration Statements on Forms S-8 (File Nos. 33-10631, 33-56772, 33-82560, 333-19265, 333-31391, 333-45348, 333-31393, 333-63304 and 333-65547) and Forms S-3 (File No’s. 333-27189, 333-37946, 333-86617 and 333-48097) of our report dated March 5, 2002, relating to the audit of the consolidated balance sheet of International Remote Imaging Systems, Inc. and subsidiaries as of December 31, 2001 and the consolidated results of their operations, cash flows, shareholders’ equity and comprehensive income for the year ended December 31, 2001, which appears in this Form 10-K.

/s/ BDO SEIDMAN, LLP

Los Angeles, California

March 5, 2002

EX-10.1(A)

                                                                 EXHIBIT 10.1(a)

[LOGO]            AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION

           STANDARD INDUSTRIAL/COMMERCIAL SINGLE-TENANT LEASE -- NET
                (DO NOT USE THIS FORM FOR MULTI-TENANT BUILDINGS)

1.      BASIC PROVISIONS ("BASIC PROVISIONS")

        1.1     PARTIES: This Lease ("Lease"), dated for reference purposes only
November 29, 2001 is made by and between NORTHPARK INDUSTRIAL ("LESSOR") and
INTERNATIONAL REMOTE IMAGING SYSTEMS, INC., a Delaware Corporation ("LESSEE"),
(collectively the "PARTIES," or individually a "PARTY").

        1.2     PREMISES: That certain real property, including all improvements
therein or to be provided by Lessor under the terms of this Lease, and commonly
known as 9162 Eton Avenue located in the County of Los Angeles, State of
California and generally described as (describe briefly the nature of the
property and, if applicable, the "PROJECT", if the property is located within a
Project) the northerly portion of a larger concrete tilt-up industrial building
consisting of approximately 23,254 square feet of area, aka Lot #5/6, Tract No.
33398, City of Los Angeles, in an MR-2 zone ("PREMISES"). (See also Paragraph 2)

        1.3     TERM: Five (5) years and -0- months ("ORIGINAL TERM") commencing
January 1, 2002 ("COMMENCEMENT DATE") and ending December 31st 2006 ("EXPIRATION
DATE"). (See also Paragraph 3).

        1.4     EARLY POSSESSION: ("EARLY POSSESSION DATE").
(See also Paragraphs 3.2 and 3.3)

        1.5     BASE RENT: $13,720.00 per month ("BASE RENT"), payable on the
First (1st) day of each month commencing (See also Paragraph 4)

[X] If this box is checked, there are provisions in this Lease for the Base Rent
    to be adjusted. See Paragraph 50

        1.6     BASE RENT PAID UPON EXECUTION: $________________________________
as Base Rent for the period ___________________________________________________.

        1.7     SECURITY DEPOSIT: $15,442.00 ("SECURITY DEPOSIT"). (See also
Paragraph 5)

        1.8     AGREED USE: research, development and manufacturing of medical
and electronic equipment and related activity. (See also Paragraph 6)

        1.9     INSURING PARTY: Lessor is the "INSURING PARTY" unless otherwise
stated herein. (See also Paragraph 8)

        1.10    GUARANTOR. The obligations of the Lessee under this Lease are to
be guaranteed by ________________________ ("GUARANTOR"). (See also Paragraph 37)

        1.11    ADDENDA AND EXHIBITS. Attached hereto is an Addendum or Addenda
consisting of Paragraphs 50 through 65, all of which constitute a part of this
Lease.

2.      PREMISES.

        2.1     LETTING. Lessor hereby leases to Lessee, and Lessee hereby
leases from Lessor, the Premises, for the term, at the rental, and upon all of
the terms, covenants and conditions set forth in this Lease. Unless otherwise
provided herein, any statement of size set forth in this Lease, or that may have
been used in calculating rental, is an approximation which the Parties agree is
reasonable and the rental based thereon is not subject to revision whether or
not the actual size is more or less.

        2.2     CONDITION. Lessor shall deliver the Premises to Lessee broom
clean and free of debris on the Commencement Date or the Early Possession Date,
whichever first occurs ("START DATE"), and, so long as the required service
contracts described in Paragraph 7.1(b) below are obtained by Lessee within
thirty (30) days following the Start Date, warrants that the existing
electrical, plumbing, fire sprinkler, lighting, heating, ventilating and air
conditioning systems ("HVAC"), loading doors, if any, and all other such
elements in the Premises, other than those constructed by Lessee, shall be in
good operating condition on said date and that the structural elements of the
roof, bearing walls and foundation of any buildings on the Premises (the
"BUILDING") shall be free of material defects. If a non-compliance with said
warranty exists as of the Start Date, Lessor shall, as Lessor's sole obligation
with respect to such matter, except as otherwise provided in this Lease,
promptly after receipt of written notice from Lessee setting forth with
specificity the nature and extent of such non-compliance, rectify same at
Lessor's expense. If, after the Start Date, Lessee does not give Lessor written
notice of any non-compliance with this warranty within: (i) one year as to the
surface of the roof and the structural portions of the roof, foundations and
bearing walls, (ii) six (6) months as to the HVAC systems, (iii) thirty (30)
days as to the remaining systems and other elements of the Building, correction
of such non-compliance shall be the obligation of Lessee at Lessee's sole cost
and expense.

        2.3     COMPLIANCE. Lessor warrants that the improvements on the
Premises comply with all applicable laws, covenants or restrictions of record,
building codes, regulations and ordinances ("APPLICABLE REQUIREMENTS") in effect
on the Start Date. Said warranty does not apply to the use to which Lessee will
put the Premises or to any Alterations or Utility Installations (as defined in
Paragraph 7.3(a)) made or to be made by Lessee. NOTE: Lessee is responsible for
determining whether or not the zoning is appropriate for Lessee's intended use,
and acknowledges that past uses of the Premises may no longer be allowed. If the
Premises do not comply with said warranty, Lessor shall, except as otherwise
provided, promptly after receipt of written notice from Lessee setting forth
with specificity the nature and extent of such non-compliance, rectify the same
at Lessor's expense. If Lessee does not give Lessor written notice of a
non-compliance with this warranty within six (6) months following the Start
Date, correction of that non-compliance shall be the obligation of Lessee at
Lessee's sole cost and expense. If the Applicable Requirements are hereafter
changed (as opposed to being in existence at the Start Date, which is addressed
in Paragraph 6.2(e) below) so as to require during the term of this Lease the
construction of an addition to or an alteration of the Building, the remediation
of any Hazardous Substance, or the reinforcement or other physical modification
of the Building ("CAPITAL EXPENDITURE"), Lessor and Lessee shall allocate the
cost of such work as follows:



                                     PAGE 1


               (a) Subject to Paragraph 2.3(c) below, if such Capital
Expenditures are required as a result of the specific and unique use of the
Premises by Lessee as compared with uses by tenants in general, Lessee shall be
fully responsible for the cost thereof, provided, however that if such Capital
Expenditure is required during the last two (2) years of this Lease and the cost
thereof exceeds six (6) months' Base Rent, Lessee may instead terminate this
Lease unless Lessor notifies Lessee, in writing, within ten (10) days after
receipt of Lessee's termination notice that Lessor has elected to pay the
difference between the actual cost thereof and the amount equal to six (6)
months' Base Rent. If Lessee elects termination, Lessee shall immediately cease
the use of the Premises which requires such Capital Expenditure and deliver to
Lessor written notice specifying a termination date at least ninety (90) days
thereafter. Such termination date shall, however, in no event be earlier than
the last day that Lessee could legally utilize the Premises without commencing
such Capital Expenditure.

               (b) If such Capital Expenditure is not the result of the specific
and unique use of the Premises by Lessee (such as governmentally mandated
seismic modifications), then Lessor and Lessee shall allocate the obligation to
pay for such costs pursuant to the provisions of Paragraph 7.1(c); provided,
however, that if such Capital Expenditure is required during the last two years
of this Lease or if Lessor reasonably determines that it is not economically
feasible to pay its share thereof, Lessor shall have the option to terminate
this Lease upon ninety (90) days prior written notice to Lessee unless Lessee
notifies Lessor, in writing, within ten (10) days after receipt of Lessor's
termination notice that Lessee will pay for such Capital Expenditure. If Lessor
does not elect to terminate, and fails to tender its share of any such Capital
Expenditure, Lessee may advance such funds and deduct same, with Interest, from
Rent until Lessor's share of such costs have been fully paid. If Lessee is
unable to finance Lessor's share, or if the balance of the Rent due and payable
for the remainder of this Lease is not sufficient to fully reimburse Lessee on
an offset basis, Lessee shall have the right to terminate this Lease upon thirty
(30) days written notice to Lessor.

               (c) Notwithstanding the above, the provisions concerning Capital
Expenditures are intended to apply only to non-voluntary, unexpected, and new
Applicable Requirements. If the Capital Expenditures are instead triggered by
Lessee as a result of an actual or proposed change in use, change in intensity
of use, or modification to the Premises then, and in that event, Lessee shall be
fully responsible for the cost thereof, and Lessee shall not have any right to
terminate this Lease.

        2.4     ACKNOWLEDGEMENTS. Lessee acknowledges that: (a) it has been
advised by Lessor and/or Brokers to satisfy itself with respect to the condition
of the Premises (including but not limited to the electrical, HVAC and fire
sprinkler systems, security, environmental aspects, and compliance with
Applicable Requirements), and their suitability for Lessee's intended use, (b)
Lessee has made such investigation as it deems necessary with reference to such
matters and assumes all responsibility therefor as the same relate to its
occupancy of the Premises, and (c) neither Lessor, Lessor's agents, nor any
Broker has made any oral or written representations or warranties with respect
to said matters other than as set forth in this Lease. In addition, Lessor
acknowledges that: (a) Broker has made no representations, promises or
warranties concerning Lessee's ability to honor the Lease or suitability to
occupy the Premises, and (b) it is Lessor's sole responsibility to investigate
the financial capability and/or suitability of all proposed tenants.

        2.5     LESSEE AS PRIOR OWNER/OCCUPANT. The warranties made by Lessor in
Paragraph 2 shall be of no force or effect if immediately prior to the Start
Date Lessee was the owner or occupant of the Premises. In such event, Lessee
shall be responsible for any necessary corrective work.

3.      TERM.

        3.1     TERM. The Commencement Date, Expiration Date and Original Term
of this Lease are as specified in Paragraph 1.3.

        3.2     EARLY POSSESSION. If Lessee totally or partially occupies the
Premises prior to the Commencement Date, the obligation to pay Base Rent shall
be abated for the period of such early possession. All other terms of this Lease
(including but not limited to the obligations to pay Real Property Taxes and
insurance premiums and to maintain the Premises) shall, however, be in effect
during such period. Any such early possession shall not affect the Expiration
Date.

        3.3     DELAY IN POSSESSION. Lessor agrees to use its best commercially
reasonable efforts to deliver possession of the Premises to Lessee by the
Commencement Date. If, despite said efforts, Lessor is unable to deliver
possession as agreed, Lessor shall not be subject to any liability therefor, nor
shall such failure affect the validity of this Lease. Lessee shall not, however,
be obligated to pay Rent or perform its other obligations until it receives
possession of the Premises. If possession is not delivered within sixty (60)
days after the Commencement Date, Lessee may, at its option, by notice in
writing within ten (10) days after the end of such sixty (60) day period, cancel
this Lease, in which event the Parties shall be discharged from all obligations
hereunder. If such written notice is not received by Lessor within said ten (10)
day period, Lessee's right to cancel shall terminate. Except as otherwise
provided, if possession is not tendered to Lessee by the Start Date and Lessee
does not terminate this Lease, as aforesaid, any period of rent abatement that
Lessee would otherwise have enjoyed shall run from the date of delivery of
possession and continue for a period equal to what Lessee would otherwise have
enjoyed under the terms hereof, but minus any days of delay caused by the acts
or omissions of Lessee. If possession of the Premises is not delivered within
four (4) months after the Commencement Date, this Lease shall terminate unless
other agreements are reached between Lessor and Lessee, in writing.

        3.4     LESSEE COMPLIANCE. Lessor shall not be required to tender
possession of the Premises to Lessee until Lessee complies with its obligation
to provide evidence of insurance (Paragraph 8.5). Pending delivery of such
evidence, Lessee shall be required to perform all of its obligations under this
Lease from and after the Start Date, including the payment of Rent,
notwithstanding Lessor's election to withhold possession pending receipt of such
evidence of insurance. Further, if Lessee is required to perform any other
conditions prior to or concurrent with the Start Date, the Start Date shall
occur but Lessor may elect to withhold possession until such conditions are
satisfied.

4.      RENT.

        4.1.    RENT DEFINED. All monetary obligations of Lessee to Lessor under
the terms of this Lease (except for the Security Deposit) are deemed to be rent
("RENT").

        4.2     PAYMENT. Lessee shall cause payment of Rent to be received by
Lessor in lawful money of the United States, without offset or deduction (except
as specifically permitted in this Lease), on or before the day on which it is
due. Rent for any period during the term hereof which is for less than one (1)
full calendar month shall be prorated based upon the actual number of days of
said month. Payment of Rent shall be made to Lessor at its address stated herein
of to such other persons or place as Lessor may from time to time designate in
writing. Acceptance of a payment which is less than the amount then due shall
not be a waiver of Lessor's rights to the balance of such Rent, regardless of
Lessor's endorsement of any check so stating.

5.      SECURITY DEPOSIT. Lessee shall deposit with Lessor upon execution hereof
the Security Deposit as security for Lessee's faithful performance of its
obligations under this Lease. If Lessee fails to pay Rent, or otherwise Defaults
under this Lease, Lessor may use, apply or retain all or any portion of said
Security Deposit for the payment of any amount due Lessor or to reimburse or
compensate Lessor for any liability, expense, loss or damage which Lessor may
suffer or incur by reason thereof. If Lessor uses or applies all or any portion
of said Security Deposit, Lessee shall within ten (10) days after written
request therefor deposit monies with Lessor sufficient to restore said Security
Deposit to the full amount required by this Lease. If the Base Rent increases
during the term of this Lease, Lessee shall, upon written request from Lessor,
deposit additional monies with Lessor so that the total amount of the Security
Deposit shall at all times bear the same proportion to the increased Base Rent
as the initial Security Deposit bore to the initial Base Rent. Should the Agreed
Use be amended to accommodate a material change in the business of Lessee or to
accommodate a sublessee or assignee, Lessor shall have the right to increase the
Security Deposit to the extent necessary, in Lessor's reasonable judgment, to
account for any increased wear and tear that the Premises may suffer as a result
thereof. If a change in control of Lessee occurs during this Lease and following
such change the financial condition of Lessee is, in Lessor's reasonable
judgment, significantly reduced, Lessee shall deposit such additional monies
with Lessor as shall be sufficient to cause the Security Deposit to be at a
commercially reasonable level based on said change in financial condition.
Lessor shall not be required to keep the Security Deposit separate from its
general accounts. Within fourteen (14) days after the expiration or termination
of this Lease, if Lessor elects to apply the Security Deposit only to unpaid
Rent, and otherwise within thirty (30) days after the Premises have been vacated
pursuant to Paragraph 7.4(c) below, Lessor shall return that portion of the
Security Deposit not used or applied by Lessor. No part of the Security Deposit
shall be considered to be held in trust, to bear interest or to be prepayment
for any monies to be paid by Lessee under this Lease.



                                     PAGE 2


6.      USE.

        6.1     USE. Lessee shall use and occupy the Premises only for the
Agreed Use, or any other legal use which is reasonably comparable thereto, and
for no other purpose. Lessee shall not use or permit the use of the Premises in
a manner that is unlawful, creates damage, waste or a nuisance, or that disturbs
owners and/or occupants of, or causes damage to neighboring properties. Lessor
shall not unreasonably withhold or delay its consent to any written request for
a modification of the Agreed Use, so long as the same will not impair the
structural integrity of the improvements on the Premises or the mechanical or
electrical systems therein, is not significantly more burdensome to the
Premises. If Lessor elects to withhold consent, Lessor shall within five (5)
business days after such request give written notification of same, which notice
shall include an explanation of Lessor's objections to the change in use.

        6.2     HAZARDOUS SUBSTANCES.

                (a) REPORTABLE USES REQUIRE CONSENT. The term "HAZARDOUS
SUBSTANCE" as used in this Lease shall mean any product, substance, or waste
whose presence, use, manufacture, disposal, transportation, or release, either
by itself or in combination with other materials expected to be on the Premises,
is either: (i) potentially injurious to the public health, safety or welfare,
the environment or the Premises, (ii) regulated or monitored by any governmental
authority, or (iii) a basis for potential liability of Lessor to any
governmental agency or third party under any applicable statute or common law
theory. Hazardous Substances shall include, but not be limited to, hydrocarbons,
petroleum, gasoline, and/or crude oil or any products, by-products or fractions
thereof. Lessee shall not engage in any activity in or on the Premises which
constitutes a Reportable Use of Hazardous Substances without the express prior
written consent of Lessor and timely compliance (at Lessee's expense) with all
Applicable Requirements. "REPORTABLE USE" shall mean (i) the installation or use
of any above or below ground storage tank, (ii) the generation, possession,
storage, use, transportation, or disposal of a Hazardous Substance that requires
a permit from, or with respect to which a report, notice, registration or
business plan is required to be filed with, any governmental authority, and/or
(iii) the presence at the Premises of a Hazardous Substance with respect to
which any Applicable Requirements requires that a notice be given to persons
entering or occupying the Premises or neighboring properties. Notwithstanding
the foregoing, Lessee may use any ordinary and customary materials reasonably
required to be used in the normal course of the Agreed Use, so long as such use
is in compliance with all Applicable Requirements, is not a Reportable Use, and
does not expose the Premises or neighboring property to any meaningful risk of
contamination or damage or expose Lessor to any liability therefor. In addition,
Lessor may condition its consent to any Reportable Use upon receiving such
additional assurances as Lessor reasonably deems necessary to protect itself,
the public, the Premises and/or the environment against damage, contamination,
injury and/or liability, including, but not limited to, the installation (and
removal on or before Lease expiration or termination) of protective
modifications (such as concrete encasements) and/or increasing the Security
Deposit.

               (b) DUTY TO INFORM LESSOR. If Lessee knows, or has reasonable
cause to believe, that a Hazardous Substance has come to be located in, on,
under or about the Premises, other than as previously consented to by Lessor,
Lessee shall immediately give written notice of such fact to Lessor, and provide
Lessor with a copy of any report, notice, claim or other documentation which it
has concerning the presence of such Hazardous Substance.

               (c) LESSEE REMEDIATION. Lessee shall not cause or permit any
Hazardous Substance to be spilled or released in, on, under, or about the
Premises (including through the plumbing or sanitary sewer system) and shall
promptly, at Lessee's expense, take all investigatory and/or remedial action
reasonably recommended, whether or not formally ordered or required, for the
cleanup of any contamination of, and for the maintenance, security and/or
monitoring of the Premises or neighboring properties, that was caused or
materially contributed to by Lessee, or pertaining to or involving any Hazardous
Substance brought onto the Premises during the term of this Lease, by or for
Lessee, or any third party.

               (d) LESSEE INDEMNIFICATION. Lessee shall indemnify, defend and
hold Lessor, its agents, employees, lenders and ground lessor, if any, harmless
from and against any and all loss of rents and/or damages, liabilities,
judgments, claims, expenses, penalties, and attorneys' and consultants' fees
arising out of or involving any Hazardous Substance brought onto the Premises by
or for Lessee, or any third party (provided, however, that Lessee shall have no
liability under this Lease with respect to underground migration of any
Hazardous Substance under the Premises from adjacent properties). Lessee's
obligations shall include, but not be limited to, the effects of any
contamination or injury to person, property or the environment created or
suffered by Lessee, and the cost of investigation, removal, remediation,
restoration and/or abatement, and shall survive the expiration or termination of
this Lease. NO TERMINATION, CANCELLATION OR RELEASE AGREEMENT ENTERED INTO BY
LESSOR AND LESSEE SHALL RELEASE LESSEE FROM ITS OBLIGATIONS UNDER THIS LEASE
WITH RESPECT TO HAZARDOUS SUBSTANCES, UNLESS SPECIFICALLY SO AGREED BY LESSOR IN
WRITING AT THE TIME OF SUCH AGREEMENT.

               (e) LESSOR INDEMNIFICATION. Lessor and its successors and assigns
shall indemnify, defend, reimburse and hold Lessee, its employees and lenders,
harmless from and against any and all environmental damages, including the cost
of remediation, which existed as a result of Hazardous Substances on the
Premises prior to the Start Date or which are caused by the gross negligence or
willful misconduct of Lessor, its agents or employees. Lessor's obligations, as
and when required by the Applicable Requirements, shall include, but not be
limited to, the cost of investigation, removal, remediation, restoration and/or
abatement, and shall survive the expiration or termination of this Lease.

               (f) INVESTIGATIONS AND REMEDIATIONS. Lessor shall retain the
responsibility and pay for any investigations or remediation measures required
by governmental entities having jurisdiction with respect to the existence of
Hazardous Substances on the Premises prior to the Start Date, unless such
remediation measure is required as a result of Lessee's use (including
"Alterations", as defined in Paragraph 7.3(a) below) of the Premises, in which
event Lessee shall be responsible for such payment. Lessee shall cooperate fully
in any such activities at the request of Lessor, including allowing Lessor and
Lessor's agents to have reasonable access to the Premises at reasonable times in
order to carry out Lessor's investigative and remedial responsibilities.

               (g) LESSOR TERMINATION OPTION. If a Hazardous Substance Condition
occurs during the term of this Lease, unless Lessee is legally responsible
therefor (in which case Lessee shall make the investigation and remediation
thereof required by the Applicable Requirements and this Lease shall continue in
full force and effect, but subject to Lessor's rights under Paragraph 6.2(d) and
Paragraph 13), Lessor may, at Lessor's option, either (i) investigate and
remediate such Hazardous Substance Condition, if required, as soon as reasonably
possible at Lessor's expense, in which event this Lease shall continue in full
force and effect, or (ii) if the estimated cost to remediate such condition
exceeds twelve (12) times the then monthly Base Rent or $100,000, whichever is
greater, give written notice to Lessee, within thirty (30) days after receipt by
Lessor of knowledge of the occurrence of such Hazardous Substance Condition, of
Lessor's desire to terminate this Lease as of the date sixty (60) days following
the date of such notice. In the event Lessor elects to give a termination
notice, Lessee may, within ten (10) days thereafter, give written notice to
Lessor of Lessee's commitment to pay the amount by which the cost of the
remediation of such Hazardous Substance Condition exceeds an amount equal to
twelve (12) times the then monthly Base Rent or $100,000, whichever is greater.
Lessee shall provide Lessor with said funds or satisfactory assurance thereof
within thirty (30) days following such commitment. In such event, this Lease
shall continue in full force and effect, and Lessor shall proceed to make such
remediation as soon as reasonably possible after the required funds are
available. If Lessee does not give such notice and provide the required funds or
assurance thereof within the time provided, this Lease shall terminate as of the
date specified in Lessor's notice of termination.

        6.3     LESSEE'S COMPLIANCE WITH APPLICABLE REQUIREMENTS. Except as
otherwise provided in this Lease, Lessee shall, at Lessee's sole expense, fully,
diligently and in a timely manner, materially comply with all Applicable
Requirements, the requirements of any applicable fire insurance underwriter or
rating bureau, and the recommendations of Lessor's engineers and/or consultants
which relate in any manner to the Premises, without regard to whether said
requirements are now in effect or become effective after the Start Date. Lessee
shall, within ten (10) days after receipt of Lessor's written request, provide
Lessor with copies of all permits and other documents, and other information
evidencing Lessee's compliance with any Applicable Requirements specified by
Lessor, and shall immediately upon receipt, notify Lessor in writing (with
copies of any documents involved) of any threatened or actual claim, notice,
citation, warning, complaint or report pertaining to or involving the failure of
Lessee or the Premises to comply with any Applicable Requirements.

        6.4     INSPECTION; COMPLIANCE. Lessor and Lessor's "Lender" (as defined
in Paragraph 30 below) and consultants shall have the right to enter into
Premises at any time, in the case of an emergency, and otherwise at reasonable
times, for the purpose of inspecting the condition of the Premises and for
verifying compliance by Lessee with this Lease. The cost of any such inspections
shall be paid by Lessor, unless a violation of Applicable Requirements, or a
contamination is found to exist or be imminent, or the inspection is requested
or ordered by a governmental authority. In such case, Lessee shall upon request
reimburse Lessor for the cost of such inspections, so long as such inspection is
reasonably related to the violation or contamination.



                                     PAGE 3


7.      MAINTENANCE; REPAIRS, UTILITY INSTALLATIONS; TRADE FIXTURES AND
        ALTERATIONS.

        7.1     LESSEE'S OBLIGATIONS.

                (a) IN GENERAL. Subject to the provisions of Paragraph 2.2
(Condition), 2.3 (Compliance), 6.3 (Lessee's Compliance with Applicable
Requirements), 7.2 (Lessor's Obligations), 9 (Damage or Destruction), and 14
(Condemnation), Lessee shall, at Lessee's sole expense, keep the Premises,
Utility Installations, and Alterations in good order, condition and repair
(whether or not the portion of the Premises requiring repairs, or the means of
repairing the same, are reasonably or readily accessible to Lessee, and whether
or not the need for such repairs occurs as a result of Lessee's use, any prior
use, the elements or the age of such portion of the Premises), including, but
not limited to, all equipment or facilities, such as plumbing, heating,
ventilating, air-conditioning, electrical, lighting facilities, boilers,
pressure vessels, fire protection system, fixtures, walls (interior and
exterior), foundations, ceilings, roofs, floors, windows, doors, plate glass,
skylights, landscaping, driveways, parking lots, fences, retaining walls, signs,
sidewalks and parkways located in, on, or adjacent to the Premises. Lessee, in
keeping the Premises in good order, condition and repair, shall exercise and
perform good maintenance practices, specifically including the procurement and
maintenance of the service contracts required by Paragraph 7.1(b) below.
Lessee's obligations shall include restorations, replacements or renewals when
necessary to keep the Premises and all improvements thereon or a part thereof in
good order, condition and state of repair. Lessee shall, during the term of this
Lease, keep the exterior appearance of the Building in a first-class condition
consistent with the exterior appearance of other similar facilities of
comparable age and size in the vicinity, including, when necessary, the exterior
repainting of the Building.

               (b) SERVICE CONTRACTS. Lessee shall, at Lessee's sole expense,
procure and maintain contracts, with copies to Lessor, in customary form and
substance for, and with contractors specializing and experienced in the
maintenance of the following equipment and improvements, if any, if and when
installed on the Premises: (i) HVAC equipment, (ii) boiler, and pressure
vessels, (iii) fire extinguishing systems, including fire alarm and/or smoke
detection, (iv) landscaping and irrigation systems, (v) roof covering and
drains, (vi) driveways and parking lots, (vii) clarifiers (viii) basic utility
feed to the perimeter of the Building, and (ix) any other equipment, if
reasonably required by Lessor.

               (c) REPLACEMENT. Subject to Lessee's indemnification of Lessor as
set forth in Paragraph 8.7 below, and without relieving Lessee of liability
resulting from Lessee's failure to exercise and perform good maintenance
practices, if the Basic Elements described in Paragraph 7.1(b) cannot be
repaired other than at a cost which is in excess of 50% of the cost of replacing
such Basic Elements, then such Basic Elements shall be replaced by Lessor, and
the cost thereof shall be prorated between the Parties and Lessee shall only be
obligated to pay, each month during the remainder of the term of this Lease, on
the date on which Base Rent is due, an amount equal to the product of
multiplying the cost of such replacement by a fraction, the numerator of which
is one, and the denominator of which is the number of months of the useful life
of such replacement as such useful life is specified pursuant to Federal income
tax regulations or guidelines for depreciation thereof (including interest on
the unamortized balance as is then commercially reasonable in the judgment of
Lessor's accountants), with Lessee reserving the right to prepay its obligation
at any time.

        7.2     LESSOR'S OBLIGATIONS. Subject to the provisions of Paragraphs
2.2 (Condition), 2.3 (Compliance), 9 (Damage or Destruction) and 14
(Condemnation), it is intended by the Parties hereto that Lessor have no
obligation, in any manner whatsoever, to repair and maintain the Premises, or
the equipment therein, all of which obligations are intended to be that of the
Lessee. It is the intention of the Parties that the terms of this Lease govern
the respective obligations of the Parties as to maintenance and repair of the
Premises, and they expressly waive the benefit of any statute now or hereafter
in effect to the extent it is inconsistent with the terms of this Lease.

        7.3     UTILITY INSTALLATIONS; TRADE FIXTURES; ALTERATIONS.

               (a) DEFINITIONS; CONSENT REQUIRED. The term "UTILITY
INSTALLATIONS" refers to all floor and window coverings, air lines, power
panels, electrical distribution, security and fire protection systems,
communication systems, lighting fixtures, HVAC equipment, plumbing, and fencing
in or on the Premises. The term "TRADE FIXTURES" shall mean Lessee's machinery
and equipment that can be removed without doing material damage to the Premises.
The term "ALTERATIONS" shall mean any modification of the improvements, other
than Utility Installations or Trade Fixtures, whether by addition or deletion.
"LESSEE OWNED ALTERATIONS AND/OR UTILITY INSTALLATIONS" are defined as
Alterations and/or Utility Installations made by Lessee that are not yet owned
by Lessor pursuant to Paragraph 7.4(a). Lessee shall not make any Alterations or
Utility Installations to the Premises without Lessor's prior written consent.
Lessee may, however, make non-structural Utility Installations to the interior
of the Premises (excluding the roof) without such consent but upon notice to
Lessor, as long as they are not visible from the outside, do not involve
puncturing, relocating or removing the roof or any existing walls, and the
cumulative cost thereof during this Lease as extended does not exceed $50,000 in
the aggregate or $10,000 in any one year.

               (b) CONSENT. Any Alterations or Utility Installations that Lessee
shall desire to make and which require the consent of the Lessor shall be
presented to Lessor in written form with detailed plans. Consent shall be deemed
conditioned upon Lessee's: (i) acquiring all applicable governmental permits,
(ii) furnishing Lessor with copies of both the permits and the plans and
specifications prior to commencement of the work, and (iii) compliance with all
conditions of said permits and other Applicable Requirements in a prompt and
expeditious manner. Any Alterations or Utility Installations shall be performed
in a workmanlike manner with good and sufficient materials. Lessee shall
promptly upon completion furnish Lessor with as-built plans and specifications.
For work which costs an amount equal to the greater of one month's Base Rent, or
$10,000, Lessor may condition its consent upon Lessee providing a lien and
completion bond in an amount equal to one and one-half times the estimated cost
of such Alteration or Utility Installation and/or upon Lessee's posting an
additional Security Deposit with Lessor.

               (c) INDEMNIFICATION. Lessee shall pay, when due, all claims for
labor or materials furnished or alleged to have been furnished to or for Lessee
at or for use on the Premises, which claims are or may be secured by any
mechanic's or materialmen's lien against the Premises or any interest therein.
Lessee shall give Lessor not less than ten (10) days' notice prior to the
commencement of any work in, on or about the Premises, and Lessor shall have the
right to post notices of non-responsibility. If Lessee shall contest the
validity of any such lien, claim or demand, then Lessee shall, at its sole
expense defend and protect itself, Lessor and the Premises against the same and
shall pay and satisfy any such adverse judgment that may be rendered thereon
before the enforcement thereof. If Lessor shall require, Lessee shall furnish a
surety bond in an amount equal to one and one-half times the amount of such
contested lien, claim or demand, indemnifying Lessor against liability for the
same. If Lessor elects to participate in any such action, Lessee shall pay
Lessor's attorneys' fees and costs.

        7.4     OWNERSHIP; REMOVAL; SURRENDER; AND RESTORATION.

               (a) OWNERSHIP. Subject to Lessor's right to require removal or
elect ownership as hereinafter provided, all Alterations and Utility
Installations made by Lessee shall be the property of Lessee, but considered a
part of the Premises. Lessor may, at any time, elect in writing to be the owner
of all or any specified part of the Lessee Owned Alterations and Utility
Installations. Unless otherwise instructed per Paragraph 7.4(b) hereof, all
Lessee Owned Alterations and Utility Installations shall, at the expiration or
termination of this Lease, become the property of Lessor and be surrendered by
Lessee with the Premises.

               (b) REMOVAL. By delivery to Lessee of written notice from Lessor
not earlier than ninety (90) and not later than thirty (30) days prior to the
end of the term of this Lease, Lessor may require that any or all Lessee Owned
Alterations or Utility Installations be removed by the expiration or termination
of this Lease. Lessor may require the removal at any time of all or any part of
any Lessee Owned Alterations or Utility Installations made without the required
consent.

               (c) SURRENDER/RESTORATION. Lessee shall surrender the Premises by
the Expiration Date or any earlier termination date, with all of the
improvements, parts and surfaces thereof broom clean and free of debris, and in
good operating order, condition and state of repair, ordinary wear and tear
excepted. "Ordinary wear and tear" shall not include any damage or deterioration
that would have been prevented by good maintenance practice. Lessee shall repair
any damage occasioned by the installation, maintenance or removal of Trade
Fixtures, Lessee Owned Alterations and/or Utility Installations, furnishings,
and equipment as well as the removal of any storage tank installed by or for
Lessee, and the removal, replacement, or remediation of any soil, material or
groundwater contaminated by Lessee. Trade Fixtures shall remain the property of
Lessee and shall be removed by Lessee. The failure by Lessee to timely vacate
the Premises pursuant to this Paragraph 7.4(c) without the express written
consent of Lessor shall constitute a holdover under the provisions of Paragraph
26 below.



                                     PAGE 4


8.      INSURANCE; INDEMNITY.

        8.1     PAYMENT FOR INSURANCE. Lessee shall pay for all insurance
required under Paragraph 8 except to the extent of the cost attributable to
liability insurance carried by Lessor under Paragraph 8.2(b) in excess of
$2,000,000 per occurrence. Premiums for policy periods commencing prior to or
extending beyond the Lease term shall be prorated to correspond to the Lease
term. Payment shall be made by Lessee to Lessor within ten (10) days following
receipt of an invoice.

        8.2     LIABILITY INSURANCE.

                (a) CARRIED BY LESSEE. Lessee shall obtain and keep in force a
Commercial General Liability Policy of Insurance protecting Lessee and Lessor
against claims for bodily injury, personal injury and property damage based upon
or arising out of the ownership, use, occupancy or maintenance of the Premises
and all areas appurtenant thereto. Such insurance shall be on an occurrence
basis providing single limit coverage in an amount not less than $2,000,000 per
occurrence with an "ADDITIONAL INSURED - MANAGERS OR LESSORS OF PREMISES
ENDORSEMENT" and contain the "AMENDMENT OF THE POLLUTION EXCLUSION ENDORSEMENT"
for damage caused by heat, smoke or fumes from a hostile fire. The Policy shall
not contain any intra-insured exclusions as between insured persons or
organizations, but shall include coverage for liability assumed under this Lease
as an "insured contract" for the performance of Lessee's indemnity obligations
under this Lease. The limits of said insurance shall not, however, limit the
liability of Lessee nor relieve Lessee of any obligation hereunder. All
insurance carried by Lessee shall be primary to and not contributory with any
similar insurance carried by Lessor, whose insurance shall be considered excess
insurance only.

                (b) CARRIED BY LESSOR. Lessor shall maintain liability insurance
as described in Paragraph 8.2(a), in addition to, and not in lieu of, the
insurance required to be maintained by Lessee. Lessee shall not be named as an
additional insured therein.

        8.3     PROPERTY INSURANCE -- BUILDING, IMPROVEMENTS AND RENTAL VALUE.

                (a) BUILDING AND IMPROVEMENTS. The Insuring Party shall obtain
and keep in force a policy or policies in the name of Lessor, with loss payable
to Lessor, any groundlessor, and to any Lender(s) insuring loss or damage to the
Premises. The amount of such insurance shall be equal to the full replacement
cost of the Premises, as the same shall exist from time to time, or the amount
required by any Lenders, but in no event more than the commercially reasonable
and available insurable value thereof. If Lessor is the Insuring Party, however,
Lessee Owned Alterations and Utility Installations, Trade Fixtures, and Lessee's
personal property shall be insured by Lessee under Paragraph 8.4 rather than by
Lessor. If the coverage is available and commercially appropriate, such policy
or policies shall insure against all risks of direct physical loss or damage
(except the perils of flood and/or earthquake unless required by a Lender),
including coverage for debris removal and the enforcement of any Applicable
Requirements requiring the upgrading, demolition, reconstruction or replacement
of any portion of the Premises as the result of a covered loss. Said policy or
policies shall also contain an agreed valuation provision in lieu of any
coinsurance clause, waiver of subrogation, and inflation guard protection
causing an increase in the annual property insurance coverage amount by a factor
of not less than the adjusted U.S. Department of Labor Consumer Price Index for
All Urban Consumers for the city nearest to where the Premises are located. If
such insurance coverage has a deductible clause, the deductible amount shall not
exceed $1,000 per occurrence, and Lessee shall be liable for such deductible
amount in the event of an Insured Loss.

                (b) RENTAL VALUE. The Insuring Party shall obtain and keep in
force a policy or policies in the name of Lessor, with loss payable to Lessor
and any Lender, insuring the loss of the full Rent for one (1) year. Said
insurance shall provide that in the event the Lease is terminated by reason of
an insured loss, the period of indemnity for such coverage shall be extended
beyond the date of the completion of repairs or replacement of the Premises, to
provide for one full year's loss of Rent from the date of any such loss. Said
insurance shall contain an agreed valuation provision in lieu of any coinsurance
clause, and the amount of coverage shall be adjusted annually to reflect the
projected Rent otherwise payable by Lessee, for the next twelve (12) month
period. Lessee shall be liable for any deductible amount in the event of such
loss.

                (c) ADJACENT PREMISES. If the Premises are part of a larger
building, or of a group of buildings owned by Lessor which are adjacent to the
Premises, the Lessee shall pay for any increase in the premiums for the property
insurance of such building or buildings if said increase is caused by Lessee's
acts, omissions, use or occupancy of the Premises.

        8.4     LESSEE'S PROPERTY/BUSINESS INTERRUPTION INSURANCE.

                (a) PROPERTY DAMAGE. Lessee shall obtain and maintain insurance
coverage on all of Lessee's personal property, Trade Fixtures, and Lessee Owned
Alterations and Utility Installations. Such insurance shall be full replacement
cost coverage with a deductible of not to exceed $1,000 per occurrence. The
proceeds from any such insurance shall be used by Lessee for the replacement of
personal property, Trade Fixtures and Lessee Owned Alterations and Utility
Installations. Lessee shall provide Lessor with written evidence that such
insurance is in force.

                (b) BUSINESS INTERRUPTION. Lessee shall obtain and maintain loss
of income and extra expense insurance in amounts as will reimburse Lessee for
direct or indirect loss of earnings attributable to all perils commonly insured
against by prudent lessees in the business of Lessee or attributable to
prevention of access to the Premises as a result of such perils.

                (c) NO REPRESENTATION OF ADEQUATE COVERAGE. Lessor makes no
representation that the limits or forms of coverage of insurance specified
herein are adequate to cover Lessee's property, business operations or
obligations under this Lease.

        8.5     INSURANCE POLICIES. Insurance required herein shall be by
companies duly licensed or admitted to transact business in the state where the
Premises are located, and maintaining during the policy term a "General
Policyholders Rating" of at least B+, V, as set forth in the most current issue
of "Best's Insurance Guide", or such other rating as may be required by a
Lender. Lessee shall not do or permit to be done anything which invalidates the
required insurance policies. Lessee shall, prior to the Start Date, deliver to
Lessor certified copies of policies of such insurance or certificates evidencing
the existence and amounts of the required insurance. No such policy shall be
cancelable or subject to modification except after thirty (30) days prior
written notice to Lessor. Lessee shall, at least thirty (30) days prior to the
expiration of such policies, furnish Lessor with evidence of renewals or
"insurance binders" evidencing renewal thereof, or Lessor may order such
insurance and charge the cost thereof to Lessee, which amount shall be payable
by Lessee to Lessor upon demand. Such policies shall be for a term of at least
one year, or the length of the remaining term of this Lease, whichever is less.
If either Party shall fail to procure and maintain the insurance required to be
carried by it, the other Party may, but shall not be required to, procure and
maintain the same.

        8.6     WAIVER OF SUBROGATION. Without affecting any other rights or
remedies, Lessee and Lessor each hereby release and relieve the other, and waive
their entire right to recover damages against the other, for loss of or damage
to its property arising out of or incident to the perils required to be insured
against herein. The effect of such releases and waivers is not limited by the
amount of insurance carried or required, or by any deductibles applicable
hereto. The Parties agree to have their respective property damage insurance
carriers waive any right to subrogation that such companies may have against
Lessor or Lessee, as the case may be, so long as the insurance is not
invalidated thereby.

        8.7     INDEMNITY. Except for Lessor's gross negligence or willful
misconduct, Lessee shall indemnify, protect, defend and hold harmless the
Premises, Lessor and its agents, Lessor's master or ground lessor, partners and
Lenders, from and against any and all claims, loss of rents and/or damages,
liens, judgments, penalties, attorneys' and consultants' fees, expenses and/or
liabilities arising out of, involving, or in connection with, the use and/or
occupancy of the Premises by Lessee. If any action or proceeding is brought
against Lessor by reason of any of the foregoing matters, Lessee shall upon
notice defend the same at Lessee's expense by counsel reasonably satisfactory to
Lessor and Lessor shall cooperate with Lessee in such defense. Lessor need not
have first paid any such claim in order to be defended or indemnified.

        8.8     EXEMPTION OF LESSOR FROM LIABILITY. Lessor shall not be liable
for injury or damage to the person or goods, wares, merchandise or other
property of Lessee, Lessee's employees, contractors, invitees, customers, or any
other person in or about the Premises, whether such damage or injury is caused
by or results from fire, steam, electricity, gas, water or rain, or from the
breakage, leakage, obstruction or other defects of pipes, fire sprinklers,
wires, appliances, plumbing, HVAC or lighting fixtures, or from any other cause,
whether the said injury or damage results from conditions arising upon the
Premises or upon other portions of the Building of which the Premises are a
part, or from other sources or places. Lessor shall not be liable for any
damages arising from any act or neglect of any other tenant of Lessor.
Notwithstanding Lessor's negligence or breach of this Lease, Lessor shall under
no circumstances be liable for injury to Lessee's business or for any loss of
income or profit therefrom.

9.      DAMAGE OR DESTRUCTION.

        9.1     DEFINITIONS.

                (a) "PREMISES PARTIAL DAMAGE" shall mean damage or destruction
to the improvements on the Premises, other than Lessee Owned Alterations and
Utility Installations, which can reasonably be repaired in six (6) months or
less from the date of the damage or destruction.



                                     PAGE 5


Lessor shall notify Lessee in writing within thirty (30) days from the date of
the damage or destruction as to whether or not the damage is Partial or Total.

                (b) "PREMISES TOTAL DESTRUCTION" shall mean damage or
destruction to the Premises, other than Lessee Owned Alterations and Utility
Installations and Trade Fixtures, which cannot reasonably be repaired in six (6)
months or less from the date of the damage or destruction. Lessor shall notify
Lessee in writing within thirty (30) days from the date of the damage or
destruction as to whether or not the damage is Partial or Total.

                (c) "INSURED LOSS" shall mean damage or destruction to
improvements on the Premises, other than Lessee Owned Alterations and Utility
Installations and Trade Fixtures, which was caused by an event required to be
covered by the insurance described in Paragraph 8.3(a), irrespective of any
deductible amounts or coverage limits involved.

                (d) "REPLACEMENT COST" shall mean the cost to repair or rebuild
the improvements owned by Lessor at the time of the occurrence to their
condition existing immediately prior thereto, including demolition, debris
removal and upgrading required by the operation of Applicable Requirements, and
without deduction for depreciation.

                (e) "HAZARDOUS SUBSTANCE CONDITION" shall mean the occurrence or
discovery of a condition involving the presence of, or a contamination by, a
Hazardous Substance as defined in Paragraph 6.2(a), in, on, or under the
Premises.

        9.2     PARTIAL DAMAGE -- INSURED LOSS. If a Premises Partial Damage
that is an Insured Loss occurs, then Lessor shall, at Lessor's expense, repair
such damage (but not Lessee's Trade Fixtures or Lessee Owned Alterations and
Utility Installations) as soon as reasonably possible and this Lease shall
continue in full force and effect; provided, however, that Lessee shall, at
Lessor's election, make the repair of any damage or destruction the total cost
to repair of which is $10,000 or less, and, in such event, Lessor shall make any
applicable insurance proceeds available to Lessee on a reasonable basis for that
purpose. Notwithstanding the foregoing, if the required insurance was not in
force or the insurance proceeds are not sufficient to effect such repair, the
Insuring Party shall promptly contribute the shortage in proceeds (except as to
the deductible which is Lessee's responsibility) as and when required to
complete said repairs. In the event, however, such shortage was due to the fact
that, by reason of the unique nature of the improvements, full replacement cost
insurance coverage was not commercially reasonable and available, Lessor shall
have no obligation to pay for the shortage in insurance proceeds or to fully
restore the unique aspects of the Premises unless Lessee provides Lessor with
the funds to cover same, or adequate assurance thereof, within ten (10) days
following receipt of written notice of such shortage and request therefor. If
Lessor receives said funds or adequate assurance thereof within said ten (10)
day period, the party responsible for making the repairs shall complete them as
soon as reasonably possible and this Lease shall remain in full force and
effect. If such funds or assurance are not received, Lessor may nevertheless
elect by written notice to Lessee within ten (10) days thereafter to: (i) make
such restoration and repair as is commercially reasonable with Lessor paying any
shortage in proceeds, in which case this Lease shall remain in full force and
effect, or have this Lease terminate thirty (30) days thereafter. Lessee shall
not be entitled to reimbursement of any funds contributed by Lessee to repair
any such damage or destruction. Premises Partial Damage due to flood or
earthquake shall be subject to Paragraph 9.3, notwithstanding that there may be
some insurance coverage, but the net proceeds of any such insurance shall be
made available for the repairs if made by either Party.

        9.3     PARTIAL DAMAGE -- UNINSURED LOSS. If a Premises Partial Damage
that is not an Insured Loss occurs, unless caused by a negligent or willful act
of Lessee (in which event Lessee shall make the repairs at Lessee's expense),
Lessor may either: (i) repair such damage as soon as reasonably possible at
Lessor's expense, in which event this Lease shall continue in full force and
effect, or (ii) terminate this Lease by giving written notice to Lessee within
thirty (30) days after receipt by Lessor of knowledge of the occurrence of such
damage. Such termination shall be effective sixty (60) days following the date
of such notice. In the event Lessor elects to terminate this Lease, Lessee shall
have the right within ten (10) days after receipt of the termination notice to
give written notice to Lessor of Lessee's commitment to pay for the repair of
such damage without reimbursement from Lessor. Lessee shall provide Lessor with
said funds or satisfactory assurance thereof within thirty (30) days after
making such commitment. In such event this Lease shall continue in full force
and effect, and Lessor shall proceed to make such repairs as soon as reasonably
possible after the required funds are available. If Lessee does not make the
required commitment, this Lease shall terminate as of the date specified in the
termination notice.

        9.4     TOTAL DESTRUCTION. Notwithstanding any other provision hereof,
if a Premises Total Destruction occurs, this Lease shall terminate sixty (60)
days following such Destruction. If the damage or destruction was caused by the
gross negligence or willful misconduct of Lessee, Lessor shall have the right to
recover Lessor's damages from Lessee, except as provided in Paragraph 8.6.

        9.5     DAMAGE NEAR END OF TERM. If at any time during the last six (6)
months of this Lease there is damage for which the cost to repair exceeds one
(1) month's Base Rent, whether or not an Insured Loss, Lessor may terminate this
Lease effective sixty (60) days following the date of occurrence of such damage
by giving a written termination notice to Lessee within thirty (30) days after
the date of occurrence of such damage. Notwithstanding the foregoing, if Lessee
at that time has an exercisable option to extend this Lease or to purchase the
Premises, then Lessee may preserve this Lease by, (a) exercising such option and
(b) providing Lessor with any shortage in insurance proceeds (or adequate
assurance thereof) needed to make the repairs on or before the earlier of (i)
the date which is ten days after Lessee's receipt of Lessor's written notice
purporting to terminate this Lease, or (ii) the day prior to the date upon which
such option expires. If Lessee duly exercises such option during such period and
provides Lessor with funds (or adequate assurance thereof) to cover any shortage
in insurance proceeds, Lessor shall, at Lessor's commercially reasonable
expense, repair such damage as soon as reasonably possible and this Lease shall
continue in full force and effect. If Lessee fails to exercise such option and
provide such funds or assurance during such period, then this Lease shall
terminate on the date specified in the termination notice and Lessee's option
shall be extinguished.

        9.6     ABATEMENT OF RENT; LESSEE'S REMEDIES.

                (a) ABATEMENT. In the event of Premises Partial Damage or
Premises Total Destruction or a Hazardous Substance Condition for which Lessee
is not responsible under this Lease, the Rent payable by Lessee for the period
required for the repair, remediation or restoration of such damage shall be
abated in proportion to the degree to which Lessee's use of the Premises is
impaired, but not to exceed the proceeds received from the Rental Value
insurance. All other obligations of Lessee hereunder shall be performed by
Lessee, and Lessor shall have no liability for any such damage, destruction,
remediation, repair or restoration except as provided herein.

                (b) REMEDIES. If Lessor shall be obligated to repair or restore
the Premises and does not commence, in a substantial and meaningful way, such
repair or restoration within ninety (90) days after such obligation shall
accrue, Lessee may, at any time prior to the commencement of such repair or
restoration, give written notice to Lessor and to any Lenders of which Lessee
has actual notice, of Lessee's election to terminate this Lease on a date not
less than sixty (60) days following the giving of such notice. If Lessee gives
such notice and such repair or restoration is not commenced within thirty (30)
days thereafter, this Lease shall terminate as of the date specified in said
notice. If the repair or restoration is commenced within said thirty (30) days,
this Lease shall continue in full force and effect. "COMMENCE" shall mean either
the unconditional authorization of the preparation of the required plans, or the
beginning of the actual work on the Premises, whichever first occurs.

        9.7     TERMINATION -- ADVANCE PAYMENTS. Upon termination of this Lease
pursuant to Paragraph 6.2(g) or Paragraph 9, an equitable adjustment shall be
made concerning advance Base Rent and any other advance payments made by Lessee
to Lessor. Lessor shall, in addition, return to Lessee so much of Lessee's
Security Deposit as has not been, or is not then required to be, used by Lessor.

        9.8     WAIVE STATUTES. Lessor and Lessee agree that the terms of this
Lease shall govern the effect of any damage to or destruction of the Premises
with respect to the termination of this Lease and hereby waive the provisions of
any present or future statute to the extent inconsistent herewith.

10.     REAL PROPERTY TAXES.

        10.1    DEFINITION OF "REAL PROPERTY TAXES." As used herein, the term
"REAL PROPERTY TAXES" shall include any form of assessment; real estate,
general, special, ordinary or extraordinary, or rental levy or tax (other than
inheritance, personal income or estate taxes); improvement bond; and/or license
fee imposed upon or levied against any legal or equitable interest of Lessor in
the Premises, Lessor's right to other income therefrom, and/or Lessor's business
of leasing, by any authority having the direct or indirect power to tax and
where the



                                     PAGE 6



funds are generated with reference to the Building address and where the
proceeds so generated are to be applied by the city, county or other local
taxing authority of a jurisdiction within which the Premises are located. The
term "REAL PROPERTY TAXES" shall also include any tax, fee, levy, assessment or
charge, or any increase therein, imposed by reason of events occurring during
the term of this Lease, including but not limited to, a change in the ownership
of the Premises.

        10.2    (a) PAYMENT OF TAXES. Lessee shall pay the Real Property Taxes
applicable to the Premises during the term of this Lease. Subject to Paragraph
10.2(b), all such payments shall be made at least ten (10) days prior to any
delinquency date. Lessee shall promptly furnish Lessor with satisfactory
evidence that such taxes have been paid. If any such taxes shall cover any
period of time prior to or after the expiration or termination of this Lease,
Lessee's share of such taxes shall be prorated to cover only that portion of the
tax bill applicable to the period that this Lease is in effect, and Lessor shall
reimburse Lessee for any overpayment. If Lessee shall fail to pay any required
Real Property Taxes, Lessor shall have the right to pay the same, and Lessee
shall reimburse Lessor therefor upon demand.

                (b) ADVANCE PAYMENT. In the event Lessee incurs a late charge on
any Rent payment, Lessor may, at Lessor's option, estimate the current Real
Property Taxes, and require that such taxes be paid in advance to Lessor by
Lessee, either: (i) in a lump sum amount equal to the installment due, at least
twenty (20) days prior to the applicable delinquency date, or (ii) monthly in
advance with the payment of the Base Rent. If Lessor elects to require payment
monthly in advance, the monthly payment shall be an amount equal to the amount
of the estimated installment of taxes divided by the number of months remaining
before the month in which said installment becomes delinquent. When the actual
amount of the applicable tax bill is known, the amount of such equal monthly
advance payments shall be adjusted as required to provide the funds needed to
pay the applicable taxes. If the amount collected by Lessor is insufficient to
pay such Real Property Taxes when due, Lessee shall pay Lessor, upon demand,
such additional sums as are necessary to pay such obligations. All monies paid
to Lessor under this Paragraph may be intermingled with other monies of Lessor
and shall not bear interest. In the event of a Breach by Lessee in the
performance of its obligations under this Lease, then any balance of funds paid
to Lessor under the provisions of this Paragraph may, at the option of Lessor,
be treated as an additional Security Deposit.

        10.3    JOINT ASSESSMENT. If the Premises are not separately assessed,
Lessee's liability shall be an equitable proportion of the Real Property Taxes
for all of the land and improvements included within the tax parcel assessed,
such proportion to be conclusively determined by Lessor from the respective
valuations assigned in the assessor's work sheets or such other information as
may be reasonably available.

        10.4    PERSONAL PROPERTY TAXES. Lessee shall pay, prior to delinquency,
all taxes assessed against and levied upon Lessee Owned Alterations, Utility
Installations, Trade Fixtures, furnishings, equipment and all personal property
of Lessee. When possible, Lessee shall cause such property to be assessed and
billed separately from the real property of Lessor. If any of Lessee's said
personal property shall be assessed with Lessor's real property, Lessee shall
pay Lessor the taxes attributable to Lessee's property within ten (10) days
after receipt of a written statement.

11.     UTILITIES. Lessee shall pay for all water, gas, heat, light, power,
telephone, trash disposal and other utilities and services supplied to the
Premises, together with any taxes thereon. If any such services are not
separately metered to Lessee, Lessee shall pay a reasonable proportion, to be
determined by Lessor, of all charges jointly metered.

12.     ASSIGNMENT AND SUBLETTING.

        12.1    LESSOR'S CONSENT REQUIRED.

                (a) Lessee shall not voluntarily or by operation of law assign,
transfer, mortgage or encumber (collectively, "ASSIGN OR ASSIGNMENT") or sublet
all or any part of Lessee's interest in this Lease or in the Premises without
Lessor's prior written consent.

                (b) A change in the control of Lessee shall constitute an
assignment requiring consent. See Paragraph 63

                (c) See Paragraph 64

                (d) An assignment or subletting without consent shall, at
Lessor's option, be a Default curable after notice per Paragraph 13.1(c), or a
noncurable Breach without the necessity of any notice and grace period. If
Lessor elects to treat such unapproved assignment or subletting as a noncurable
Breach, Lessor may either: (i) terminate this Lease, or (ii) upon thirty (30)
days written notice, increase the monthly Base Rent to one hundred ten percent
(110%) of the Base Rent then in effect. Further, in the event of such Breach and
rental adjustment, (i) the purchase price of any option to purchase the Premises
held by Lessee shall be subject to similar adjustment to one hundred ten percent
(110%) of the price previously in effect, and (ii) all fixed and non-fixed
rental adjustments scheduled during the remainder of the Lease term shall be
increased to One Hundred Ten Percent (110%) of the scheduled adjusted rent.

                (e) Lessee's remedy for any breach of Paragraph 12.1 by Lessor
shall be limited to compensatory damages and/or injunctive relief.

        12.2    TERMS AND CONDITIONS APPLICABLE TO ASSIGNMENT AND SUBLETTING.

                (a) Regardless of Lessor's consent, any assignment or subletting
shall not: (i) be effective without the express written assumption by such
assignee or sublessee of the obligations of Lessee under this Lease; (ii)
release Lessee of any obligations hereunder; or (iii) alter the primary
liability of Lessee for the payment of Rent or for the performance of any other
obligations to be performed by Lessee.

                (b) Lessor may accept Rent or performance of Lessee's
obligations from any person other than Lessee pending approval or disapproval of
an assignment. Neither a delay in the approval or disapproval of such assignment
nor the acceptance of Rent or performance shall constitute a waiver or estoppel
of Lessor's right to exercise its remedies for Lessee's Default or Breach.

                (c) Lessor's consent to any assignment or subletting shall not
constitute a consent to any subsequent assignment or subletting.

                (d) In the event of any Default or Breach by Lessee, Lessor may
proceed directly against Lessee, any Guarantors or anyone else responsible for
the performance of Lessee's obligations under this Lease, including any assignee
or sublessee, without first exhausting Lessor's remedies against any other
person or entity responsible therefore to Lessor, or any security held by
Lessor.

                (e) Each request for consent to an assignment or subletting
shall be in writing, accompanied by information relevant to Lessor's
determination as to the financial and operational responsibility and
appropriateness of the proposed assignee or sublessee, including but not limited
to the intended use and/or required modification of the Premises, if any. Lessee
agrees to provide Lessor with such other or additional information and/or
documentation as may be reasonably requested. Lessee shall reimburse Lessor for
any actual costs affiliated with the request for consent, including but not
limited to legal fees incurred by Lessor.

                (f) Any assignee of, or sublessee under, this Lease shall, by
reason of accepting such assignment or entering into such sublease, be deemed to
have assumed and agreed to conform and comply with each and every term,
covenant, condition and obligation herein to be observed or performed by Lessee
during the term of said assignment or sublease, other than such obligations as
are contrary to or inconsistent with provisions of an assignment or sublease to
which Lessor has specifically consented to in writing.

        12.3    ADDITIONAL TERMS AND CONDITIONS APPLICABLE TO SUBLETTING. The
following terms and conditions shall apply to any subletting by Lessee of all or
any part of the Premises and shall be deemed included in all subleases under
this Lease whether or not expressly incorporated therein:

                (a) Lessee hereby assigns and transfers to Lessor all of
Lessee's interest in all Rent payable on any sublease, and Lessor may collect
such Rent and apply same toward Lessee's obligations under this Lease; provided,
however, that until a Breach shall occur in the performance of Lessee's
obligations, Lessee may collect said Rent. Lessor shall not, by reason of the
foregoing or any assignment of such sublease, nor by reason of the collection of
Rent, be deemed liable to the sublessee for any failure of Lessee to perform and
comply with any of Lessee's obligations to such sublessee. Lessee hereby
irrevocably authorizes and directs any such sublessee, upon receipt of a written




                                     PAGE 7


notice from Lessor stating that a Breach exists in the performance of Lessee's
obligations under this Lease, to pay to Lessor all Rent due and to become due
under the sublease. Sublessee shall rely upon any such notice from Lessor and
shall pay all Rents to Lessor without any obligation or right to inquire as to
whether such Breach exists, notwithstanding any claim from Lessee to the
contrary.

                (b) In the event of a Breach by Lessee, Lessor may, at its
option, require sublessee to attorn to Lessor, in which event Lessor shall
undertake the obligations of the sublessor under such sublease from the time of
the exercise of said option to the expiration of such sublease; provided,
however, Lessor shall not be liable for any prepaid rents or security deposit
paid by such sublessee to such sublessor or for any prior Defaults or Breaches
of such sublessor.

                (c) Any matter requiring the consent of the sublessor under a
sublease shall also require the consent of Lessor.

                (d) No sublessee shall further assign or sublet all or any part
of the Premises without Lessor's prior written consent.

                (e) Lessor shall deliver a copy of any notice of Default or
Breach by Lessee to the sublessee, who shall have the right to cure the Default
of Lessee within the grace period, if any, specified in such notice. The
sublessee shall have a right of reimbursement and offset from and against Lessee
for any such Defaults cured by the sublessee.

13.     DEFAULT; BREACH; REMEDIES.

        13.1    DEFAULT; BREACH. A "DEFAULT" is defined as a failure by the
Lessee to comply with or perform any of the terms, covenants, conditions or
rules under this Lease. A "BREACH" is defined as the occurrence of one or more
of the following Defaults, and the failure of Lessee to cure such Default within
any applicable grace period:

                (a) The abandonment of the Premises; or the vacating of the
Premises without providing a commercially reasonable level of security, or where
the coverage of the property insurance described in Paragraph 8.3 is jeopardized
as a result thereof, or without providing reasonable assurances to minimize
potential vandalism.

                (b) The failure of Lessee to make any payment of Rent or any
Security Deposit required to be made by Lessee hereunder, whether to Lessor or
to a third party, when due, to provide reasonable evidence of insurance or
surety bond, or to fulfill any obligation under this Lease which endangers or
threatens life or property, where such failure continues for a period of three
(3) business days following written notice to Lessee.

                (c) The failure by Lessee to provide (i) reasonable written
evidence of compliance with Applicable Requirements, (ii) the service contracts,
(iii) the rescission of an unauthorized assignment or subletting, (iv) a Tenancy
Statement, (v) a requested subordination, (vi) evidence concerning any guaranty
and/or Guarantor, (vii) any document requested under Paragraph 42 (easements),
or (viii) any other documentation or information which Lessor may reasonably
require of Lessee under the terms of this Lease, where any such failure
continues for a period of ten (10) days following written notice to Lessee.

                (d) A Default by Lessee as to the terms, covenants, conditions
or provisions of this Lease, or of the rules adopted under Paragraph 40 hereof,
other than those described in subparagraphs 13.1(a), (b) or (c), above, where
such Default continues for a period of thirty (30) days after written notice;
provided, however, that if the nature of Lessee's Default is such that more than
thirty (30) days are reasonably required for its cure, then it shall not be
deemed to be a Breach if Lessee commences such cure within said thirty (30) day
period and thereafter diligently prosecutes such cure to completion.

                (e) The occurrence of any of the following events: (i) the
making of any general arrangement or assignment for the benefit of creditors;
(ii) becoming a "DEBTOR" as defined in 11 U.S.C. Section 101 or any successor
statute thereto (unless, in the case of a petition filed against Lessee, the
same is dismissed within sixty (60) days); (iii) the appointment of a trustee or
receiver to take possession of substantially all of Lessee's assets located at
the Premises or of Lessee's interest in this Lease, where possession is not
restored to Lessee within thirty (30) days; or (iv) the attachment, execution or
other judicial seizure of substantially all of Lessee's assets located at the
Premises or of Lessee's interest in this Lease, where such seizure is not
discharged within thirty (30) days; provided, however, in the event that any
provision of this subparagraph (e) is contrary to any applicable law, such
provision shall be of no force or effect, and not affect the validity of the
remaining provisions.

                (f) The discovery that any financial statement of Lessee or of
any Guarantor given to Lessor was materially false.

                (g) If the performance of Lessee's obligations under this Lease
is guaranteed: (i) the death of a Guarantor, (ii) the termination of a
Guarantor's liability with respect to this Lease other than in accordance with
the terms of such guaranty, (iii) a Guarantor's becoming insolvent or the
subject of a bankruptcy filing, (iv) a Guarantor's refusal to honor the
guaranty, or (v) a Guarantor's breach of its guaranty obligation on an
anticipatory basis, and Lessee's failure, within sixty (60) days following
written notice of any such event, to provide written alternative assurance or
security, which, when coupled with the then existing resources of Lessee, equals
or exceeds the combined financial resources of Lessee and the Guarantors that
existed at the time of execution of this Lease.

        13.2    REMEDIES. If Lessee fails to perform any of its affirmative
duties or obligations, within ten (10) days after written notice (or in case of
an emergency, without notice), Lessor may, at its option, perform such duty or
obligation on Lessee's behalf, including but not limited to the obtaining of
reasonably required bonds, insurance policies, or governmental licenses, permits
or approvals. The costs and expenses of any such performance by Lessor shall be
due and payable by Lessee upon receipt of invoice therefor. If any check given
to Lessor by Lessee shall not be honored by the bank upon which it is drawn,
Lessor, at its option, may require all future payments to be made by Lessee to
be by cashier's check. In the event of a Breach, Lessor may, with or without
further notice or demand, and without limiting Lessor in the exercise of any
right or remedy which Lessor may have by reason of such Breach:

                (a) Terminate Lessee's right to possession of the Premises by
any lawful means, in which case this Lease shall terminate and Lessee shall
immediately surrender possession to Lessor. In such event Lessor shall be
entitled to recover from Lessee: (i) the unpaid Rent which had been earned at
the time of termination; (ii) the worth at the time of award of the amount by
which the unpaid rent which would have been earned after termination until the
time of award exceeds the amount of such rental loss that the Lessee proves
could have been reasonably avoided; (iii) the worth at the time of award of the
amount by which the unpaid rent for the balance of the term after the time of
award exceeds the amount of such rental loss that the Lessee proves could be
reasonably avoided; and (iv) any other amount necessary to compensate Lessor for
all the detriment proximately caused by the Lessee's failure to perform its
obligations under this Lease or which in the ordinary course of things would be
likely to result therefrom, including but not limited to the cost of recovering
possession of the Premises, expenses of reletting, including necessary
renovation and alteration of the Premises, reasonable attorneys' fees, and that
portion of any leasing commission paid by Lessor in connection with this Lease
applicable to the unexpired term of this Lease. The worth at the time of award
of the amount referred to in provision (iii) of the immediately preceding
sentence shall be computed by discounting such amount at the discount rate of
the Federal Reserve Bank of the District within which the Premises are located
at the time of award plus one percent (1%). Efforts by Lessor to mitigate
damages caused by Lessee's Breach of this Lease shall not waive Lessor's right
to recover damages under Paragraph 12. If termination of this Lease is obtained
through the provisional remedy of unlawful detainer, Lessor shall have the right
to recover in such proceeding any unpaid Rent and damages as are recoverable
therein, or Lessor may reserve the right to recover all or any part thereof in a
separate suit. If a notice and grace period required under Paragraph 13.1 was
not previously given, a notice to pay rent or quit, or to perform or quit given
to Lessee under the unlawful detainer statute shall also constitute the notice
required by Paragraph 13.1. In such case, the applicable grace period required
by Paragraph 13.1 and the unlawful detainer statute shall run concurrently, and
the failure of Lessee to cure the Default within the greater of the two such
grace periods shall constitute both an unlawful detainer and a Breach of this
Lease entitling Lessor to the remedies provided for in this Lease and/or by said
statute.

                (b) Continue the Lease and Lessee's right to possession and
recover the Rent as it becomes due, in which event Lessee may sublet or assign,
subject only to reasonable limitations. Acts of maintenance, efforts to relet,
and/or the appointment of a receiver to protect the Lessor's interests, shall
not constitute a termination of the Lessee's right to possession.

                (c) Pursue any other remedy now or hereafter available under the
laws or judicial decisions of the state wherein the Premises are located. The
expiration or termination of this Lease and/or the termination of Lessee's right
to possession shall not relieve Lessee from liability under any indemnity
provisions of this Lease as to matters occurring or accruing during the term
hereof or by reason of


                                     PAGE 8


Lessee's occupancy of the Premises.

        13.3    INDUCEMENT RECAPTURE. Any agreement for free or abated rent or
other charges, or for the giving or paying by Lessor to or for Lessee of any
cash or other bonus, inducement or consideration for Lessee's entering into this
Lease, all of which concessions are hereinafter referred to as "INDUCEMENT
PROVISIONS," shall be deemed conditioned upon Lessee's full and faithful
performance of all of the terms, covenants and conditions of this Lease. Upon
Breach of this Lease by Lessee, any such Inducement Provision shall
automatically be deemed deleted from this Lease and of no further force or
effect, and any rent, other charge, bonus, inducement or consideration
theretofore abated, given or paid by Lessor under such an Inducement Provision
shall be immediately due and payable by Lessee to Lessor, notwithstanding any
subsequent cure of said Breach by Lessee. The acceptance by Lessor of rent or
the cure of the Breach which initiated the operation of this paragraph shall not
be deemed a waiver by Lessor of the provisions of this paragraph unless
specifically so stated in writing by Lessor at the time of such acceptance.

        13.4    LATE CHARGES. Lessee hereby acknowledges that late payment by
Lessee of Rent will cause Lessor to incur costs not contemplated by this Lease,
the exact amount of which will be extremely difficult to ascertain. Such costs
include, but are not limited to, processing and accounting charges, and late
charges which may be imposed upon Lessor by any Lender. Accordingly, if any Rent
shall not be received by Lessor within five (5) days after such amount shall be
due, then, without any requirement for notice to Lessee, Lessee shall pay to
Lessor a one-time late charge equal to ten percent (10%) of each such overdue
amount. The parties hereby agree that such late charge represents a fair and
reasonable estimate of the costs Lessor will incur by reason of such late
payment. Acceptance of such late charge by Lessor shall in no event constitute a
waiver of Lessee's Default or Breach with respect to such overdue amount, nor
prevent the exercise of any of the other rights and remedies granted hereunder.
In the event that a late charge is payable hereunder, whether or not collected,
for three (3) consecutive installments of Base Rent, then notwithstanding any
provision of this Lease to the contrary, Base Rent shall, at Lessor's option,
become due and payable quarterly in advance.

        13.5    INTEREST. Any monetary payment due Lessor hereunder, other than
late charges, not received by Lessor, when due as to scheduled payments (such as
Base Rent) or within thirty (30) days following the date on which it was due for
non-scheduled payment, shall bear interest from the date when due, as to
scheduled payments, or the thirty-first (31st) day after it was due as to
non-scheduled payments. The interest ("INTEREST") charged shall be equal to the
prime rate reported in the Wall Street Journal as published closest prior to the
date when due plus four percent (4%), but shall not exceed the maximum rate
allowed by law. Interest is payable in addition to the potential late charge
provided for in Paragraph 13.4.

        13.6    BREACH BY LESSOR.

                (a) NOTICE OF BREACH. Lessor shall not be deemed in breach of
this Lease unless Lessor fails within a reasonable time to perform an obligation
required to be performed by Lessor. For purposes of this Paragraph, a reasonable
time shall in no event be less than thirty (30) days after receipt by Lessor,
and any Lender whose name and address shall have been furnished Lessee in
writing for such purpose, of written notice specifying wherein such obligation
of Lessor has not been performed; provided, however, that if the nature of
Lessor's obligation is such that more than thirty (30) days are reasonably
required for its performance, then Lessor shall not be in breach if performance
is commenced within such thirty (30) day period and thereafter diligently
pursued to completion.

                (b) PERFORMANCE BY LESSEE ON BEHALF OF LESSOR. In the event that
neither Lessor nor Lender cures said breach within thirty (30) days after
receipt of said notice, or if having commenced said cure they do not diligently
pursue it to completion, then Lessee may elect to cure said breach at Lessee's
expense and offset from Rent an amount equal to the greater of one month's Base
Rent or the Security Deposit, and to pay an excess of such expense under
protest, reserving Lessee's right to reimbursement from Lessor. Lessee shall
document the cost of said cure and supply said documentation to Lessor.

14.     CONDEMNATION. If the Premises or any portion thereof are taken under the
power of eminent domain or sold under the threat of the exercise of said power
(collectively "CONDEMNATION"), this Lease shall terminate as to the part taken
as of the date the condemning authority takes title or possession, whichever
first occurs. If more than ten percent (10%) of any building portion of the
Premises, or more than twenty-five percent (25%) of the land area portion of the
Premises not occupied by any building, is taken by Condemnation, Lessee may, at
Lessee's option, to be exercised in writing within ten (10) days after Lessor
shall have given Lessee written notice of such taking (or in the absence of such
notice, within ten (10) days after the condemning authority shall have taken
possession) terminate this Lease as of the date the condemning authority takes
such possession. If Lessee does not terminate this Lease in accordance with the
foregoing, this Lease shall remain in full force and effect as to the portion of
the Premises remaining, except that the Base Rent shall be reduced in proportion
to the reduction in utility of the Premises caused by such Condemnation.
Condemnation awards and/or payments shall be the property of Lessor, whether
such award shall be made as compensation for diminution in value of the
leasehold, the value of the part taken, or for severance damages; provided,
however, that Lessee shall be entitled to any compensation for Lessee's
relocation expenses, loss of business goodwill and/or Trade Fixtures, without
regard to whether or not this Lease is terminated pursuant to the provisions of
this Paragraph. All Alterations and Utility Installations made to the Premises
by Lessee, for purposes of Condemnation only, shall be considered the property
of the Lessee and Lessee shall be entitled to any and all compensation which is
payable therefor. In the event that this Lease is not terminated by reason of
the Condemnation, Lessor shall repair any damage to the Premises caused by such
Condemnation.

15.     BROKERS' FEE.

16.     ESTOPPEL CERTIFICATES.

                (a) Each Party (as "RESPONDING PARTY") shall within ten (10)
days after written notice from the other Party (the "REQUESTING PARTY") execute,
acknowledge and deliver to the Requesting Party a statement in writing in form
similar to the then most current "ESTOPPEL CERTIFICATE" form published by the
American Industrial Real Estate Association, plus such additional information,
confirmation and/or statements as may be reasonably requested by the Requesting
Party.

                (b) If the Responding Party shall fail to execute or deliver the
Estoppel Certificate within such ten day period, the Requesting Party may
execute an Estoppel Certificate stating that: (i) the Lease is in full force and
effect without modification except as may be represented by the Requesting
Party, (ii) there are no uncured defaults in the Requesting Party's performance,
and (iii) if Lessor is the Requesting Party, not more than one month's Rent has
been paid in advance. Prospective purchasers and encumbrancers may rely upon the
Requesting Party's Estoppel Certificate, and the Responding Party shall be
estopped from denying the truth of the facts contained in said Certificate.



                                     PAGE 9


                (c) If Lessor desires to finance, refinance, or sell the
Premises, or any part thereof, Lessee and all Guarantors shall deliver to any
potential lender or purchaser designated by Lessor such financial statements as
may be reasonably required by such lender or purchaser, including but not
limited to Lessee's financial statements for the past three (3) years. All such
financial statements shall be received by Lessor and such lender or purchaser in
confidence and shall be used only for the purposes herein set forth.

17.     DEFINITION OF LESSOR. The term "LESSOR" as used herein shall mean the
owner or owners at the time in question of the fee title to the Premises, or, if
this is a sublease, of the Lessee's interest in the prior lease. In the event of
a transfer of Lessor's title or interest in the Premises or this Lease, Lessor
shall deliver to the transferee or assignee (in cash or by credit) any unused
Security Deposit held by Lessor. Except as provided in Paragraph 15, upon such
transfer or assignment and delivery of the Security Deposit, as aforesaid, the
prior Lessor shall be relieved of all liability with respect to the obligations
and/or covenants under this Lease thereafter to be performed by the Lessor.
Subject to the foregoing, the obligations and/or covenants in this Lease to be
performed by the Lessor shall be binding only upon the Lessor as hereinabove
defined. Notwithstanding the above, and subject to the provisions of Paragraph
20 below, the original Lessor under this Lease, and all subsequent holders of
the Lessor's interest in this Lease shall remain liable and responsible with
regard to the potential duties and liabilities of Lessor pertaining to Hazardous
Substances as outlined in Paragraph 6 above.

18.     SEVERABILITY. The invalidity of any provision of this Lease, as
determined by a court of competent jurisdiction, shall in no way affect the
validity of any other provision hereof.

19.     DAYS. Unless otherwise specifically indicated to the contrary, the word
"days" as used in this Lease shall mean and refer to calendar days.

20.     LIMITATION ON LIABILITY. Subject to the provisions of Paragraph 17
above, the obligations of Lessor under this Lease shall not constitute personal
obligations of Lessor, the individual partners of Lessor or its or their
individual partners, directors, officers or shareholders, and Lessee shall look
to the Premises, and to no other assets of Lessor, for the satisfaction of any
liability of Lessor with respect to this Lease, and shall not seek recourse
against the individual partners of Lessor, or its or their individual partners,
directors, officers or shareholders, or any of their personal assets for such
satisfaction.

21.     TIME OF ESSENCE. Time is of the essence with respect to the performance
of all obligations to be performed or observed by the Parties under this Lease.

22.     NO PRIOR OR OTHER AGREEMENTS; BROKER DISCLAIMER. This Lease contains all
agreements between the Parties with respect to any matter mentioned herein, and
no other prior or contemporaneous agreement or understanding shall be effective.
Lessor and Lessee each represents and warrants to the Brokers that it has made,
and is relying solely upon, its own investigation as to the nature, quality,
character and financial responsibility of the other Party to this Lease and as
to the nature, quality and character of the Premises. Brokers have no
responsibility with respect thereto or with respect to any default or breach
hereof by either Party. The liability (including court costs and Attorneys'
fees), of any Broker with respect to negotiation, execution, delivery or
performance by either Lessor or Lessee under this Lease or any amendment or
modification hereto shall be limited to an amount up to the fee received by such
Broker pursuant to this Lease; provided, however, that the foregoing limitation
on each Broker's liability shall not be applicable to any gross negligence or
willful misconduct of such Broker.

23.     NOTICES.

                23.1    NOTICE REQUIREMENTS. All notices required or permitted
by this Lease shall be in writing and may be delivered in person (by hand or by
courier) or may be sent by regular, certified or registered mail or U.S. Postal
Service Express Mail, with postage prepaid, or by facsimile transmission, and
shall be deemed sufficiently given if served in a manner specified in this
Paragraph 23. The addresses noted adjacent to a Party's signature on this Lease
shall be that Party's address for delivery or mailing of notices. Either Party
may by written notice to the other specify a different address for notice,
except that upon Lessee's taking possession of the Premises, the Premises shall
constitute Lessee's address for notice. A copy of all notices to Lessor shall be
concurrently transmitted to such party or parties at such addresses as Lessor
may from time to time hereafter designate in writing.

                23.2    DATE OF NOTICE. Any notice sent by registered or
certified mail, return receipt requested, shall be deemed given on the date of
delivery shown on the receipt card, or if no delivery date is shown, the
postmark thereon. If sent by regular mail the notice shall be deemed given
forty-eight (48) hours after the same is addressed as required herein and mailed
with postage prepaid. Notices delivered by United States Express Mail or
overnight courier that guarantee next day delivery shall be deemed given
twenty-four (24) hours after delivery of the same to the Postal Service or
courier. Notices transmitted by facsimile transmission or similar means shall be
deemed delivered upon telephone confirmation of receipt, provided a copy is also
delivered via delivery or mail. If notice is received on a Saturday, Sunday or
legal holiday, it shall be deemed received on the next business day.

24.     WAIVERS. No waiver by Lessor of the Default or Breach of any term,
covenant or condition hereof by Lessee, shall be deemed a waiver of any other
term, covenant or condition hereof, or of any subsequent Default or Breach by
Lessee of the same or of any other term, covenant or condition hereof. Lessor's
consent to, or approval of, any act shall not be deemed to render unnecessary
the obtaining of Lessor's consent to, or approval of, any subsequent or similar
act by Lessee, or be construed as the basis of an estoppel to enforce the
provision or provisions of this Lease requiring such consent. The acceptance of
Rent by Lessor shall not be a waiver of any Default or Breach by Lessee. Any
payment by Lessee may be accepted by Lessor on account of monies or damages due
Lessor, notwithstanding any qualifying statements or conditions made by Lessee
in connection therewith, which such statements and/or conditions shall be of no
force or effect whatsoever unless specifically agreed to in writing by Lessor at
or before the time of deposit of such payment.

25.     RECORDING. Either Lessor or Lessee shall, upon request of the other,
execute, acknowledge and deliver to the other a short form memorandum of this
Lease for recording purposes. The Party requesting recordation shall be
responsible for payment of any fees applicable thereto.

26.     NO RIGHT TO HOLDOVER. Lessee has no right to retain possession of the
Premises or any part thereof beyond the expiration or termination of this Lease.
In the event that Lessee holds over, then the Base Rent shall be increased to
one hundred fifty percent (150%) of the Base Rent applicable during the month
immediately preceding the expiration or termination. Nothing contained herein
shall be construed as consent by Lessor to any holding over by Lessee.

27.     CUMULATIVE REMEDIES. No remedy or election hereunder shall be deemed
exclusive but shall, wherever possible, be cumulative with all other remedies at
law or in equity.

28.     COVENANTS AND CONDITIONS; CONSTRUCTION OF AGREEMENT. All provisions of
this Lease to be observed or performed by Lessee are both covenants and
conditions. In construing this Lease, all headings and titles are for the
convenience of the Parties only and shall not be considered a part of this
Lease. Whenever required by the context, the singular shall include the plural
and vice versa. This Lease shall not be construed as if prepared by one of the
parties, but rather according to its fair meaning as a whole, as if both parties
had prepared it.

29.     BINDING EFFECT; CHOICE OF LAW. This Lease shall be binding upon the
parties, their personal representatives, successors and assigns and be governed
by the laws of the State in which the Premises are located. Any litigation
between the Parties hereto concerning this Lease shall be initiated in the
county in which the Premises are located.

30.     SUBORDINATION; ATTORNMENT; NON-DISTURBANCE.

        30.1    SUBORDINATION. This Lease and any Option granted hereby shall be
subject and subordinate to any ground lease, mortgage, deed of trust, or other
hypothecation or security device (collectively, "SECURITY DEVICE"), now or
hereafter placed upon the Premises, to any and all advances made on the security
thereof, and to all renewals, modifications, and extensions thereof. Lessee
agrees that the holders of any such Security Devices (in this Lease together
referred to as "Lessor's Lender") shall have no liability or obligation to
perform any of the obligations of Lessor under this Lease. Any Lender may elect
to have this Lease and/or any Option granted hereby superior to the lien of its
Security Device by giving written notice thereof to Lessee, whereupon this Lease
and such Options shall be deemed prior to such Security Device, notwithstanding
the relative dates of the documentation or recordation thereof.

        30.2    ATTORNMENT. Subject to the non-disturbance provisions of
Paragraph 30.3, Lessee agrees to attorn to a Lender or any other party who
acquires ownership of the Premises by reason of a foreclosure of a Security
Device, and that in the event of such foreclosure,



                                    PAGE 10


such new owner shall not: (i) be liable for any act or omission of any prior
lessor or with respect to events occurring prior to acquisition of ownership;
(ii) be subject to any offsets or defenses which Lessee might have against any
prior lessor; or (iii) be bound by prepayment of more than one (1) month's rent.

        30.3    NON-DISTURBANCE. With respect to Security Devices entered into
by Lessor after the execution of this Lease, Lessee's subordination of this
Lease shall be subject to receiving a commercially reasonable non-disturbance
agreement (a "NON-DISTURBANCE AGREEMENT") from the Lender which Non-Disturbance
Agreement provides that Lessee's possession of the Premises, and this Lease,
including any options to extend the term hereof, will not be disturbed so long
as Lessee is not in Breach hereof and attorns to the record owner of the
Premises. Further, within sixty (60) days after the execution of this Lease,
Lessor shall use its commercially reasonable efforts to obtain a Non-Disturbance
Agreement from the holder of any pre-existing Security Device which is secured
by the Premises. In the event that Lessor is unable to provide the
Non-Disturbance Agreement within said sixty (60) days, then Lessee may, at
Lessee's option, directly contact Lessor's lender and attempt to negotiate for
the execution and delivery of a Non-Disturbance Agreement.

        30.4    SELF-EXECUTING. The agreements contained in this Paragraph 30
shall be effective without the execution of any further documents; provided,
however, that, upon written request from Lessor or a Lender in connection with a
sale, financing or refinancing of the Premises, Lessee and Lessor shall execute
such further writings as may be reasonably required to separately document any
subordination, attornment and/or Non-Disturbance Agreement provided for herein.

31.     ATTORNEYS' FEES. If any Party or Broker brings an action or proceeding
involving the Premises to enforce the terms hereof or to declare rights
hereunder, the Prevailing Party (as hereafter defined) in any such proceeding,
action, or appeal thereon, shall be entitled to reasonable attorneys' fees. Such
fees may be awarded in the same suit or recovered in a separate suit, whether or
not such action or proceeding is pursued to decision or judgment. The term,
"PREVAILING PARTY" shall include, without limitation, a Party or Broker who
substantially obtains or defeats the relief sought, as the case may be, whether
by compromise, settlement, judgment, or the abandonment by the other Party or
Broker of its claim or defense. The attorneys' fees award shall not be computed
in accordance with any court fee schedule, but shall be such as to fully
reimburse all attorneys' fees reasonably incurred. In addition, Lessor shall be
entitled to attorneys' fees, costs and expenses incurred in the preparation and
service of notices of Default and consultations in connection therewith, whether
or not a legal action is subsequently commenced in connection with such Default
or resulting Breach.

32.     LESSOR'S ACCESS; SHOWING PREMISES; REPAIRS. Lessor and Lessor's agents
shall have the right to enter the Premises at any time, in the case of an
emergency, and otherwise at reasonable times for the purpose of showing the same
to prospective purchasers, lenders, or lessees, and making such alterations,
repairs, improvements or additions to the Premises as Lessor may deem necessary.
All such activities shall be without abatement of rent or liability to Lessee.
Lessor may at any time place on the Premises any ordinary "FOR SALE" signs and
Lessor may during the last six (6) months of the term hereof place on the
Premises any ordinary "FOR LEASE" signs. Lessee may at any time place on or
about the Premises any ordinary "FOR SUBLEASE" sign.

33.     AUCTIONS. Lessee shall not conduct, nor permit to be conducted, any
auction upon the Premises without Lessor's prior written consent. Lessor shall
not be obligated to exercise any standard of reasonableness in determining
whether to permit an auction.

34.     SIGNS. Except for ordinary "For Sublease" signs, Lessee shall not place
any sign upon the Premises without Lessor's prior written consent. All signs
must comply with all Applicable Requirements.

35.     TERMINATION; MERGER. Unless specifically stated otherwise in writing by
Lessor, the voluntary or other surrender of this Lease by Lessee, the mutual
termination or cancellation hereof, or a termination hereof by Lessor for Breach
by Lessee, shall automatically terminate any sublease or lesser estate in the
Premises; provided, however, that Lessor may elect to continue any one or all
existing subtenancies. Lessor's failure within ten (10) days following any such
event to elect to the contrary by written notice to the holder of any such
lesser interest, shall constitute Lessor's election to have such event
constitute the termination of such interest.

36.     CONSENTS. Except as otherwise provided herein, wherever in this Lease
the consent of a Party is required to an act by or for the other Party, such
consent shall not be unreasonably withheld or delayed. Lessor's actual
reasonable costs and expenses (including but not limited to architects',
attorneys', engineers' and other consultants' fees) incurred in the
consideration of, or response to, a request by Lessee for any Lessor consent,
including but not limited to consents to an assignment, a subletting or the
presence or use of a Hazardous Substance, shall be paid by Lessee upon receipt
of an invoice and supporting documentation therefor. Lessor's consent to any
act, assignment or subletting shall not constitute an acknowledgment that no
Default or Breach by Lessee of this Lease exists, nor shall such consent be
deemed a waiver of any then existing Default or Breach, except as may be
otherwise specifically stated in writing by Lessor at the time of such consent.
The failure to specify herein any particular condition to Lessor's consent shall
not preclude the imposition by Lessor at the time of consent of such further or
other conditions as are then reasonable with reference to the particular matter
for which consent is being given. In the event that either Party disagrees with
any determination made by the other hereunder and reasonably requests the
reasons for such determination, the determining party shall furnish its reasons
in writing and in reasonable detail within ten (10) business days following such
request.

37.     GUARANTOR.

        37.1    EXECUTION. The Guarantors, if any, shall each execute a guaranty
in the form most recently published by the American Industrial Real Estate
Association, and each such Guarantor shall have the same obligations as Lessee
under this Lease.

        37.2    DEFAULT. It shall constitute a Default of the Lessee if any
Guarantor fails or refuses, upon request to provide: (a) evidence of the
execution of the guaranty, including the authority of the party signing on
Guarantor's behalf to obligate Guarantor, and in the case of a corporate
Guarantor, a certified copy of a resolution of its board of directors
authorizing the making of such guaranty, (b) current financial statements, (c) a
Tenancy Statement, or (d) written confirmation that the guaranty is still in
effect.

38.     QUIET POSSESSION. Subject to payment by Lessee of the Rent and
performance of all of the covenants, conditions and provisions on Lessee's part
to be observed and performed under this Lease, Lessee shall have quiet
possession and quiet enjoyment of the Premises during the term hereof.

39.     OPTIONS.

        39.1    DEFINITION. "OPTION" shall mean: (a) the right to extend the
term of or renew this Lease or to extend or renew any lease that Lessee has on
other property of Lessor; (b) the right of first refusal or first offer to lease
either the Premises or other property of Lessor; (c) the right to purchase or
the right of first refusal to purchase the Premises or other property of Lessor.

        39.2    OPTIONS PERSONAL TO ORIGINAL LESSEE. Each Option granted to
Lessee in this Lease is personal to the original Lessee, and cannot be assigned
or exercised by anyone other than said original Lessee and only while the
original Lessee is in full possession of the Premises and, if requested by
Lessor, with Lessee certifying that Lessee has no intention of thereafter
assigning or subletting.

        39.3    MULTIPLE OPTIONS. In the event that Lessee has any multiple
Options to extend or renew this Lease, a later Option cannot be exercised unless
the prior Options have been validly exercised.

        39.4    EFFECT OF DEFAULT ON OPTIONS.

                (a) Lessee shall have no right to exercise an Option: (i) during
the period commencing with the giving of any notice of Default and continuing
until said Default is cured, (ii) during the period of time any Rent is unpaid
(without regard to whether notice thereof is given Lessee), (iii) during the
time Lessee is in Breach of this Lease, or (iv) in the event that Lessee has
been given three (3) or more notices of separate Default, whether or not the
Defaults are cured, during the twelve (12) month period immediately preceding
the exercise of the Option.

                (b) The period of time within which an Option may be exercised
shall not be extended or enlarged by reason of Lessee's inability to exercise an
Option because of the provisions of Paragraph 39.4(a).

                (c) An Option shall terminate and be of no further force or
effect, notwithstanding Lessee's due and timely exercise of the Option, if,
after such exercise and prior to the commencement of the extended term, (i)
Lessee fails to pay Rent for a period of thirty (30) days after such Rent
becomes due (without any necessity of Lessor to give notice thereof), (ii)
Lessor gives to Lessee three (3) or more notices of separate Default during any
twelve (12) month period, whether or not the Defaults are cured, or (iii) if
Lessee commits a Breach of this Lease.

40.     MULTIPLE BUILDINGS. If the Premises are a part of a group of buildings
controlled by Lessor, Lessee agrees that it will observe all reasonable rules
and regulations which Lessor may make from time to time for the management,
safety, and care of said properties, including


                                    PAGE 11


the care and cleanliness of the grounds and including the parking, loading and
unloading of vehicles, and that Lessee will pay its fair share of common
expenses incurred in connection therewith.

41.     SECURITY MEASURES. Lessee hereby acknowledges that the rental payable to
Lessor hereunder does not include the cost of guard service or other security
measures, and that Lessor shall have no obligation whatsoever to provide same.
Lessee assumes all responsibility for the protection of the Premises, Lessee,
its agents and invitees and their property from the acts of third parties.

42.     RESERVATIONS. Lessor reserves to itself the right, from time to time, to
grant, without the consent or joinder of Lessee, such easements, rights and
dedications that Lessor deems necessary, and to cause the recordation of parcel
maps and restrictions, so long as such easements, rights, dedications, maps and
restrictions do not unreasonably interfere with the use of the Premises by
Lessee. Lessee agrees to sign any documents reasonably requested by Lessor to
effectuate any such easement rights, dedication, map or restrictions.

43.     PERFORMANCE UNDER PROTEST. If at any time a dispute shall arise as to
any amount or sum of money to be paid by one Party to the other under the
provisions hereof, the Party against whom the obligation to pay the money is
asserted shall have the right to make payment "under protest" and such payment
shall not be regarded as a voluntary payment and there shall survive the right
on the part of said Party to institute suit for recovery of such sum. If it
shall be adjudged that there was no legal obligation on the part of said Party
to pay such sum or any part thereof, said Party shall be entitled to recover
such sum or so much thereof as it was not legally required to pay.

44.     AUTHORITY. If either Party hereto is a corporation, trust, limited
liability company, partnership, or similar entity, each individual executing
this Lease on behalf of such entity represents and warrants that he or she is
duly authorized to execute and deliver this Lease on its behalf. Each Party
shall, within thirty (30) days after request, deliver to the other Party
satisfactory evidence of such authority.

45.     CONFLICT. Any conflict between the printed provisions of this Lease and
the typewritten or handwritten provisions shall be controlled by the typewritten
or handwritten provisions.

46.     OFFER. Preparation of this Lease by either Party or their agent and
submission of same to the other Party shall not be deemed an offer to lease to
the other Party. This Lease is not intended to be binding until executed and
delivered by all Parties hereto.

47.     AMENDMENTS. This Lease may be modified only in writing, signed by the
Parties in interest at the time of the modification. As long as they do not
materially change Lessee's obligations hereunder, Lessee agrees to make such
reasonable non-monetary modifications to this Lease as may be reasonably
required by a Lender in connection with the obtaining of normal financing or
refinancing of the Premises.

48.     MULTIPLE PARTIES. If more than one person or entity is named herein as
either Lessor or Lessee, such multiple Parties shall have joint and several
responsibility to comply with the terms of this Lease.

49.     MEDIATION AND ARBITRATION OF DISPUTES. An Addendum requiring the
Mediation and/or the Arbitration of all disputes between the Parties and/or
Brokers arising out of this Lease [ ] IS  [X] IS NOT attached to this Lease.

LESSOR AND LESSEE HAVE CAREFULLY READ AND REVIEWED THIS LEASE AND EACH TERM AND
PROVISION CONTAINED HEREIN, AND BY THE EXECUTION OF THIS LEASE SHOW THEIR
INFORMED AND VOLUNTARY CONSENT THERETO. THE PARTIES HEREBY AGREE THAT, AT THE
TIME THIS LEASE IS EXECUTED, THE TERMS OF THIS LEASE ARE COMMERCIALLY REASONABLE
AND EFFECTUATE THE INTENT AND PURPOSE OF LESSOR AND LESSEE WITH RESPECT TO THE
PREMISES.

________________________________________________________________________________

ATTENTION: NO REPRESENTATION OR RECOMMENDATION IS MADE BY THE AMERICAN
INDUSTRIAL REAL ESTATE ASSOCIATION OR BY ANY BROKER AS TO THE LEGAL SUFFICIENCY,
LEGAL EFFECT, OR TAX CONSEQUENCES OF THIS LEASE OR THE TRANSACTION TO WHICH IT
RELATES. THE PARTIES ARE URGED TO:

1.   SEEK ADVICE OF COUNSEL AS TO THE LEGAL AND TAX CONSEQUENCES OF THIS LEASE.

2.   RETAIN APPROPRIATE CONSULTANTS TO REVIEW AND INVESTIGATE THE CONDITION OF
THE PREMISES. SAID INVESTIGATION SHOULD INCLUDE BUT NOT BE LIMITED TO: THE
POSSIBLE PRESENCE OF HAZARDOUS SUBSTANCES, THE ZONING OF THE PREMISES, THE
STRUCTURAL INTEGRITY, THE CONDITION OF THE ROOF AND OPERATING SYSTEMS, AND THE
SUITABILITY OF THE PREMISES FOR LESSEE'S INTENDED USE.

WARNING: IF THE PREMISES IS LOCATED IN A STATE OTHER THAN CALIFORNIA, CERTAIN
PROVISIONS OF THE LEASE MAY NEED TO BE REVISED TO COMPLY WITH THE LAWS OF THE
STATE IN WHICH THE PREMISES IS LOCATED.
________________________________________________________________________________

The parties hereto have executed this Lease at the place and on the dates
specified above their respective signatures.

Executed at: BEVERLY HILLS, CALIFORNIA   Executed at: CHATSWORTH, CALIFORNIA

on: December 27, 2001                    on: December     , 2001

By LESSOR:                               By LESSEE:

        NORTHPARK INDUSTRIAL                 INTERNATIONAL REMOTE IMAGING
                                                     SYSTEMS, INC.


By:           /s/ Gary Siegel            By:           /s/ J.Y. Caloz

Name Printed: GARY SIEGEL                Name Printed: J.Y. CALOZ

Title:        Partner                    Title:        CFO

By:           /s/ Thomas L. Harner       By:           /s/ Achille M. Bigliardi

Name Printed: Thomas L. Harner           Name Printed: Achille M. Bigliardi

Title: West America Const. Corp. -       Title: President, Iris Diagnostics
             Vice President

Address: 8929 Wilshire Blvd., #400       Address: 9162 Elton Avenue
         Beverly Hills, CA 90211                  Chatsworth, CA 91311

Telephone: (310) 652-8288                Telephone: (310) 709-1244

Facsimile: (310) 652-4972                Facsimile: (818)

Federal ID No.   95-3146812              Federal ID No.

NOTE: These forms are often modified to meet the changing requirements of law
      and industry needs. Always write or call to make sure you are utilizing
      the most current form: AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION, 700
      So. Flower Street, Suite 600, Los Angeles, California 90017. (213)
      687-8777. Fax No. (213) 687-8616


                                    PAGE 12

                        STANDARD ADDENDUM TO LEASE - NET


                   Lease dated:  November 29, 2001
                                 -------------------------------------------
                   Lessor:       NORTHPARK INDUSTRIAL
                                 -------------------------------------------
                   Lessee:       INTERNATIONAL REMOTE IMAGING SYSTEMS, INC.
                                 -------------------------------------------


        IN THE EVENT OF ANY CONFLICT BETWEEN THE PRINTED PROVISIONS OF THE LEASE
        AND THIS ADDENDUM, THE PROVISIONS OF THIS ADDENDUM SHALL CONTROL

50)     BASE RENT (PARAGRAPH 1.5, CONTINUED): In addition to the base rent that
        Lessee is obligated to pay under Paragraphs 1.5 and 4, Lessee will also
        be obligated to pay Lessor the sum of $1,440.00 per month as Lessor's
        monthly estimate for Lessee's share of Real Property Taxes, insurance,
        landscaping and irrigation system maintenance. The current average
        monthly costs for Real Property Taxes, insurance, landscaping and
        irrigation for the subject Premises are $1,100.00, $150.00, and $190.00,
        respectively. Every year of this Lease, during the month of July, and
        during the month immediately following the termination of this Lease,
        Lessor will prepare an accounting of all actual Real Property Taxes,
        insurance, landscaping and irrigation system maintenance for the just
        concluded twelve-month period. Any differences between the actual
        expenses and Lessor's estimates shall be either immediately refunded to
        Lessee or immediately due by the Lessee, whichever the case may be.

        Lessee or its authorized agent shall have the right, upon five (5) days
        prior written notice to Lessor, to inspect, at Lessor's main accounting
        offices, Lessor's unaudited books and records regarding these expenses.

        The monthly base rent shall be increased annually and paid in accordance
        with the following rent schedule:

        The rent payable for the period of January 1, 2002 through December 31,
        2002 shall be $13,720.00 per month.

        The rent payable for the period of January 1, 2003 through December 31,
        2003 shall be $14,131.00 per month.

        The rent payable for the period of January 1, 2004 through December 31,
        2004 shall be $14,555.00 per month.

        The rent payable for the period of January 1, 2005 through December 31,
        2005 shall be $14,992.00 per month.

        The rent payable for the period of January 1, 2006 through December 31,
        2006 shall be $15,442.00 per month.

51)     VEHICLE PARKING (PARAGRAPH 2.6, CONTINUED): Lessee shall be entitled to
        44 parking spaces located on those portions of the parking lot and/or in
        the parking structure directly across the street from the Premises which
        have been designated by Lessor for parking.

        Lessee or Lessee's employees, visitors, customers, or guests shall not
        park in driveways, alleyways, easement ways or other areas not
        specifically marked as parking spaces.

        No automotive repair, car washing, waxing and detailing, or covered
        parking is permitted at any time.

        Prohibited vehicles are not permitted; examples of prohibited vehicles
        shall include, but shall not be limited to, trailers, campers,
        recreational vehicles, boats, "dead automobiles" or automobiles parked
        longer than 48 hours.

        If Lessee permits or allows parking other than in designated parking
        spaces or permits or allows any of the aforedescribed prohibited
        vehicles to park on any portion of the parking areas or anywhere else
        within the Premises, then Lessor shall have the right, without notice,
        in addition to other rights and remedies it may have, to remove or tow
        away the vehicle involved and charge the cost to Lessee, which cost
        shall be immediately payable by Lessee upon demand by Lessor.

        In addition to, and not in limitation of any of Lessor's rights under
        this Lease, Lessor shall have the right, at any time and from time to
        time, to relocate, modify, adjust, redesign and otherwise change the
        common areas available for parking within the Premises, provided the
        total number of parking spaces is not reduced, notwithstanding that some
        of Lessee's parking space(s) may be used as location for its trash
        containers, and establish, modify, amend and enforce rules, regulations
        and restrictions with respect thereto, including, but not limited to,
        time limits, for example, such as temporary loading zones or areas,
        redesigning parking spaces from diagonal or vertical, or vice versa, and
        changing the traffic patterns within the Premises.

52)     SECURITY DEPOSIT (PARAGRAPH 5, CONTINUED) The security deposit shall be
        used and may be refunded only in accordance with Paragraph 5 and in
        connection with this paragraph. Lessee may not use any portion of the
        security deposit to satisfy any of Lessee's rental obligations hereunder
        including the last month's rental payment. Any failure of Lessee to pay
        any of Lessee's rental obligations when due constitutes a material
        breach of this Lease for which Lessor may re-enter and take possession
        of the Premises in accordance with law, notwithstanding the fact that
        Lessor may have possession of a security deposit.

53)     USE (PARAGRAPH 6.1, CONTINUED) Lessee understands that there are no
        restrictions contained in this Lease as to the type of business which
        may be conducted by any other present or future tenant of any building
        located near or adjacent to the building in which the Premises are
        located, and that Lessor may lease space to other tenants whose business
        is the same or competitive with that of Lessee.


        Lessor                                 Lessee


        ------------                           ------------
        Initial Here                           Initial Here


                        STANDARD ADDENDUM TO LEASE - NET
                                  PAGE 2 OF 4


        NO OUTSIDE STORAGE. Under no circumstances shall Lessee be permitted to
        use the exterior areas of the Premises, including driveways, alleyways
        or easement ways or anywhere else outside the building, for the
        temporary or permanent storage of any property, including but not
        limited to inventory, parts, work in process, pallets, or the
        installation of any type of equipment, including but not limited to air
        compressors or any other equipment. In the event that any unauthorized
        storage or installation of equipment or property shall occur, then
        Lessor shall have the right, without notice, in addition to such other
        rights and remedies that it may have, to remove the property and/or
        equipment at Lessee's expense, which shall be paid by Lessee upon demand
        by Lessor. No unauthorized seating areas, lunch areas or compressor
        sheds are permitted anywhere in the driveways, alleyways or easement
        ways, alleys or anywhere else outside the building.

        INGRESS AND EGRESS; LOADING AND UNLOADING. It is understood and agreed
        that the exterior portion of the premises and property are to be used by
        Lessee solely for ingress and egress and for the parking of vehicles as
        authorized by Lessor. The exterior portions of the premises at no time
        will be used by Lessee for loading or unloading, except at the loading
        dock. It is the parties' intention that Lessee will neither cause nor
        permit anything which will detract from keeping the exterior of the
        building and premises in a clean, orderly, and uncluttered condition
        fully in keeping with the highest standards and reflecting an image of
        the highest quality and standards.

        EXTERIOR WATER USE LIMITATIONS. Except for irrigation purposes, Lessee
        shall not use any water either from exterior sources or from sources
        within the building, on or about the exterior area of the Premises for
        any purpose whatsoever without Lessor's prior written consent. Any of
        Lessee's procedures, processes or other work which require the use of
        water shall be done solely within the confines of the building, and no
        water shall be allowed to drain onto the exterior area of the Premises.

54)     MAINTENANCE; REPAIRS, UTILITY INSTALLATIONS; TRADE FIXTURES AND
        ALTERATIONS (PARAGRAPH 7, CONTINUED) Notwithstanding anything to the
        contrary in Paragraph 7.1(b), in order to maintain a cohesive
        landscaping appearance throughout the business park, Lessor shall
        maintain all landscaping and irrigation system contracts, and Lessee
        shall reimburse Lessor for those costs pursuant to Paragraph 50.

        ROOF. Lessee shall inform Lessor of any work anticipated on the roof, in
        conjunction with its operation and obtain permission to do same prior to
        commencement of same. Lessee shall not make any alterations,
        improvements or additions to the Premises, without Lessor's prior
        written consent. Should Lessee make any alterations, etc. without the
        prior written consent of Lessor, Lessor may, at any time during the term
        of this Lease or upon its termination, require that Lessee, at its
        expense, remove any or all of the same and that Lessee pay to Lessor the
        amount of any damage to the roof caused by Lessee, or Lessor may remove
        same at Lessee's expense.

        UNAUTHORIZED ALTERATIONS. Lessee shall obtain Lessor's prior written
        approval for the installation of any interior or exterior window
        coverings, including but not limited to drapes, blinds, sunshades,
        sunscreens, holiday or other decorations or any type of film window
        treatment. No exterior painting is permitted. In the event that any such
        unauthorized installations or alterations occur, then Lessor shall have
        the right, without notice, in addition to such other rights and remedies
        that it may have, to remove all of the same at Lessee's expense, which
        shall be paid by Lessee upon demand by Lessor.

        SECURITY. Security bars or other security measures installed by Lessee
        require prior written consent of Lessor. Such installations, except for
        electronic security systems, shall remain as part of the Premises upon
        termination of the Lease unless Lessor requests removal of such
        installations and restoration of the Premises in accordance with
        Paragraph 7.4.

55)     OWNERSHIP; REMOVAL; SURRENDER; AND RESTORATION (PARAGRAPH 7.4,
        CONTINUED) Lessor's right under Paragraph 7.4(b) to require that any or
        all Lessee Owned Alterations or Utility Installations be removed by
        Lessee by the expiration or earlier termination of this Lease applies to
        all tenant improvements, including but not limited to improvements which
        were made to the Premises by Lessor at the request of Lessee and
        improvements the cost of which was amortized over the Lease term or a
        portion thereof in the form of additional rent. If Lessee desires to
        install wallpaper in the Premises, Lessor may require the removal and
        restoration of the walls upon Lessee's vacancy of the Premises, which
        shall be done at Lessee's sole cost and expense.

56)     REPLACEMENT COST (PARAGRAPH 8.3(a), CONTINUED) With reference to the
        property insurance required by Paragraph 8.3(a), Lessor and Lessee agree
        that the full replacement cost of the Premises will be not less than
        $1,163,000.00 as of the Commencement Date of the term of this Lease.

57)     ASSIGNMENT AND SUBLETTING (PARAGRAPH 12, CONTINUED) Subject to the
        provisions of Paragraph 12, Lessee may sublease the Premises upon
        Lessor's written consent. Within five (5) days of Lessee entering into a
        sublease of the Premises, Lessee shall deliver to Lessor a copy of any
        written sublease.

        Except as provided in Paragraph 12.2(e) in the case of Lessor's consent
        to an assignment or subletting and notwithstanding anything to the
        contrary contained in Paragraph 12, in the event that Lessee requests
        Lessor's signature or consent to any action or on any document,
        including but not limited to loan or security documents relating to loan
        transactions in which Lessee is taking part, Lessor may require Lessee
        to pay to Lessor an initial minimum fee of $350.00 to cover Lessor's
        legal and other fees and costs in reviewing and responding to each such
        request, and Lessee agrees to pay additional legal fees as are actually
        incurred by Lessor in reviewing and responding thereto.


        Lessor                                 Lessee


        ------------                           ------------
        Initial Here                           Initial Here


                        STANDARD ADDENDUM TO LEASE - NET
                                  PAGE 3 OF 4



58)     HOLDOVER (PARAGRAPH 26, CONTINUED) If Lessee remains in possession of
        the Premises after the expiration of the Lease term, without Lessor's
        written consent, then Lessee's occupancy of the Premises shall be deemed
        to be a holdover tenancy upon all of the provisions of this Lease
        pertaining to obligations of Lessee, but not including any options or
        rights of first refusal, if any, granted to Lessee under this Lease. If
        Lessee's hold-over tenancy exceeds ten (10) days, Lessee may terminate
        the tenancy only by giving sixty (60) days written notice of termination
        to Lessor, whereas Lessor may terminate the tenancy or change the terms
        of the Lease upon giving to Lessee sixty (60) days written notice
        thereof. The termination date shall be the last day of the month in
        which the notice requirement has been met.

        Notwithstanding anything to the contrary contained in Paragraphs 1.3,
        1.5, 3.1, 4 or elsewhere in this Lease, Lessee's obligation to pay rent
        shall continue until (i) Lessee has removed all of its property from the
        Premises, (ii) Lessee has made any repairs required under Paragraph
        7.4(c), (iii) Lessee has removed all Alterations, improvements,
        additions and Utility Installations which Lessor requires Lessee to
        remove pursuant to Paragraph 7.4(b), and (iv) Lessee has notified Lessor
        in writing that all of the items (i) through (iii) of this paragraph, to
        the extent applicable, have been accomplished.

59)     DECLARATION of COVENANTS, CONDITIONS AND RESTRICTIONS FOR NORTHPARK
        INDUSTRIAL CENTER. Lessee acknowledges receipt of a copy of the
        Declaration of Covenants, Conditions and Restrictions for Northpark
        Industrial Center recorded with the County of Los Angeles as document
        numbers 79-760182 and 85-1324915. Lessee has reviewed and approved said
        documents and agrees to be bound by all the terms and conditions
        therein. Lessee further agrees that said Covenants, Conditions and
        Restrictions shall be binding upon Lessee and any sublessee, successor
        and assigns which they may have.

60)     TENANT IMPROVEMENTS (LESSOR'S COST): Subject to Lessee's execution of
        the Lease Agreement dated November 28, 2001 for the premises located
        9172 Eton Avenue, Lessor shall, at Lessor's cost, cut one (1) opening in
        the north wall of the office area (and shall cut one opening in the
        southern wall of the office area in the premises located at 9172 Eton
        Avenue) to connect the premises located at 9162 Eton Avenue with the
        premises located at 9172 Eton Avenue . Said openings shall be a 3'0 x
        6'8" cased opening. Upon Lessee's vacancy of either (or both) buildings,
        Lessee shall, at Lessee's cost, close said openings, which shall be done
        so as to create a similar condition to that prior to the cut-outs.

61)     PREMISES (PARAGRAPHS 1.2(A), 1.4 AND 2, CONTINUED):

        a) Lessee acknowledges that it has been the Lessee of the Premises since
        August 1, 1993, pursuant to the lease made between Lessor and Lessee
        dated July 21, 1993, and that Lessee continuously leased the premises
        since August 1, 1993. By entering into this new Lease, the Lessee agrees
        that its responsibility for all of its actions and for use of the
        Premises since August 1, 1993 shall continue unabated. This Lease shall
        not relieve Lessee of the Lessee's responsibility for all its prior
        actions. This Lease and all prior leases between Lessor and Lessee shall
        be treated as one continuous lease for such purpose.

        b) AS DESCRIBED ABOVE IN PARAGRAPH 61(a), LESSEE HAS BEEN AND IS
        CURRENTLY LEASING THE PREMISES SINCE AUGUST 1, 1993. UPON EXECUTION OF
        THIS LEASE BY BOTH PARTIES, LESSOR SHALL AUTOMATICALLY TERMINATE ANY
        PRE-EXISTING LEASES.

62)     The approximate leasable space in the Premises is 23,254 square feet
        which represents 41.6% of the total leasable space in the building
        complex of which the Premises area a part. Said percentage shall be used
        throughout the term of this Lease for the purpose of determining
        Insurance Premiums pursuant to Paragraphs 8 and 56, Property Taxes
        pursuant to paragraph 10, and other common area items pursuant to
        Paragraphs 7 and 11 of this Lease where increases in said items
        relate to the entire building complex of which the Premises are a part.

63)     PARAGRAPH 12.1b (CONTINUED): For purposes of this Lease, a "change in
        the control of Lessee" means the happening of any of the following
        events:

        (i)     When any "person" as such term is used in Sections 13(d) and
                14(d) of the Securities Exchange Act of 1934 (the "Exchange
                Act") becomes the "beneficial owner" (as defined in Rule 13d-3
                under the Exchange Act), directly or indirectly, of securities
                of the Lessee fifty percent (50%) or more of the combined voting
                power of the Lessee's then outstanding securities entitled to
                vote generally in the election of directors; or

        (ii)    The stockholders of the Lessee approve a merger, consolidation
                or sale of substantially all the assets of the Lessee with or to
                any other corporation, other than a merger, consolidation or
                sale of substantially all the assets which would result in the
                voting securities of the Lessee outstanding immediately prior
                thereto continuing to represent (either by remaining outstanding
                or by being converted into voting securities of the surviving
                entity) more than fifty percent (50%) of the total voting power
                represented by the voting securities of the Lessee or such
                surviving entity outstanding immediately after such merger,
                consolidation or sale of substantially all the assets of the
                Lessee; or

        (iii)   A change in the composition of the Board of Directors of the
                Lessee, as a result of which fewer than a majority of the
                directors are Incumbent Directors. "Incumbent Directors" shall
                mean directors who either (a) are directors of the Lessee as of
                the date of the commencement of this Lease or any applicable
                extension or renewal, or (b) are elected, or nominated for
                election to the Board of Directors of the Lessee with the
                affirmative votes of at least a majority of the Incumbent
                Directors at the time of such election or nomination (but shall
                not include an individual whose election or nomination is in
                connection with an actual or threatened proxy contest relation
                to the election of directors to the Lessee).


        Lessor                                 Lessee

        /s/ [ILLEGIBLE]                        /s/ [ILLEGIBLE]
        ---------------                        ---------------
        Initial Here                           Initial Here




                        STANDARD ADDENDUM TO LEASE - NET
                                  PAGE 4 OF 4



64)     PARAGRAPH 12.1c (CONTINUED): The involvement of Lessee or its assets in
        any merger, bulk sale or leveraged buy-out, whether in a single
        transaction or series of related transactions and whether or not a
        formal assignment or hypothecation of this Lease or Lessee's assets
        occurs, which results or will result in a reduction of the Net Worth of
        Lessee by an amount greater than 25% of such Net Worth as it was
        represented at the time of the execution of this Lease or at the time of
        the most recent assignment to which Lessor has consented, or as it
        exists immediately prior to said transaction or transactions
        constituting such reduction, whichever was or is greater, shall be
        considered an assignment of this Lease requiring Lessor's consent which
        shall be unreasonably withheld. "Net Worth of Lessee" shall mean the net
        worth of Lessee (excluding any guarantors) established under generally
        accepted accounting principles as currently in effect on the date
        hereof.

65)     OPTION TO EXTEND

        A. Lessor hereby grants to Lessee the option to extend the term of this
        Lease for a Five 5) year period commencing when the prior term expires
        upon each and all of the following terms and conditions:

               (i) Lessee gives to Lessor and Lessor receives written notice of
        the exercise of the option to extend this Lease for said additional term
        no earlier than nine months and no later than six months prior to the
        time that the option period would commence if the option were exercised,
        time being of the essence. If said notification of the exercise of said
        option is not so given and received, this option shall automatically
        expire;

               (ii) The provisions of paragraph 39, including the provision
        relating to default of Lessee set forth in paragraph 39.4 of this Lease
        are conditions of this Option;

               (iii) All of the terms and conditions of this Lease except where
        specifically modified by this option shall apply;

               (iv) On January 1, 2007, the monthly rent payable under paragraph
        1.5 and 4 of the attached Lease shall be adjusted by the increase, if
        any, from the date this Lease commenced in the C.P.I. As used herein,
        the term "C.P.I. shall mean the Consumer Price Index of the Bureau of
        Labor Statistics of the U.S. Department of Labor for All Urban
        Consumers, Los Angeles-Anaheim-Riverside, California (1982/84=100), "All
        Items", herein referred to as "C.P.I."

                       a. The monthly rent payable in accordance with paragraph
        A(iv) of this Addendum shall be calculated as follows: the rent payable
        for the first month of the term of this Lease, as set forth in paragraph
        4 of the attached Lease, shall be multiplied by a fraction the numerator
        of which shall be the C.P.I. of the calendar month immediately preceding
        the effective date of the subject rent escalation, and the denominator
        of which shall be the C.P.I. for the calendar month in which the
        original Lease term commenced. The sum so calculated shall constitute
        the new monthly rent hereunder, but, in no event, shall such new monthly
        rent be less than 103% of the rent payable for the month immediately
        preceding the date for rent adjustment.

                       b. In the event the compilation and/or publication of the
        C.P.I. shall be discontinued, then the index most nearly the same as the
        C.P.I. shall be used to make such calculation. In the event that Lessor
        and Lessee cannot agree on such alternative index, then the matter shall
        be submitted for decision to the American Arbitration Association in
        accordance with the rules of said association and the decision of the
        arbitrators shall be binding upon the parties. The cost of said
        Arbitrators shall be paid equally be Lessor and Lessee.

                       c. Lessor shall notify Lessee of any rental increases
        pursuant to this paragraph as soon as practicable after the relevant
        C.P.I. figures have been released. Until such notification, Lessee shall
        continue to pay the rent in effect during the prior rental period. After
        notification of a rental increase, Lessee shall commence making rental
        payments in the increased amount and shall, within ten (10) days after
        such notification, pay to Lessor the amount of any rental increases due
        for previous months.

        B. If this option to extend is exercised, the option term shall commence
        on January. 1, 2007 and shall end on December 31, 2011

        C. On January 1 2008 January 1 2009, January 1, 2010 and again on
        January 1, 2011 , the monthly rent payable shall be adjusted upward by
        3% over the rent payable for the month immediately preceding each rental
        adjustment.




LESSOR:                                LESSEE:


NORTHPARK INDUSTRIAL                   INTERNATIONAL REMOTE IMAGING SYSTEMS,
                                       INC.



By: [SIGNATURE ILLEGIBLE]              By: [SIGNATURE ILLEGIBLE]
    ----------------------------           -------------------------------------


By: [SIGNATURE ILLEGIBLE]              By: [SIGNATURE ILLEGIBLE]
    ----------------------------           -------------------------------------



                               PARKING AGREEMENT



THIS PARKING AGREEMENT, DATED November 29, 2001 , for reference purposes only,
is made by and between NORTHPARK INDUSTRIAL (herein called "Lessor") and
INTERNATIONAL REMOTE IMAGING SYSTEMS, INC. (herein called "Lessee"). Lessor
leases to Lessee under a separate written Lease the Premises known as 9162 Eton
Avenue , Chatsworth, California, and the Agreements of the parties in this
Parking Agreement are in addition to the agreements of the parties in said
Lease.

1. Subject to the terms and conditions contained in this Agreement, Lessor
hereby agrees that Lessee and persons designated by Lessee may use 21 parking
spaces in the Parking Garage located at 9151 Eton Ave., Chatsworth, California
(hereinafter the "Garage"). The parking spaces hereunder shall be provided on an
unreserved "first come, first served" basis.

2. The term of this Agreement shall be concurrent with the term of this Lease
Agreement ("Lease").

3. Lessee shall at all times comply with all applicable ordinances, rules,
regulations, codes, laws, statutes and requirements of all federal, state,
county and municipal governmental bodies or their subdivisions respecting the
use of the Garage. Lessee shall extend all of its insurance policies required
under the Lease to include vehicles to be parked in the Garage hereunder and
personal property located therein or thereon. Upon request, Lessee shall provide
Lessor with certificates or other satisfactory evidence of such insurance.
Lessor reserves the right to adopt, modify, and enforce reasonable Rules
governing the use of the Garage from time to time, including any card-key,
sticker or other identification or entrance system, and hours of operation. The
Rules set forth hereinafter are currently in effect. Lessor may refuse to permit
any person who violates such Rules to park in the Garage, and any violation of
the Rules shall subject the car to removal from the Garage.

4. Lessee acknowledges receipt of one card-key for each parking space provided.
Lessee shall be responsible for the return of said card-key upon its vacancy of
the Garage. A replacement fee of $25.00 will be charged for any lost or damaged
card-key.

5. Except for intentional acts of gross negligence by Lessor, Lessor shall have
no liability whatsoever for any damage to property or any other items located in
the Garage, nor for any personal injuries or death arising out of any incident
or matter relating to the Garage. In all events, Lessee agrees to look first to
its insurance carrier for payment of any losses sustained in connection with
Lessee's use of the Garage. Lessee hereby waives on behalf of its insurance
carriers all rights of subrogation against Lessor. Lessor reserves the right to
assign specific spaces and to reserve spaces for visitors, small cars,
handicapped persons and for other lessees, and Lessee and persons designated by
Lessee shall not park in any such assigned or reserved spaces. Lessor also
reserves the right to close all or any portion of the Garage in order to make
repairs or perform maintenance services, or to alter, modify, re-stripe the
Garage, or if required by casualty, strike, condemnation, act of God,
governmental law or other reason beyond Lessor's reasonable control. In such
event, Lessor shall refund any prepaid parking rent hereunder, pro-rated on a
per diem basis.

6. Prior to furnishing any card-keys to any person, Lessee shall provide Lessor
with a list including all names, type of automobile, year of manufacture,
drivers license number and automobile license number for all persons using the
Garage at any time.

7. If Lessee shall default under this Agreement, Lessor shall have the right to
cancel this Agreement on ten (10) days written notice, unless within such ten
(10) day period Lessee cures such default. If Lessee shall default under this
Agreement a second time after receiving prior written notice for the same
offense, Lessor shall have the right to cancel this Agreement on ten (10) days
written notice. Lessor shall have the right to remove from the Garage any
vehicles hereunder which are in breach of this Agreement or Rules contained
herein, without any liability whatsoever. Accordingly, Lessor may then
deactivate the respective card-key(s) with ten (10) days notice as stated above.

8. LESSEE ACKNOWLEDGES RECEIPT OF A COPY OF THE DECLARATION OF COVENANTS,
CONDITIONS AND RESTRICTIONS FOR NORTHPARK INDUSTRIAL CENTER RECORDED WITH THE
COUNTY OF LOS ANGELES AS DOCUMENT NUMBERS 79-760182 AND 85-1324915. LESSEE HAS
REVIEWED AND APPROVED SAID DOCUMENTS AND AGREES TO BE BOUND BY ALL THE TERMS AND
CONDITIONS THEREIN. LESSEE FURTHER AGREES THAT SAID COVENANTS, CONDITIONS AND
RESTRICTIONS SHALL BE BINDING UPON LESSEE AND ANY SUBLESSEE, SUCCESSOR AND
ASSIGNS WHICH THEY MAY HAVE.



                                      RULES

a.      Lessee agrees to acquaint all persons to whom Lessee assigns parking
        space of these Rules.

b.      Garage hours: Twenty-four (24) hours, seven (7) days a week.

c.      Cars must be parked entirely within the stall lines painted on the
        floor, and only small cars may be parked in areas reserved for compacts.
        All cars must be parked head-in only.

d.      All directional signs and arrows must be observed.

e.      Speed limit shall be 5 miles per hour.

f.      Parking is prohibited in all areas not expressly designated for parking,
        including without limitation:

        1.      Aisles.

        2.      Loading zones.

        3.      Areas not striped for parking.

        4.      Areas where "No Parking" signs are posted.

        5.      Ramps, right side up - left side down.

g.      Spaces reserved for handicapped parking must be used only by vehicles
properly designated.


        Lessor Initial Here                     Lessee Initial Here

        [/s/ GS] [  ]                           [/s/ ILLEGIBLE] [/s/ ILLEGIBLE]




                               PARKING AGREEMENT
                                  (continued)

h.      Parking stickers, card-key or any other devices or forms of
        identification or entry supplied by Lessor shall remain the property of
        Lessor. Such devices must be displayed as requested and may not be
        mutilated in any manner. The serial number of the parking identification
        device may not be obliterated. Devices are not transferable and any
        device in the possession of any unauthorized holder will be void.

i.      Monthly fees shall be payable in advance prior to the first day of each
        month. Failure to do so will automatically cancel parking privileges and
        the card-keys used by Lessee will be voided on the fifth (5th) day of
        the month. No deductions or allowances from the monthly rate will be
        made for days on which the Garage is not used by Lessee or its
        designees.

j.      Garage managers or personnel are not authorized to make or allow any
        exceptions to these Rules.

k.      Each driver of a vehicle is required to drive and park safely, and lock
        and secure their own vehicle.

l.      Loss or theft of parking identification, card-keys or other such devices
        must be reported to Lessor immediately. Any parking devices reported
        lost or stolen found on any unauthorized car will be confiscated and the
        illegal holder will be fined at the then prevailing written rate. Lost
        or stolen devices found by Lessee or its employees must be returned to
        Lessor.

m.      Washing, waxing, cleaning or servicing of any vehicle by Lessee or its
        employees or agents is prohibited. Parking spaces may only be used for
        parking automobiles.

n.      Parking spaces shall be used only for parking by vehicles no larger than
        full size passenger automobiles or pick-up trucks. Prohibited vehicles
        are not permitted; examples of prohibited vehicles shall include, but
        shall not be limited to, vehicles exceeding 6' 6" in height, trucks or
        trucking equipment, trailers, campers, recreational vehicles, boats,
        "dead automobiles" or automobiles parked longer than 24 hours. No
        automotive repair or work is permitted. If Lessee permits or allows any
        of the aforedescribed prohibited vehicles to park on any portion of the
        parking areas, then Lessor shall have the right, without notice, in
        addition to other rights and remedies it may have, to remove or tow away
        the vehicle involved and charge the cost to Lessee which cost shall be
        immediately payable by Lessee upon demand by Lessor.

o.      Other prohibitions include but are not limited to: eating in Garage,
        loitering, throwing trash, leaky vehicles, damage to gates, arms,
        card-key readers, entry or exit equipment, other vehicles, real or
        personal property, fences, rails or walls.

p.      Lessor may prohibit violators of Rules from using parking spaces
        provided to Lessee hereunder. In such case, Lessor shall void the
        violator's card-key and notify Lessee in writing. Said individual(s)
        would be prohibited from using Garage, but Lessee would continue leasing
        same until a fine of $75.00 is paid or until Lessor agrees to reinstate
        the violator, at Lessor's option.




LESSOR:                                LESSEE:


NORTHPARK INDUSTRIAL                   INTERNATIONAL REMOTE IMAGING SYSTEMS,
                                       INC.



By: /s/ [SIGNATURE ILLEGIBLE]          By: /s/ [SIGNATURE ILLEGIBLE]
    ----------------------------           -------------------------------------


By: /s/ [SIGNATURE ILLEGIBLE]          By: /s/ [SIGNATURE ILLEGIBLE]
    ----------------------------           -------------------------------------

EX-10.1(B)

                                                                 EXHIBIT 10.1(b)

               [LOGO] AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION

           STANDARD INDUSTRIAL/COMMERCIAL SINGLE-TENANT LEASE -- NET
                (DO NOT USE THIS FORM FOR MULTI-TENANT BUILDINGS)

1.      BASIC PROVISIONS ("BASIC PROVISIONS")

        1.1     PARTIES: This Lease ("Lease"), dated for reference purposes only
November 28, 2001 is made by and between NORTHPARK INDUSTRIAL ("LESSOR") and
INTERNATIONAL REMOTE IMAGING SYSTEMS, INC., a Delaware Corporation ("LESSEE"),
(collectively the "PARTIES," or individually a "PARTY").

        1.2     PREMISES: That certain real property, including all improvements
therein or to be provided by Lessor under the terms of this Lease, and commonly
known as 9172 Eton Avenue, located in the County of Los Angeles, State of
California, and generally described as (describe briefly the nature of the
property and, if applicable, the "PROJECT", if the property is located within a
Project) a concrete tilt-up industrial building consisting of approximately
20,338 square feet of area, aka Lot #7, Tract No. 33398, City of Los Angeles, in
an MR-2 zone ("PREMISES"). (See also Paragraph 2)

        1.3     TERM: Five (5) years and -0- months ("ORIGINAL TERM") commencing
January 1, 2002 ("COMMENCEMENT DATE") and ending December 31, 2006 ("EXPIRATION
DATE"). (See also Paragraph 3).

        1.4     EARLY POSSESSION: ______________________________________________
("EARLY POSSESSION DATE"). (See also Paragraphs 3.2 and 3.3)

        1.5     BASE RENT: $11,999.00 per month ("BASE RENT"), payable on the
First (1st) day  of each month commencing _____________________________________.
(See also Paragraph 4)

[X] If this box is checked, there are provisions in this Lease for the Base Rent
    to be adjusted. -- See Paragraph 50

        1.6     BASE RENT PAID UPON EXECUTION: $11,999.00 as Base Rent for the
period January 1, 2002 through January 31, 2002.

        1.7     SECURITY DEPOSIT: $13,505.00 ("SECURITY DEPOSIT"). (See also
Paragraph 5)

        1.8     AGREED USE: research, development and manufacturing of medical
and electronic equipment and related activity. (See also Paragraph 6)

        1.9     INSURING PARTY: Lessor is the "INSURING PARTY" unless otherwise
stated herein. (See also Paragraph 8)

        1.11    GUARANTOR. The obligations of the Lessee under this Lease are to
be guaranteed by _______________________________________________________________
_________________________________________ ("GUARANTOR"). (See also Paragraph 37)

        1.12    ADDENDA AND EXHIBITS. Attached hereto is an Addendum or Addenda
consisting of Paragraphs 50 through 63, all of which constitute a part of this
Lease.

2.      PREMISES.

        2.1     LETTING. Lessor hereby leases to Lessee, and Lessee hereby
leases from Lessor, the Premises, for the term, at the rental, and upon all of
the terms, covenants and conditions set forth in this Lease. Unless otherwise
provided herein, any statement of size set forth in this Lease, or that may have
been used in calculating rental, is an approximation which the Parties agree is
reasonable and the rental based thereon is not subject to revision whether or
not the actual size is more or less.

        2.2     CONDITION. Lessor shall deliver the Premises to Lessee broom
clean and free of debris on the Commencement Date or the Early Possession Date,
whichever first occurs ("START DATE"), and, so long as the required service
contracts described in Paragraph 7.1(b) below are obtained by Lessee within
thirty (30) days following the Start Date, warrants that the existing
electrical, plumbing, fire sprinkler, lighting, heating, ventilating and air
conditioning systems ("HVAC"), loading doors, if any, and all other such
elements in the Premises, other than those constructed by Lessee, shall be in
good operating condition on said date and that the structural elements of the
roof, bearing walls and foundation of any buildings on the Premises (the
"BUILDING") shall be free of material defects. If a non-compliance with said
warranty exists as of the Start Date, Lessor shall, as Lessor's sole obligation
with respect to such matter, except as otherwise provided in this Lease,
promptly after receipt of written notice from Lessee setting forth with
specificity the nature and extent of such non-compliance, rectify same at
Lessor's expense. If, after the Start Date, Lessee does not give Lessor written
notice of any non-compliance with this warranty within: (i) one year as to the
surface of the roof and the structural portions of the roof, foundations and
bearing walls, (ii) six (6) months as to the HVAC systems, (iii) thirty (30)
days as to the remaining systems and other elements of the Building, correction
of such non-compliance shall be the obligation of Lessee at Lessee's sole cost
and expense.

        2.3     COMPLIANCE. Lessor warrants that the improvements on the
Premises comply with all applicable laws, covenants or restrictions of record,
building codes, regulations and ordinances ("APPLICABLE REQUIREMENTS") in effect
on the Start Date. Said warranty does not apply to the use to which Lessee will
put the Premises or to any Alterations or Utility Installations (as defined in
Paragraph 7.3(a)) made or to be made by Lessee. NOTE: Lessee is responsible for
determining whether or not the zoning is appropriate for Lessee's intended use,
and acknowledges that past uses of the Premises may no longer be allowed. If the
Premises do not comply with said warranty, Lessor shall, except as otherwise
provided, promptly after receipt of written notice from Lessee setting forth
with specificity the nature and extent of such non-compliance, rectify the same
at Lessor's expense. If Lessee does not give Lessor written notice of a
non-compliance with this warranty within six (6) months following the Start
Date, correction of that non-compliance shall be the obligation of Lessee at
Lessee's sole cost and expense. If the Applicable Requirements are hereafter
changed (as opposed to being in existence at the Start Date, which is addressed
in Paragraph 6.2(e) below) so as to require during the term of this Lease the
construction of an addition to or an alteration of the Building, the remediation
of any Hazardous Substance, or the reinforcement or other physical modification
of the Building ("CAPITAL EXPENDITURE"), Lessor and Lessee shall allocate the
cost of such work as follows:



                                     PAGE 1


               (a) Subject to Paragraph 2.3(c) below, if such Capital
Expenditures are required as a result of the specific and unique use of the
Premises by Lessee as compared with uses by tenants in general, Lessee shall be
fully responsible for the cost thereof, provided, however that if such Capital
Expenditure is required during the last two (2) years of this Lease and the cost
thereof exceeds six (6) months' Base Rent, Lessee may instead terminate this
Lease unless Lessor notifies Lessee, in writing, within ten (10) days after
receipt of Lessee's termination notice that Lessor has elected to pay the
difference between the actual cost thereof and the amount equal to six (6)
months' Base Rent. If Lessee elects termination, Lessee shall immediately cease
the use of the Premises which requires such Capital Expenditure and deliver to
Lessor written notice specifying a termination date at least ninety (90) days
thereafter. Such termination date shall, however, in no event be earlier than
the last day that Lessee could legally utilize the Premises without commencing
such Capital Expenditure.

               (b) If such Capital Expenditure is not the result of the specific
and unique use of the Premises by Lessee (such as governmentally mandated
seismic modifications), then Lessor and Lessee shall allocate the obligation to
pay for such costs pursuant to the provisions of Paragraph 7.1(c); provided,
however, that if such Capital Expenditure is required during the last two years
of this Lease or if Lessor reasonably determines that it is not economically
feasible to pay its share thereof, Lessor shall have the option to terminate
this Lease upon ninety (90) days prior written notice to Lessee unless Lessee
notifies Lessor, in writing, within ten (10) days after receipt of Lessor's
termination notice that Lessee will pay for such Capital Expenditure. If Lessor
does not elect to terminate, and fails to tender its share of any such Capital
Expenditure, Lessee may advance such funds and deduct same, with Interest, from
Rent until Lessor's share of such costs have been fully paid. If Lessee is
unable to finance Lessor's share, or if the balance of the Rent due and payable
for the remainder of this Lease is not sufficient to fully reimburse Lessee on
an offset basis, Lessee shall have the right to terminate this Lease upon thirty
(30) days written notice to Lessor.

               (c) Notwithstanding the above, the provisions concerning Capital
Expenditures are intended to apply only to non-voluntary, unexpected, and new
Applicable Requirements. If the Capital Expenditures are instead triggered by
Lessee as a result of an actual or proposed change in use, change in intensity
of use, or modification to the Premises then, and in that event, Lessee shall be
fully responsible for the cost thereof, and Lessee shall not have any right to
terminate this Lease.

        2.4     ACKNOWLEDGEMENTS. Lessee acknowledges that: (a) it has been
advised by Lessor and/or Brokers to satisfy itself with respect to the condition
of the Premises (including but not limited to the electrical, HVAC and fire
sprinkler systems, security, environmental aspects, and compliance with
Applicable Requirements), and their suitability for Lessee's intended use, (b)
Lessee has made such investigation as it deems necessary with reference to such
matters and assumes all responsibility therefor as the same relate to its
occupancy of the Premises, and (c) neither Lessor, Lessor's agents, nor any
Broker has made any oral or written representations or warranties with respect
to said matters other than as set forth in this Lease. In addition, Lessor
acknowledges that: (a) Broker has made no representations, promises or
warranties concerning Lessee's ability to honor the Lease or suitability to
occupy the Premises, and (b) it is Lessor's sole responsibility to investigate
the financial capability and/or suitability of all proposed tenants.

        2.5     LESSEE AS PRIOR OWNER/OCCUPANT. The warranties made by Lessor in
Paragraph 2 shall be of no force or effect if immediately prior to the Start
Date Lessee was the owner or occupant of the Premises. In such event, Lessee
shall be responsible for any necessary corrective work.

3.      TERM.

        3.1     TERM. The Commencement Date, Expiration Date and Original Term
of this Lease are as specified in Paragraph 1.3.

        3.2     EARLY POSSESSION. If Lessee totally or partially occupies the
Premises prior to the Commencement Date, the obligation to pay Base Rent shall
be abated for the period of such early possession. All other terms of this Lease
(including but not limited to the obligations to pay Real Property Taxes and
insurance premiums and to maintain the Premises) shall, however, be in effect
during such period. Any such early possession shall not affect the Expiration
Date.

        3.3     DELAY IN POSSESSION. Lessor agrees to use its best commercially
reasonable efforts to deliver possession of the Premises to Lessee by the
Commencement Date. If, despite said efforts, Lessor is unable to deliver
possession as agreed, Lessor shall not be subject to any liability therefor, nor
shall such failure affect the validity of this Lease. Lessee shall not, however,
be obligated to pay Rent or perform its other obligations until it receives
possession of the Premises. If possession is not delivered within sixty (60)
days after the Commencement Date, Lessee may, at its option, by notice in
writing within ten (10) days after the end of such sixty (60) day period, cancel
this Lease, in which event the Parties shall be discharged from all obligations
hereunder. If such written notice is not received by Lessor within said ten (10)
day period, Lessee's right to cancel shall terminate. Except as otherwise
provided, if possession is not tendered to Lessee by the Start Date and Lessee
does not terminate this Lease, as aforesaid, any period of rent abatement that
Lessee would otherwise have enjoyed shall run from the date of delivery of
possession and continue for a period equal to what Lessee would otherwise have
enjoyed under the terms hereof, but minus any days of delay caused by the acts
or omissions of Lessee. If possession of the Premises is not delivered within
four (4) months after the Commencement Date, this Lease shall terminate unless
other agreements are reached between Lessor and Lessee, in writing.

        3.4     LESSEE COMPLIANCE. Lessor shall not be required to tender
possession of the Premises to Lessee until Lessee complies with its obligation
to provide evidence of insurance (Paragraph 8.5). Pending delivery of such
evidence, Lessee shall be required to perform all of its obligations under this
Lease from and after the Start Date, including the payment of Rent,
notwithstanding Lessor's election to withhold possession pending receipt of such
evidence of insurance. Further, if Lessee is required to perform any other
conditions prior to or concurrent with the Start Date, the Start Date shall
occur but Lessor may elect to withhold possession until such conditions are
satisfied.

4.      RENT.

        4.1.    RENT DEFINED. All monetary obligations of Lessee to Lessor under
the terms of this Lease (except for the Security Deposit) are deemed to be rent
("RENT").

        4.2     PAYMENT. Lessee shall cause payment of Rent to be received by
Lessor in lawful money of the United States, without offset or deduction (except
as specifically permitted in this Lease), on or before the day on which it is
due. Rent for any period during the term hereof which is for less than one (1)
full calendar month shall be prorated based upon the actual number of days of
said month. Payment of Rent shall be made to Lessor at its address stated herein
or to such other persons or place as Lessor may from time to time designate in
writing. Acceptance of a payment which is less than the amount then due shall
not be a waiver of Lessor's rights to the balance of such Rent, regardless of
Lessor's endorsement of any check so stating.

5.      SECURITY DEPOSIT. Lessee shall deposit with Lessor upon execution hereof
the Security Deposit as security for Lessee's faithful performance of its
obligations under this Lease. If Lessee fails to pay Rent, or otherwise Defaults
under this Lease, Lessor may use, apply or retain all or any portion of said
Security Deposit for the payment of any amount due Lessor or to reimburse or
compensate Lessor for any liability, expense, loss or damage which Lessor may
suffer or incur by reason thereof. If Lessor uses or applies all or any portion
of said Security Deposit, Lessee shall within ten (10) days after written
request therefor deposit monies with Lessor sufficient to restore said Security
Deposit to the full amount required by this Lease. If the Base Rent increases
during the term of this Lease, Lessee shall, upon written request from Lessor,
deposit additional monies with Lessor so that the total amount of the Security
Deposit shall at all times bear the same proportion to the increased Base Rent
as the initial Security Deposit bore to the initial Base Rent. Should the Agreed
Use be amended to accommodate a material change in the business of Lessee or to
accommodate a sublessee or assignee, Lessor shall have the right to increase the
Security Deposit to the extent necessary, in Lessor's reasonable judgment, to
account for any increased wear and tear that the Premises may suffer as a result
thereof. If a change in control of Lessee occurs during this Lease and following
such change the financial condition of Lessee is, in Lessor's reasonable
judgment, significantly reduced, Lessee shall deposit such additional monies
with Lessor as shall be sufficient to cause the Security Deposit to be at a
commercially reasonable level based on said change in financial condition.
Lessor shall not be required to keep the Security Deposit separate from its
general accounts. Within fourteen (14) days after the expiration or termination
of this Lease, if Lessor elects to apply the Security Deposit only to unpaid
Rent, and otherwise within thirty (30) days after the Premises have been vacated
pursuant to Paragraph 7.4(c) below, Lessor shall return that portion of the
Security Deposit not used or applied by Lessor. No part of the Security Deposit
shall be considered to be held in trust, to bear interest or to be prepayment
for any monies to be paid by Lessee under this Lease.



                                     PAGE 2


6.      USE.
        6.1     USE. Lessee shall use and occupy the Premises only for the
Agreed Use, or any other legal use which is reasonably comparable thereto, and
for no other purpose. Lessee shall not use or permit the use of the Premises in
a manner that is unlawful, creates damage, waste or a nuisance, or that disturbs
owners and/or occupants of, or causes damage to neighboring properties. Lessor
shall not unreasonably withhold or delay its consent to any written request for
a modification of the Agreed Use, so long as the same will not impair the
structural integrity of the improvements on the Premises or the mechanical or
electrical systems therein, is not significantly more burdensome to the
Premises. If Lessor elects to withhold consent, Lessor shall within five (5)
business days after such request give written notification of same, which notice
shall include an explanation of Lessor's objections to the change in use.

        6.2     HAZARDOUS SUBSTANCES.
                (a) REPORTABLE USES REQUIRE CONSENT. The term "HAZARDOUS
SUBSTANCE" as used in this Lease shall mean any product, substance, or waste
whose presence, use, manufacture, disposal, transportation, or release, either
by itself or in combination with other materials expected to be on the Premises,
is either: (i) potentially injurious to the public health, safety or welfare,
the environment or the Premises, (ii) regulated or monitored by any governmental
authority, or (iii) a basis for potential liability of Lessor to any
governmental agency or third party under any applicable statute or common law
theory. Hazardous Substances shall include, but not be limited to, hydrocarbons,
petroleum, gasoline, and/or crude oil or any products, by-products or fractions
thereof. Lessee shall not engage in any activity in or on the Premises which
constitutes a Reportable Use of Hazardous Substances without the express prior
written consent of Lessor and timely compliance (at Lessee's expense) with all
Applicable Requirements. "REPORTABLE USE" shall mean (i) the installation or use
of any above or below ground storage tank, (ii) the generation, possession,
storage, use, transportation, or disposal of a Hazardous Substance that requires
a permit from, or with respect to which a report, notice, registration or
business plan is required to be filed with, any governmental authority, and/or
(iii) the presence at the Premises of a Hazardous Substance with respect to
which any Applicable Requirements requires that a notice be given to persons
entering or occupying the Premises or neighboring properties. Notwithstanding
the foregoing, Lessee may use any ordinary and customary materials reasonably
required to be used in the normal course of the Agreed Use, so long as such use
is in compliance with all Applicable Requirements, is not a Reportable Use, and
does not expose the Premises or neighboring property to any meaningful risk of
contamination or damage or expose Lessor to any liability therefor. In addition,
Lessor may condition its consent to any Reportable Use upon receiving such
additional assurances as Lessor reasonably deems necessary to protect itself,
the public, the Premises and/or the environment against damage, contamination,
injury and/or liability, including, but not limited to, the installation (and
removal on or before Lease expiration or termination) of protective
modifications (such as concrete encasements) and/or increasing the Security
Deposit.

               (b) DUTY TO INFORM LESSOR. If Lessee knows, or has reasonable
cause to believe, that a Hazardous Substance has come to be located in, on,
under or about the Premises, other than as previously consented to by Lessor,
Lessee shall immediately give written notice of such fact to Lessor, and provide
Lessor with a copy of any report, notice, claim or other documentation which it
has concerning the presence of such Hazardous Substance.

               (c) LESSEE REMEDIATION. Lessee shall not cause or permit any
Hazardous Substance to be spilled or released in, on, under, or about the
Premises (including through the plumbing or sanitary sewer system) and shall
promptly, at Lessee's expense, take all investigatory and/or remedial action
reasonably recommended, whether or not formally ordered or required, for the
cleanup of any contamination of, and for the maintenance, security and/or
monitoring of the Premises or neighboring properties, that was caused or
materially contributed to by Lessee, or pertaining to or involving any Hazardous
Substance brought onto the Premises during the term of this Lease, by or for
Lessee, or any third party.

               (d) LESSEE INDEMNIFICATION. Lessee shall indemnify, defend and
hold Lessor, its agents, employees, lenders and ground lessor, if any, harmless
from and against any and all loss of rents and/or damages, liabilities,
judgments, claims, expenses, penalties, and attorneys' and consultants' fees
arising out of or involving any Hazardous Substance brought onto the Premises by
or for Lessee, or any third party (provided, however, that Lessee shall have no
liability under this Lease with respect to underground migration of any
Hazardous Substance under the Premises from adjacent properties). Lessee's
obligations shall include, but not be limited to, the effects of any
contamination or injury to person, property or the environment created or
suffered by Lessee, and the cost of investigation, removal, remediation,
restoration and/or abatement, and shall survive the expiration or termination of
this Lease. NO TERMINATION, CANCELLATION OR RELEASE AGREEMENT ENTERED INTO BY
LESSOR AND LESSEE SHALL RELEASE LESSEE FROM ITS OBLIGATIONS UNDER THIS LEASE
WITH RESPECT TO HAZARDOUS SUBSTANCES, UNLESS SPECIFICALLY SO AGREED BY LESSOR IN
WRITING AT THE TIME OF SUCH AGREEMENT.

               (e) LESSOR INDEMNIFICATION. Lessor and its successors and assigns
shall indemnify, defend, reimburse and hold Lessee, its employees and lenders,
harmless from and against any and all environmental damages, including the cost
of remediation, which existed as a result of Hazardous Substances on the
Premises prior to the Start Date or which are caused by the gross negligence or
willful misconduct of Lessor, its agents or employees. Lessor's obligations, as
and when required by the Applicable Requirements, shall include, but not be
limited to, the cost of investigation, removal, remediation, restoration and/or
abatement, and shall survive the expiration or termination of this Lease.

               (f) INVESTIGATIONS AND REMEDIATIONS. Lessor shall retain the
responsibility and pay for any investigations or remediation measures required
by governmental entities having jurisdiction with respect to the existence of
Hazardous Substances on the Premises prior to the Start Date, unless such
remediation measure is required as a result of Lessee's use (including
"Alterations", as defined in Paragraph 7.3(a) below) of the Premises, in which
event Lessee shall be responsible for such payment. Lessee shall cooperate fully
in any such activities at the request of Lessor, including allowing Lessor and
Lessor's agents to have reasonable access to the Premises at reasonable times in
order to carry out Lessor's investigative and remedial responsibilities.

               (g) LESSOR TERMINATION OPTION. If a Hazardous Substance Condition
occurs during the term of this Lease, unless Lessee is legally responsible
therefor (in which case Lessee shall make the investigation and remediation
thereof required by the Applicable Requirements and this Lease shall continue in
full force and effect, but subject to Lessor's rights under Paragraph 6.2(d) and
Paragraph 13), Lessor may, at Lessor's option, either (i) investigate and
remediate such Hazardous Substance Condition, if required, as soon as reasonably
possible at Lessor's expense, in which event this Lease shall continue in full
force and effect, or (ii) if the estimated cost to remediate such condition
exceeds twelve (12) times the then monthly Base Rent or $100,000, whichever is
greater, give written notice to Lessee, within thirty (30) days after receipt by
Lessor of knowledge of the occurrence of such Hazardous Substance Condition, of
Lessor's desire to terminate this Lease as of the date sixty (60) days following
the date of such notice. In the event Lessor elects to give a termination
notice, Lessee may, within ten (10) days thereafter, give written notice to
Lessor of Lessee's commitment to pay the amount by which the cost of the
remediation of such Hazardous Substance Condition exceeds an amount equal to
twelve (12) times the then monthly Base Rent or $100,000, whichever is greater.
Lessee shall provide Lessor with said funds or satisfactory assurance thereof
within thirty (30) days following such commitment. In such event, this Lease
shall continue in full force and effect, and Lessor shall proceed to make such
remediation as soon as reasonably possible after the required funds are
available. If Lessee does not give such notice and provide the required funds or
assurance thereof within the time provided, this Lease shall terminate as of the
date specified in Lessor's notice of termination.

        6.3     LESSEE'S COMPLIANCE WITH APPLICABLE REQUIREMENTS. Except as
otherwise provided in this Lease, Lessee shall, at Lessee's sole expense, fully,
diligently and in a timely manner, materially comply with all Applicable
Requirements, the requirements of any applicable fire insurance underwriter or
rating bureau, and the recommendations of Lessor's engineers and/or consultants
which relate in any manner to the Premises, without regard to whether said
requirements are now in effect or become effective after the Start Date. Lessee
shall, within ten (10) days after receipt of Lessor's written request, provide
Lessor with copies of all permits and other documents, and other information
evidencing Lessee's compliance with any Applicable Requirements specified by
Lessor, and shall immediately upon receipt, notify Lessor in writing (with
copies of any documents involved) of any threatened or actual claim, notice,
citation, warning, complaint or report pertaining to or involving the failure of
Lessee or the Premises to comply with any Applicable Requirements.

        6.4     INSPECTION; COMPLIANCE. Lessor and Lessor's "Lender" (as defined
in Paragraph 30 below) and consultants shall have the right to enter into
Premises at any time, in the case of an emergency, and otherwise at reasonable
times, for the purpose of inspecting the condition of the Premises and for
verifying compliance by Lessee with this Lease. The cost of any such inspections
shall be paid by Lessor, unless a violation of Applicable Requirements, or a
contamination is found to exist or be imminent, or the inspection is requested
or ordered by a governmental authority. In such case, Lessee shall upon request
reimburse Lessor for the cost of such inspections, so long as such inspection is
reasonably related to the violation or contamination.



                                     PAGE 3


7.      MAINTENANCE; REPAIRS, UTILITY INSTALLATIONS; TRADE FIXTURES AND
        ALTERATIONS.

        7.1     LESSEE'S OBLIGATIONS.
                (a) IN GENERAL. Subject to the provisions of Paragraph 2.2
(Condition), 2.3 (Compliance), 6.3 (Lessee's Compliance with Applicable
Requirements), 7.2 (Lessor's Obligations), 9 (Damage or Destruction), and 14
(Condemnation), Lessee shall, at Lessee's sole expense, keep the Premises,
Utility Installations, and Alterations in good order, condition and repair
(whether or not the portion of the Premises requiring repairs, or the means of
repairing the same, are reasonably or readily accessible to Lessee, and whether
or not the need for such repairs occurs as a result of Lessee's use, any prior
use, the elements or the age of such portion of the Premises), including, but
not limited to, all equipment or facilities, such as plumbing, heating,
ventilating, air-conditioning, electrical, lighting facilities, boilers,
pressure vessels, fire protection system, fixtures, walls (interior and
exterior), foundations, ceilings, roofs, floors, windows, doors, plate glass,
skylights, landscaping, driveways, parking lots, fences, retaining walls, signs,
sidewalks and parkways located in, on, or adjacent to the Premises. Lessee, in
keeping the Premises in good order, condition and repair, shall exercise and
perform good maintenance practices, specifically including the procurement and
maintenance of the service contracts required by Paragraph 7.1(b) below.
Lessee's obligations shall include restorations, replacements or renewals when
necessary to keep the Premises and all improvements thereon or a part thereof in
good order, condition and state of repair. Lessee shall, during the term of this
Lease, keep the exterior appearance of the Building in a first-class condition
consistent with the exterior appearance of other similar facilities of
comparable age and size in the vicinity, including, when necessary, the exterior
repainting of the Building.

               (b) SERVICE CONTRACTS. Lessee shall, at Lessee's sole expense,
procure and maintain contracts, with copies to Lessor, in customary form and
substance for, and with contractors specializing and experienced in the
maintenance of the following equipment and improvements, if any, if and when
installed on the Premises: (i) HVAC equipment, (ii) boiler, and pressure
vessels, (iii) fire extinguishing systems, including fire alarm and/or smoke
detection, (iv) landscaping and irrigation systems, (v) roof covering and
drains, (vi) driveways and parking lots, (vii) clarifiers (viii) basic utility
feed to the perimeter of the Building, and (ix) any other equipment, if
reasonably required by Lessor.

               (c) REPLACEMENT. Subject to Lessee's indemnification of Lessor as
set forth in Paragraph 8.7 below, and without relieving Lessee of liability
resulting from Lessee's failure to exercise and perform good maintenance
practices, if the Basic Elements described in Paragraph 7.1(b) cannot be
repaired other than at a cost which is in excess of 50% of the cost of replacing
such Basic Elements, then such Basic Elements shall be replaced by Lessor, and
the cost thereof shall be prorated between the Parties and Lessee shall only be
obligated to pay, each month during the remainder of the term of this Lease, on
the date on which Base Rent is due, an amount equal to the product of
multiplying the cost of such replacement by a fraction, the numerator of which
is one, and the denominator of which is the number of months of the useful life
of such replacement as such useful life is specified pursuant to Federal income
tax regulations or guidelines for depreciation thereof (including interest on
the unamortized balance as is then commercially reasonable in the judgment of
Lessor's accountants), with Lessee reserving the right to prepay its obligation
at any time.

        7.2     LESSOR'S OBLIGATIONS. Subject to the provisions of Paragraphs
2.2 (Condition), 2.3 (Compliance), 9 (Damage or Destruction) and 14
(Condemnation), it is intended by the Parties hereto that Lessor have no
obligation, in any manner whatsoever, to repair and maintain the Premises, or
the equipment therein, all of which obligations are intended to be that of the
Lessee. It is the intention of the Parties that the terms of this Lease govern
the respective obligations of the Parties as to maintenance and repair of the
Premises, and they expressly waive the benefit of any statute now or hereafter
in effect to the extent it is inconsistent with the terms of this Lease.

        7.3     UTILITY INSTALLATIONS; TRADE FIXTURES; ALTERATIONS.
               (a) DEFINITIONS; CONSENT REQUIRED. The term "UTILITY
INSTALLATIONS" refers to all floor and window coverings, air lines, power
panels, electrical distribution, security and fire protection systems,
communication systems, lighting fixtures, HVAC equipment, plumbing, and fencing
in or on the Premises. The term "TRADE FIXTURES" shall mean Lessee's machinery
and equipment that can be removed without doing material damage to the Premises.
The term "ALTERATIONS" shall mean any modification of the improvements, other
than Utility Installations or Trade Fixtures, whether by addition or deletion.
"LESSEE OWNED ALTERATIONS AND/OR UTILITY INSTALLATIONS" are defined as
Alterations and/or Utility Installations made by Lessee that are not yet owned
by Lessor pursuant to Paragraph 7.4(a). Lessee shall not make any Alterations or
Utility Installations to the Premises without Lessor's prior written consent.
Lessee may, however, make non-structural Utility Installations to the interior
of the Premises (excluding the roof) without such consent but upon notice to
Lessor, as long as they are not visible from the outside, do not involve
puncturing, relocating or removing the roof or any existing walls, and the
cumulative cost thereof during this Lease as extended does not exceed $50,000 in
the aggregate or $10,000 in any one year.

               (b) CONSENT. Any Alterations or Utility Installations that Lessee
shall desire to make and which require the consent of the Lessor shall be
presented to Lessor in written form with detailed plans. Consent shall be deemed
conditioned upon Lessee's: (i) acquiring all applicable governmental permits,
(ii) furnishing Lessor with copies of both the permits and the plans and
specifications prior to commencement of the work, and (iii) compliance with all
conditions of said permits and other Applicable Requirements in a prompt and
expeditious manner. Any Alterations or Utility Installations shall be performed
in a workmanlike manner with good and sufficient materials. Lessee shall
promptly upon completion furnish Lessor with as-built plans and specifications.
For work which costs an amount equal to the greater of one month's Base Rent, or
$10,000, Lessor may condition its consent upon Lessee providing a lien and
completion bond in an amount equal to one and one-half times the estimated cost
of such Alteration or Utility Installation and/or upon Lessee's posting an
additional Security Deposit with Lessor.

               (c) INDEMNIFICATION. Lessee shall pay, when due, all claims for
labor or materials furnished or alleged to have been furnished to or for Lessee
at or for use on the Premises, which claims are or may be secured by any
mechanic's or materialmen's lien against the Premises or any interest therein.
Lessee shall give Lessor not less than ten (10) days' notice prior to the
commencement of any work in, on or about the Premises, and Lessor shall have the
right to post notices of non-responsibility. If Lessee shall contest the
validity of any such lien, claim or demand, then Lessee shall, at its sole
expense defend and protect itself, Lessor and the Premises against the same and
shall pay and satisfy any such adverse judgment that may be rendered thereon
before the enforcement thereof. If Lessor shall require, Lessee shall furnish a
surety bond in an amount equal to one and one-half times the amount of such
contested lien, claim or demand, indemnifying Lessor against liability for the
same. If Lessor elects to participate in any such action, Lessee shall pay
Lessor's attorneys' fees and costs.

        7.4     OWNERSHIP; REMOVAL; SURRENDER; AND RESTORATION.
               (a) OWNERSHIP. Subject to Lessor's right to require removal or
elect ownership as hereinafter provided, all Alterations and Utility
Installations made by Lessee shall be the property of Lessee, but considered a
part of the Premises. Lessor may, at any time, elect in writing to be the owner
of all or any specified part of the Lessee Owned Alterations and Utility
Installations. Unless otherwise instructed per Paragraph 7.4(b) hereof, all
Lessee Owned Alterations and Utility Installations shall, at the expiration or
termination of this Lease, become the property of Lessor and be surrendered by
Lessee with the Premises.

               (b) REMOVAL. By delivery to Lessee of written notice from Lessor
not earlier than ninety (90) and not later than thirty (30) days prior to the
end of the term of this Lease, Lessor may require that any or all Lessee Owned
Alterations or Utility Installations be removed by the expiration or termination
of this Lease. Lessor may require the removal at any time of all or any part of
any Lessee Owned Alterations or Utility Installations made without the required
consent.

               (c) SURRENDER/RESTORATION. Lessee shall surrender the Premises by
the Expiration Date or any earlier termination date, with all of the
improvements, parts and surfaces thereof broom clean and free of debris, and in
good operating order, condition and state of repair, ordinary wear and tear
excepted. "Ordinary wear and tear" shall not include any damage or deterioration
that would have been prevented by good maintenance practice. Lessee shall repair
any damage occasioned by the installation, maintenance or removal of Trade
Fixtures, Lessee Owned Alterations and/or Utility Installations, furnishings,
and equipment as well as the removal of any storage tank installed by or for
Lessee, and the removal, replacement, or remediation of any soil, material or
groundwater contaminated by Lessee. Trade Fixtures shall remain the property of
Lessee and shall be removed by Lessee. The failure by Lessee to timely vacate
the Premises pursuant to this Paragraph 7.4(c) without the express written
consent of Lessor shall constitute a holdover under the provisions of Paragraph
26 below.



                                     PAGE 4


8.      INSURANCE; INDEMNITY.

        8.1     PAYMENT FOR INSURANCE. Lessee shall pay for all insurance
required under Paragraph 8 except to the extent of the cost attributable to
liability insurance carried by Lessor under Paragraph 8.2(b) in excess of
$2,000,000 per occurrence. Premiums for policy periods commencing prior to or
extending beyond the Lease term shall be prorated to correspond to the Lease
term. Payment shall be made by Lessee to Lessor within ten (10) days following
receipt of an invoice.

        8.2     LIABILITY INSURANCE.

                (a) CARRIED BY LESSEE. Lessee shall obtain and keep in force a
Commercial General Liability Policy of Insurance protecting Lessee and Lessor
against claims for bodily injury, personal injury and property damage based upon
or arising out of the ownership, use, occupancy or maintenance of the Premises
and all areas appurtenant thereto. Such insurance shall be on an occurrence
basis providing single limit coverage in an amount not less than $2,000,000 per
occurrence with an "ADDITIONAL INSURED -- MANAGERS OR LESSORS OF PREMISES
ENDORSEMENT" and contain the "AMENDMENT OF THE POLLUTION EXCLUSION ENDORSEMENT"
for damage caused by heat, smoke or fumes from a hostile fire. The Policy shall
not contain any intra-insured exclusions as between insured persons or
organizations, but shall include coverage for liability assumed under this Lease
as an "insured contract" for the performance of Lessee's indemnity obligations
under this Lease. The limits of said insurance shall not, however, limit the
liability of Lessee nor relieve Lessee of any obligation hereunder. All
insurance carried by Lessee shall be primary to and not contributory with any
similar insurance carried by Lessor, whose insurance shall be considered excess
insurance only.

                (b) CARRIED BY LESSOR. Lessor shall maintain liability insurance
as described in Paragraph 8.2(a), in addition to, and not in lieu of, the
insurance required to be maintained by Lessee. Lessee shall not be named as an
additional insured therein.

        8.3     PROPERTY INSURANCE -- BUILDING, IMPROVEMENTS AND RENTAL VALUE.

                (a) BUILDING AND IMPROVEMENTS. The Insuring Party shall obtain
and keep in force a policy or policies in the name of Lessor, with loss payable
to Lessor, any ground lessor, and to any Lender(s) insuring loss or damage to
the Premises. The amount of such insurance shall be equal to the full
replacement cost of the Premises, as the same shall exist from time to time, or
the amount required by any Lenders, but in no event more than the commercially
reasonable and available insurable value thereof. If Lessor is the Insuring
Party, however, Lessee Owned Alterations and Utility Installations, Trade
Fixtures, and Lessee's personal property shall be insured by Lessee under
Paragraph 8.4 rather than by Lessor. If the coverage is available and
commercially appropriate, such policy or policies shall insure against all risks
of direct physical loss or damage (except the perils of flood and/or earthquake
unless required by a Lender), including coverage for debris removal and the
enforcement of any Applicable Requirements requiring the upgrading, demolition,
reconstruction or replacement of any portion of the Premises as the result of a
covered loss. Said policy or policies shall also contain an agreed valuation
provision in lieu of any coinsurance clause, waiver of subrogation, and
inflation guard protection causing an increase in the annual property insurance
coverage amount by a factor of not less than the adjusted U.S. Department of
Labor Consumer Price Index for All Urban Consumers for the city nearest to where
the Premises are located. If such insurance coverage has a deductible clause,
the deductible amount shall not exceed $1,000 per occurrence, and Lessee shall
be liable for such deductible amount in the event of an Insured Loss.

                (b) RENTAL VALUE. The Insuring Party shall obtain and keep in
force a policy or policies in the name of Lessor, with loss payable to Lessor
and any Lender, insuring the loss of the full Rent for one (1) year. Said
insurance shall provide that in the event the Lease is terminated by reason of
an insured loss, the period of indemnity for such coverage shall be extended
beyond the date of the completion of repairs or replacement of the Premises, to
provide for one full year's loss of Rent from the date of any such loss. Said
insurance shall contain an agreed valuation provision in lieu of any coinsurance
clause, and the amount of coverage shall be adjusted annually to reflect the
projected Rent otherwise payable by Lessee, for the next twelve (12) month
period. Lessee shall be liable for any deductible amount in the event of such
loss.

                (c) ADJACENT PREMISES. If the Premises are part of a larger
building, or of a group of buildings owned by Lessor which are adjacent to the
Premises, the Lessee shall pay for any increase in the premiums for the property
insurance of such building or buildings if said increase is caused by Lessee's
acts, omissions, use or occupancy of the Premises.

        8.4     LESSEE'S PROPERTY/BUSINESS INTERRUPTION INSURANCE.

                (a) PROPERTY DAMAGE. Lessee shall obtain and maintain insurance
coverage on all of Lessee's personal property, Trade Fixtures, and Lessee Owned
Alterations and Utility Installations. Such insurance shall be full replacement
cost coverage with a deductible of not to exceed $1,000 per occurrence. The
proceeds from any such insurance shall be used by Lessee for the replacement of
personal property, Trade Fixtures and Lessee Owned Alterations and Utility
Installations. Lessee shall provide Lessor with written evidence that such
insurance is in force.

                (b) BUSINESS INTERRUPTION. Lessee shall obtain and maintain loss
of income and extra expense insurance in amounts as will reimburse Lessee for
direct or indirect loss of earnings attributable to all perils commonly insured
against by prudent lessees in the business of Lessee or attributable to
prevention of access to the Premises as a result of such perils.

                (c) NO REPRESENTATION OF ADEQUATE COVERAGE. Lessor makes no
representation that the limits or forms of coverage of insurance specified
herein are adequate to cover Lessee's property, business operations or
obligations under this Lease.

        8.5     INSURANCE POLICIES. Insurance required herein shall be by
companies duly licensed or admitted to transact business in the state where the
Premises are located, and maintaining during the policy term a "General
Policyholders Rating" of at least B+, V, as set forth in the most current issue
of "Best's Insurance Guide", or such other rating as may be required by a
Lender. Lessee shall not do or permit to be done anything which invalidates the
required insurance policies. Lessee shall, prior to the Start Date, deliver to
Lessor certified copies of policies of such insurance or certificates evidencing
the existence and amounts of the required insurance. No such policy shall be
cancelable or subject to modification except after thirty (30) days prior
written notice to Lessor. Lessee shall, at least thirty (30) days prior to the
expiration of such policies, furnish Lessor with evidence of renewals or
"insurance binders" evidencing renewal thereof, or Lessor may order such
insurance and charge the cost thereof to Lessee, which amount shall be payable
by Lessee to Lessor upon demand. Such policies shall be for a term of at least
one year, or the length of the remaining term of this Lease, whichever is less.
If either Party shall fail to procure and maintain the insurance required to be
carried by it, the other Party may, but shall not be required to, procure and
maintain the same.

        8.6     WAIVER OF SUBROGATION. Without affecting any other rights or
remedies, Lessee and Lessor each hereby release and relieve the other, and waive
their entire right to recover damages against the other, for loss of or damage
to its property arising out of or incident to the perils required to be insured
against herein. The effect of such releases and waivers is not limited by the
amount of insurance carried or required, or by any deductibles applicable
hereto. The Parties agree to have their respective property damage insurance
carriers waive any right to subrogation that such companies may have against
Lessor or Lessee, as the case may be, so long as the insurance is not
invalidated thereby.

        8.7     INDEMNITY. Except for Lessor's gross negligence or willful
misconduct, Lessee shall indemnify, protect, defend and hold harmless the
Premises, Lessor and its agents, Lessor's master or ground lessor, partners and
Lenders, from and against any and all claims, loss of rents and/or damages,
liens, judgments, penalties, attorneys' and consultants' fees, expenses and/or
liabilities arising out of, involving, or in connection with, the use and/or
occupancy of the Premises by Lessee. If any action or proceeding is brought
against Lessor by reason of any of the foregoing matters, Lessee shall upon
notice defend the same at Lessee's expense by counsel reasonably satisfactory to
Lessor and Lessor shall cooperate with Lessee in such defense. Lessor need not
have first paid any such claim in order to be defended or indemnified.

        8.8     EXEMPTION OF LESSOR FROM LIABILITY. Lessor shall not be liable
for injury or damage to the person or goods, wares, merchandise or other
property of Lessee, Lessee's employees, contractors, invitees, customers, or any
other person in or about the Premises, whether such damage or injury is caused
by or results from fire, steam, electricity, gas, water or rain, or from the
breakage, leakage, obstruction or other defects of pipes, fire sprinklers,
wires, appliances, plumbing, HVAC or lighting fixtures, or from any other cause,
whether the said injury or damage results from conditions arising upon the
Premises or upon other portions of the Building of which the Premises are a
part, or from other sources or places. Lessor shall not be liable for any
damages arising from any act or neglect of any other tenant of Lessor.
Notwithstanding Lessor's negligence or breach of this Lease, Lessor shall under
no circumstances be liable for injury to Lessee's business or for any loss of
income or profit therefrom.

9.      DAMAGE OR DESTRUCTION.

        9.1     DEFINITIONS.

                (a) "PREMISES PARTIAL DAMAGE" shall mean damage or destruction
to the improvements on the Premises, other than Lessee Owned Alterations and
Utility Installations, which can reasonably be repaired in six (6) months or
less from the date of the damage or destruction.



                                     PAGE 5

Lessor shall notify Lessee in writing within thirty (30) days from the date of
the damage or destruction as to whether or not the damage is Partial or Total.

                (b) "PREMISES TOTAL DESTRUCTION" shall mean damage or
destruction to the Premises, other than Lessee Owned Alterations and Utility
Installations and Trade Fixtures, which cannot reasonably be repaired in six (6)
months or less from the date of the damage or destruction. Lessor shall notify
Lessee in writing within thirty (30) days from the date of the damage or
destruction as to whether or not the damage is Partial or Total.

                (c) "INSURED LOSS" shall mean damage or destruction to
improvements on the Premises, other than Lessee Owned Alterations and Utility
Installations and Trade Fixtures, which was caused by an event required to be
covered by the insurance described in Paragraph 8.3(a), irrespective of any
deductible amounts or coverage limits involved.

                (d) "REPLACEMENT COST" shall mean the cost to repair or rebuild
the improvements owned by Lessor at the time of the occurrence to their
condition existing immediately prior thereto, including demolition, debris
removal and upgrading required by the operation of Applicable Requirements, and
without deduction for depreciation.

                (e) "HAZARDOUS SUBSTANCE CONDITION" shall mean the occurrence or
discovery of a condition involving the presence of, or a contamination by, a
Hazardous Substance as defined in Paragraph 6.2(a), in, on, or under the
Premises.

        9.2     PARTIAL DAMAGE -- INSURED LOSS. If a Premises Partial Damage
that is an Insured Loss occurs, then Lessor shall, at Lessor's expense, repair
such damage (but not Lessee's Trade Fixtures or Lessee Owned Alterations and
Utility Installations) as soon as reasonably possible and this Lease shall
continue in full force and effect; provided, however, that Lessee shall, at
Lessor's election, make the repair of any damage or destruction the total cost
to repair of which is $10,000 or less, and, in such event, Lessor shall make any
applicable insurance proceeds available to Lessee on a reasonable basis for that
purpose. Notwithstanding the foregoing, if the required insurance was not in
force or the insurance proceeds are not sufficient to effect such repair, the
Insuring Party shall promptly contribute the shortage in proceeds (except as to
the deductible which is Lessee's responsibility) as and when required to
complete said repairs. In the event, however, such shortage was due to the fact
that, by reason of the unique nature of the improvements, full replacement cost
insurance coverage was not commercially reasonable and available, Lessor shall
have no obligation to pay for the shortage in insurance proceeds or to fully
restore the unique aspects of the Premises unless Lessee provides Lessor with
the funds to cover same, or adequate assurance thereof, within ten (10) days
following receipt of written notice of such shortage and request therefor. If
Lessor receives said funds or adequate assurance thereof within said ten (10)
day period, the party responsible for making the repairs shall complete them as
soon as reasonably possible and this Lease shall remain in full force and
effect. If such funds or assurance are not received, Lessor may nevertheless
elect by written notice to Lessee within ten (10) days thereafter to: (i) make
such restoration and repair as is commercially reasonable with Lessor paying any
shortage in proceeds, in which case this Lease shall remain in full force and
effect, or have this Lease terminate thirty (30) days thereafter. Lessee shall
not be entitled to reimbursement of any funds contributed by Lessee to repair
any such damage or destruction. Premises Partial Damage due to flood or
earthquake shall be subject to Paragraph 9.3, notwithstanding that there may be
some insurance coverage, but the net proceeds of any such insurance shall be
made available for the repairs if made by either Party.

        9.3     PARTIAL DAMAGE -- UNINSURED LOSS. If a Premises Partial Damage
that is not an Insured Loss occurs, unless caused by a negligent or willful act
of Lessee (in which event Lessee shall make the repairs at Lessee's expense),
Lessor may either: (i) repair such damage as soon as reasonably possible at
Lessor's expense, in which event this Lease shall continue in full force and
effect, or (ii) terminate this Lease by giving written notice to Lessee within
thirty (30) days after receipt by Lessor of knowledge of the occurrence of such
damage. Such termination shall be effective sixty (60) days following the date
of such notice. In the event Lessor elects to terminate this Lease, Lessee shall
have the right within ten (10) days after receipt of the termination notice to
give written notice to Lessor of Lessee's commitment to pay for the repair of
such damage without reimbursement from Lessor. Lessee shall provide Lessor with
said funds or satisfactory assurance thereof within thirty (30) days after
making such commitment. In such event this Lease shall continue in full force
and effect, and Lessor shall proceed to make such repairs as soon as reasonably
possible after the required funds are available. If Lessee does not make the
required commitment, this Lease shall terminate as of the date specified in the
termination notice.

        9.4     TOTAL DESTRUCTION. Notwithstanding any other provision hereof,
if a Premises Total Destruction occurs, this Lease shall terminate sixty (60)
days following such Destruction. If the damage or destruction was caused by the
gross negligence or willful misconduct of Lessee, Lessor shall have the right to
recover Lessor's damages from Lessee, except as provided in Paragraph 8.6.

        9.5     DAMAGE NEAR END OF TERM. If at any time during the last six (6)
months of this Lease there is damage for which the cost to repair exceeds one
(1) month's Base Rent, whether or not an Insured Loss, Lessor may terminate this
Lease effective sixty (60) days following the date of occurrence of such damage
by giving a written termination notice to Lessee within thirty (30) days after
the date of occurrence of such damage. Notwithstanding the foregoing, if Lessee
at that time has an exercisable option to extend this Lease or to purchase the
Premises, then Lessee may preserve this Lease by, (a) exercising such option and
(b) providing Lessor with any shortage in insurance proceeds (or adequate
assurance thereof) needed to make the repairs on or before the earlier of (i)
the date which is ten days after Lessee's receipt of Lessor's written notice
purporting to terminate this Lease, or (ii) the day prior to the date upon which
such option expires. If Lessee duly exercises such option during such period and
provides Lessor with funds (or adequate assurance thereof) to cover any shortage
in insurance proceeds, Lessor shall, at Lessor's commercially reasonable
expense, repair such damage as soon as reasonably possible and this Lease shall
continue in full force and effect. If Lessee fails to exercise such option and
provide such funds or assurance during such period, then this Lease shall
terminate on the date specified in the termination notice and Lessee's option
shall be extinguished.

        9.6     ABATEMENT OF RENT; LESSEE'S REMEDIES.
                (a) ABATEMENT. In the event of Premises Partial Damage or
Premises Total Destruction or a Hazardous Substance Condition for which Lessee
is not responsible under this Lease, the Rent payable by Lessee for the period
required for the repair, remediation or restoration of such damage shall be
abated in proportion to the degree to which Lessee's use of the Premises is
impaired, but not to exceed the proceeds received from the Rental Value
insurance. All other obligations of Lessee hereunder shall be performed by
Lessee, and Lessor shall have no liability for any such damage, destruction,
remediation, repair or restoration except as provided herein.

                (b) REMEDIES. If Lessor shall be obligated to repair or restore
the Premises and does not commence, in a substantial and meaningful way, such
repair or restoration within ninety (90) days after such obligation shall
accrue, Lessee may, at any time prior to the commencement of such repair or
restoration, give written notice to Lessor and to any Lenders of which Lessee
has actual notice, of Lessee's election to terminate this Lease on a date not
less than sixty (60) days following the giving of such notice. If Lessee gives
such notice and such repair or restoration is not commenced within thirty (30)
days thereafter, this Lease shall terminate as of the date specified in said
notice. If the repair or restoration is commenced within said thirty (30) days,
this Lease shall continue in full force and effect. "COMMENCE" shall mean either
the unconditional authorization of the preparation of the required plans, or the
beginning of the actual work on the Premises, whichever first occurs.

        9.7     TERMINATION -- ADVANCE PAYMENTS. Upon termination of this Lease
pursuant to Paragraph 6.2(g) or Paragraph 9, an equitable adjustment shall be
made concerning advance Base Rent and any other advance payments made by Lessee
to Lessor. Lessor shall, in addition, return to Lessee so much of Lessee's
Security Deposit as has not been, or is not then required to be, used by Lessor.

        9.8     WAIVE STATUTES. Lessor and Lessee agree that the terms of this
Lease shall govern the effect of any damage to or destruction of the Premises
with respect to the termination of this Lease and hereby waive the provisions of
any present or future statute to the extent inconsistent herewith.

10.     REAL PROPERTY TAXES.
        10.1    DEFINITION OF "REAL PROPERTY TAXES." As used herein, the term
"REAL PROPERTY TAXES" shall include any form of assessment; real estate,
general, special, ordinary or extraordinary, or rental levy or tax (other than
inheritance, personal income or estate taxes); improvement bond; and/or license
fee imposed upon or levied against any legal or equitable interest of Lessor in
the Premises, Lessor's right to other income therefrom, and/or Lessor's business
of leasing, by any authority having the direct or indirect power to tax and
where the



                                     PAGE 6



funds are generated with reference to the Building address and where the
proceeds so generated are to be applied by the city, county or other local
taxing authority of a jurisdiction within which the Premises are located. The
term "REAL PROPERTY TAXES" shall also include any tax, fee, levy, assessment or
charge, or any increase therein, imposed by reason of events occurring during
the term of this Lease, including but not limited to, a change in the ownership
of the Premises.

        10.2    (a) PAYMENT OF TAXES. Lessee shall pay the Real Property Taxes
applicable to the Premises during the term of this Lease. Subject to Paragraph
10.2(b), all such payments shall be made at least ten (10) days prior to any
delinquency date. Lessee shall promptly furnish Lessor with satisfactory
evidence that such taxes have been paid. If any such taxes shall cover any
period of time prior to or after the expiration or termination of this Lease,
Lessee's share of such taxes shall be prorated to cover only that portion of the
tax bill applicable to the period that this Lease is in effect, and Lessor shall
reimburse Lessee for any overpayment. If Lessee shall fail to pay any required
Real Property Taxes, Lessor shall have the right to pay the same, and Lessee
shall reimburse Lessor therefor upon demand.

                (b) ADVANCE PAYMENT. In the event Lessee incurs a late charge on
any Rent payment, Lessor may, at Lessor's option, estimate the current Real
Property Taxes, and require that such taxes be paid in advance to Lessor by
Lessee, either: (i) in a lump sum amount equal to the installment due, at least
twenty (20) days prior to the applicable delinquency date, or (ii) monthly in
advance with the payment of the Base Rent. If Lessor elects to require payment
monthly in advance, the monthly payment shall be an amount equal to the amount
of the estimated installment of taxes divided by the number of months remaining
before the month in which said installment becomes delinquent. When the actual
amount of the applicable tax bill is known, the amount of such equal monthly
advance payments shall be adjusted as required to provide the funds needed to
pay the applicable taxes. If the amount collected by Lessor is insufficient to
pay such Real Property Taxes when due, Lessee shall pay Lessor, upon demand,
such additional sums as are necessary to pay such obligations. All monies paid
to Lessor under this Paragraph may be intermingled with other monies of Lessor
and shall not bear interest. In the event of a Breach by Lessee in the
performance of its obligations under this Lease, then any balance of funds paid
to Lessor under the provisions of this Paragraph may, at the option of Lessor,
be treated as an additional Security Deposit.

        10.3    JOINT ASSESSMENT. If the Premises are not separately assessed,
Lessee's liability shall be an equitable proportion of the Real Property Taxes
for all of the land and improvements included within the tax parcel assessed,
such proportion to be conclusively determined by Lessor from the respective
valuations assigned in the assessor's work sheets or such other information as
may be reasonably available.

        10.4    PERSONAL PROPERTY TAXES. Lessee shall pay, prior to delinquency,
all taxes assessed against and levied upon Lessee Owned Alterations, Utility
Installations, Trade Fixtures, furnishings, equipment and all personal property
of Lessee. When possible, Lessee shall cause such property to be assessed and
billed separately from the real property of Lessor. If any of Lessee's said
personal property shall be assessed with Lessor's real property, Lessee shall
pay Lessor the taxes attributable to Lessee's property within ten (10) days
after receipt of a written statement.

11.     UTILITIES. Lessee shall pay for all water, gas, heat, light, power,
telephone, trash disposal and other utilities and services supplied to the
Premises, together with any taxes thereon. If any such services are not
separately metered to Lessee, Lessee shall pay a reasonable proportion, to be
determined by Lessor, of all charges jointly metered.

12.     ASSIGNMENT AND SUBLETTING.

        12.1    LESSOR'S CONSENT REQUIRED.

                (a) Lessee shall not voluntarily or by operation of law assign,
transfer, mortgage or encumber (collectively, "ASSIGN OR ASSIGNMENT") or sublet
all or any part of Lessee's interest in this Lease or in the Premises without
Lessor's prior written consent.

                (b) A change in the control of Lessee shall constitute an
assignment requiring consent. See Paragraph 62.

                (d) An assignment or subletting without consent shall, at
Lessor's option, be a Default curable after notice per Paragraph 13.1(c), or a
noncurable Breach without the necessity of any notice and grace period. If
Lessor elects to treat such unapproved assignment or subletting as a noncurable
Breach, Lessor may either: (i) terminate this Lease, or (ii) upon thirty (30)
days written notice, increase the monthly Base Rent to one hundred ten percent
(110%) of the Base Rent then in effect. Further, in the event of such Breach and
rental adjustment, (i) the purchase price of any option to purchase the Premises
held by Lessee shall be subject to similar adjustment to one hundred ten percent
(110%) of the price previously in effect, and (ii) all fixed and non-fixed
rental adjustments scheduled during the remainder of the Lease term shall be
increased to One Hundred Ten Percent (110%) of the scheduled adjusted rent.

                (e) Lessee's remedy for any breach of Paragraph 12.1 by Lessor
shall be limited to compensatory damages and/or injunctive relief.

        12.2    TERMS AND CONDITIONS APPLICABLE TO ASSIGNMENT AND SUBLETTING.

                (a) Regardless of Lessor's consent, any assignment or subletting
shall not: (i) be effective without the express written assumption by such
assignee or sublessee of the obligations of Lessee under this Lease; (ii)
release Lessee of any obligations hereunder; or (iii) alter the primary
liability of Lessee for the payment of Rent or for the performance of any other
obligations to be performed by Lessee.

                (b) Lessor may accept Rent or performance of Lessee's
obligations from any person other than Lessee pending approval or disapproval of
an assignment. Neither a delay in the approval or disapproval of such assignment
nor the acceptance of Rent or performance shall constitute a waiver or estoppel
of Lessor's right to exercise its remedies for Lessee's Default or Breach.

                (c) Lessor's consent to any assignment or subletting shall not
constitute a consent to any subsequent assignment or subletting.

                (d) In the event of any Default or Breach by Lessee, Lessor may
proceed directly against Lessee, any Guarantors or anyone else responsible for
the performance of Lessee's obligations under this Lease, including any assignee
or sublessee, without first exhausting Lessor's remedies against any other
person or entity responsible therefore to Lessor, or any security held by
Lessor.

                (e) Each request for consent to an assignment or subletting
shall be in writing, accompanied by information relevant to Lessor's
determination as to the financial and operational responsibility and
appropriateness of the proposed assignee or sublessee, including but not limited
to the intended use and/or required modification of the Premises, if any. Lessee
agrees to provide Lessor with such other or additional information and/or
documentation as may be reasonably requested.

                (f) Any assignee of, or sublessee under, this Lease shall, by
reason of accepting such assignment or entering into such sublease, be deemed to
have assumed and agreed to conform and comply with each and every term,
covenant, condition and obligation herein to be observed or performed by Lessee
during the term of said assignment or sublease, other than such obligations as
are contrary to or inconsistent with provisions of an assignment or sublease to
which Lessor has specifically consented to in writing.

        12.3    ADDITIONAL TERMS AND CONDITIONS APPLICABLE TO SUBLETTING. The
following terms and conditions shall apply to any subletting by Lessee of all or
any part of the Premises and shall be deemed included in all subleases under
this Lease whether or not expressly incorporated therein:

                (a) Lessee hereby assigns and transfers to Lessor all of
Lessee's interest in all Rent payable on any sublease, and Lessor may collect
such Rent and apply same toward Lessee's obligations under this Lease; provided,
however, that until a Breach shall occur in the performance of Lessee's
obligations, Lessee may collect said Rent. Lessor shall not, by reason of the
foregoing or any assignment of such sublease, nor by reason of the collection of
Rent, be deemed liable to the sublessee for any failure of Lessee to perform and
comply with any of Lessee's obligations to such sublessee. Lessee hereby
irrevocably authorizes and directs any such sublessee, upon receipt of a written




                                     PAGE 7


notice from Lessor stating that a Breach exists in the performance of Lessee's
obligations under this Lease, to pay to Lessor all Rent due and to become due
under the sublease. Sublessee shall rely upon any such notice from Lessor and
shall pay all Rents to Lessor without any obligation or right to inquire as to
whether such Breach exists, notwithstanding any claim from Lessee to the
contrary.

                (b) In the event of a Breach by Lessee, Lessor may, at its
option, require sublessee to attorn to Lessor, in which event Lessor shall
undertake the obligations of the sublessor under such sublease from the time of
the exercise of said option to the expiration of such sublease; provided,
however, Lessor shall not be liable for any prepaid rents or security deposit
paid by such sublessee to such sublessor or for any prior Defaults or Breaches
of such sublessor.

                (c) Any matter requiring the consent of the sublessor under a
sublease shall also require the consent of Lessor.

                (d) No sublessee shall further assign or sublet all or any part
of the Premises without Lessor's prior written consent.

                (e) Lessor shall deliver a copy of any notice of Default or
Breach by Lessee to the sublessee, who shall have the right to cure the Default
of Lessee within the grace period, if any, specified in such notice. The
sublessee shall have a right of reimbursement and offset from and against Lessee
for any such Defaults cured by the sublessee.

13.     DEFAULT; BREACH; REMEDIES.

        13.1    DEFAULT; BREACH. A "DEFAULT" is defined as a failure by the
Lessee to comply with or perform any of the terms, covenants, conditions or
rules under this Lease. A "BREACH" is defined as the occurrence of one or more
of the following Defaults, and the failure of Lessee to cure such Default within
any applicable grace period:

                (a) The abandonment of the Premises; or the vacating of the
Premises without providing a commercially reasonable level of security, or where
the coverage of the property insurance described in Paragraph 8.3 is jeopardized
as a result thereof, or without providing reasonable assurances to minimize
potential vandalism.

                (b) The failure of Lessee to make any payment of Rent or any
Security Deposit required to be made by Lessee hereunder, whether to Lessor or
to a third party, when due, to provide reasonable evidence of insurance or
surety bond, or to fulfill any obligation under this Lease which endangers or
threatens life or property, where such failure continues for a period of three
(3) business days following written notice to Lessee.

                (c) The failure by Lessee to provide (i) reasonable written
evidence of compliance with Applicable Requirements, (ii) the service contracts,
(iii) the rescission of an unauthorized assignment or subletting, (iv) a Tenancy
Statement, (v) a requested subordination, (vi) evidence concerning any guaranty
and/or Guarantor, (vii) any document requested under Paragraph 42 (easements),
or (viii) any other documentation or information which Lessor may reasonably
require of Lessee under the terms of this Lease, where any such failure
continues for a period of ten (10) days following written notice to Lessee.

                (d) A Default by Lessee as to the terms, covenants, conditions
or provisions of this Lease, or of the rules adopted under Paragraph 40 hereof,
other than those described in subparagraphs 13.1(a), (b) or (c), above, where
such Default continues for a period of thirty (30) days after written notice;
provided, however, that if the nature of Lessee's Default is such that more than
thirty (30) days are reasonably required for its cure, then it shall not be
deemed to be a Breach if Lessee commences such cure within said thirty (30) day
period and thereafter diligently prosecutes such cure to completion.

                (e) The occurrence of any of the following events: (i) the
making of any general arrangement or assignment for the benefit of creditors;
(ii) becoming a "DEBTOR" as defined in 11 U.S.C. Section 101 or any successor
statute thereto (unless, in the case of a petition filed against Lessee, the
same is dismissed within sixty (60) days); (iii) the appointment of a trustee or
receiver to take possession of substantially all of Lessee's assets located at
the Premises or of Lessee's interest in this Lease, where possession is not
restored to Lessee within thirty (30) days; or (iv) the attachment, execution or
other judicial seizure of substantially all of Lessee's assets located at the
Premises or of Lessee's interest in this Lease, where such seizure is not
discharged within thirty (30) days; provided, however, in the event that any
provision of this subparagraph 13.1 (e) is contrary to any applicable law, such
provision shall be of no force or effect, and not affect the validity of the
remaining provisions.

                (f) The discovery that any financial statement of Lessee or of
any Guarantor given to Lessor was materially false.

                (g) If the performance of Lessee's obligations under this Lease
is guaranteed: (i) the death of a Guarantor; (ii) the termination of a
Guarantor's liability with respect to this Lease other than in accordance with
the terms of such guaranty; (iii) a Guarantor's becoming insolvent or the
subject of a bankruptcy filing; (iv) a Guarantor's refusal to honor the
guaranty; or (v) a Guarantor's breach of its guaranty obligation on an
anticipatory basis, and Lessee's failure, within sixty (60) days following
written notice of any such event, to provide written alternative assurance or
security, which, when coupled with the then existing resources of Lessee, equals
or exceeds the combined financial resources of Lessee and the Guarantors that
existed at the time of execution of this Lease.

        13.2    REMEDIES. If Lessee fails to perform any of its affirmative
duties or obligations, within ten (10) days after written notice (or in case of
an emergency, without notice), Lessor may, at its option, perform such duty or
obligation on Lessee's behalf, including but not limited to the obtaining of
reasonably required bonds, insurance policies, or governmental licenses, permits
or approvals. The costs and expenses of any such performance by Lessor shall be
due and payable by Lessee upon receipt of invoice therefor. If any check given
to Lessor by Lessee shall not be honored by the bank upon which it is drawn,
Lessor, at its option, may require all future payments to be made by Lessee to
be by cashier's check. In the event of a Breach, Lessor may, with or without
further notice or demand, and without limiting Lessor in the exercise of any
right or remedy which Lessor may have by reason of such Breach:

                (a) Terminate Lessee's right to possession of the Premises by
any lawful means, in which case this Lease shall terminate and Lessee shall
immediately surrender possession to Lessor. In such event Lessor shall be
entitled to recover from Lessee: (i) the unpaid Rent which had been earned at
the time of termination; (ii) the worth at the time of award of the amount by
which the unpaid rent which would have been earned after termination until the
time of award exceeds the amount of such rental loss that the Lessee proves
could have been reasonably avoided; (iii) the worth at the time of award of the
amount by which the unpaid rent for the balance of the term after the time of
award exceeds the amount of such rental loss that the Lessee proves could be
reasonably avoided; and (iv) any other amount necessary to compensate Lessor for
all the detriment proximately caused by the Lessee's failure to perform its
obligations under this Lease or which in the ordinary course of things would be
likely to result therefrom, including but not limited to the cost of recovering
possession of the Premises, expenses of reletting, including necessary
renovation and alteration of the Premises, reasonable attorneys' fees, and that
portion of any leasing commission paid by Lessor in connection with this Lease
applicable to the unexpired term of this Lease. The worth at the time of award
of the amount referred to in provision (iii) of the immediately preceding
sentence shall be computed by discounting such amount at the discount rate of
the Federal Reserve Bank of the District within which the Premises are located
at the time of award plus one percent (1%). Efforts by Lessor to mitigate
damages caused by Lessee's Breach of this Lease shall not waive Lessor's right
to recover damages under Paragraph 12. If termination of this Lease is obtained
through the provisional remedy of unlawful detainer, Lessor shall have the right
to recover in such proceeding any unpaid Rent and damages as are recoverable
therein, or Lessor may reserve the right to recover all or any part thereof in a
separate suit. If a notice and grace period required under Paragraph 13.1 was
not previously given, a notice to pay rent or quit, or to perform or quit given
to Lessee under the unlawful detainer statute shall also constitute the notice
required by Paragraph 13.1. In such case, the applicable grace period required
by Paragraph 13.1 and the unlawful detainer statute shall run concurrently, and
the failure of Lessee to cure the Default within the greater of the two such
grace periods shall constitute both an unlawful detainer and a Breach of this
Lease entitling Lessor to the remedies provided for in this Lease and/or by said
statute.

                (b) Continue the Lease and Lessee's right to possession and
recover the Rent as it becomes due, in which event Lessee may sublet or assign,
subject only to reasonable limitations. Acts of maintenance, efforts to relet,
and/or the appointment of a receiver to protect the Lessor's interests, shall
not constitute a termination of the Lessee's right to possession.

                (c) Pursue any other remedy now or hereafter available under the
laws or judicial decisions of the state wherein the Premises are located. The
expiration or termination of this Lease and/or the termination of Lessee's right
to possession shall not relieve Lessee from liability under any indemnity
provisions of this Lease as to matters occurring or accruing during the term
hereof or by reason of


                                     PAGE 8


Lessee's occupancy of the Premises.

        13.3    INDUCEMENT RECAPTURE. Any agreement for free or abated rent or
other charges, or for the giving or paying by Lessor to or for Lessee of any
cash or other bonus, inducement or consideration for Lessee's entering into this
Lease, all of which concessions are hereinafter referred to as "INDUCEMENT
PROVISIONS," shall be deemed conditioned upon Lessee's full and faithful
performance of all of the terms, covenants and conditions of this Lease. Upon
Breach of this Lease by Lessee, any such Inducement Provision shall
automatically be deemed deleted from this Lease and of no further force or
effect, and any rent, other charge, bonus, inducement or consideration
theretofore abated, given or paid by Lessor under such an Inducement Provision
shall be immediately due and payable by Lessee to Lessor, notwithstanding any
subsequent cure of said Breach by Lessee. The acceptance by Lessor of Rent or
the cure of the Breach which initiated the operation of this paragraph shall not
be deemed a waiver by Lessor of the provisions of this paragraph unless
specifically so stated in writing by Lessor at the time of such acceptance.

        13.4    LATE CHARGES. Lessee hereby acknowledges that late payment by
Lessee of Rent will cause Lessor to incur costs not contemplated by this Lease,
the exact amount of which will be extremely difficult to ascertain. Such costs
include, but are not limited to, processing and accounting charges, and late
charges which may be imposed upon Lessor by any Lender. Accordingly, if any Rent
shall not be received by Lessor within five (5) days after such amount shall be
due, then, without any requirement for notice to Lessee, Lessee shall pay to
Lessor a one-time late charge equal to ten percent (10%) of each such overdue
amount. The Parties hereby agree that such late charge represents a fair and
reasonable estimate of the costs Lessor will incur by reason of such late
payment. Acceptance of such late charge by Lessor shall in no event constitute a
waiver of Lessee's Default or Breach with respect to such overdue amount, nor
prevent the exercise of any of the other rights and remedies granted hereunder.
In the event that a late charge is payable hereunder, whether or not collected,
for three (3) consecutive installments of Base Rent, then notwithstanding any
provision of this Lease to the contrary, Base Rent shall, at Lessor's option,
become due and payable quarterly in advance.

        13.5    INTEREST. Any monetary payment due Lessor hereunder, other than
late charges, not received by Lessor, when due as to scheduled payments (such as
Base Rent) or within thirty (30) days following the date on which it was due for
non-scheduled payment, shall bear interest from the date when due, as to
scheduled payments, or the thirty-first (31st) day after it was due as to
non-scheduled payments. The interest ("Interest") charged shall be equal to the
prime rate reported in the Wall Street Journal as published closest prior to the
date when due plus four percent (4%), but shall not exceed the maximum rate
allowed by law. Interest is payable in addition to the potential late charge
provided for in Paragraph 13.4.

        13.6    BREACH BY LESSOR.

                (a) NOTICE OF BREACH. Lessor shall not be deemed in breach of
this Lease unless Lessor fails within a reasonable time to perform an obligation
required to be performed by Lessor. For purposes of this Paragraph, a reasonable
time shall in no event be less than thirty (30) days after receipt by Lessor,
and any Lender whose name and address shall have been furnished Lessee in
writing for such purpose, of written notice specifying wherein such obligation
of Lessor has not been performed; provided, however, that if the nature of
Lessor's obligation is such that more than thirty (30) days are reasonably
required for its performance, then Lessor shall not be in breach if performance
is commenced within such thirty (30) day period and thereafter diligently
pursued to completion.

                (b) PERFORMANCE BY LESSEE ON BEHALF OF LESSOR. In the event that
neither Lessor nor Lender cures said breach within thirty (30) days after
receipt of said notice, or if having commenced said cure they do not diligently
pursue it to completion, then Lessee may elect to cure said breach at Lessee's
expense and offset from Rent an amount equal to the greater of one month's Base
Rent or the Security Deposit, and to pay an excess of such expense under
protest, reserving Lessee's right to reimbursement from Lessor. Lessee shall
document the cost of said cure and supply said documentation to Lessor.

14.     CONDEMNATION. If the Premises or any portion thereof are taken under the
power of eminent domain or sold under the threat of the exercise of said power
(collectively "CONDEMNATION"), this Lease shall terminate as to the part taken
as of the date the condemning authority takes title or possession, whichever
first occurs. If more than ten percent (10%) of any building portion of the
Premises, or more than twenty-five percent (25%) of the land area portion of the
Premises not occupied by any building, is taken by Condemnation, Lessee may, at
Lessee's option, to be exercised in writing within ten (10) days after Lessor
shall have given Lessee written notice of such taking (or in the absence of such
notice, within ten (10) days after the condemning authority shall have taken
possession) terminate this Lease as of the date the condemning authority takes
such possession. If Lessee does not terminate this Lease in accordance with the
foregoing, this Lease shall remain in full force and effect as to the portion of
the Premises remaining, except that the Base Rent shall be reduced in proportion
to the reduction in utility of the Premises caused by such Condemnation.
Condemnation awards and/or payments shall be the property of Lessor, whether
such award shall be made as compensation for diminution in value of the
leasehold, the value of the part taken, or for severance damages; provided,
however, that Lessee shall be entitled to any compensation for Lessee's
relocation expenses, loss of business goodwill and/or Trade Fixtures, without
regard to whether or not this Lease is terminated pursuant to the provisions of
this Paragraph. All Alterations and Utility Installations made to the Premises
by Lessee, for purposes of Condemnation only, shall be considered the property
of the Lessee and Lessee shall be entitled to any and all compensation which is
payable therefor. In the event that this Lease is not terminated by reason of
the Condemnation, Lessor shall repair any damage to the Premises caused by such
Condemnation.

15.     BROKERS' FEE.

16.     ESTOPPEL CERTIFICATES.

                (a) Each Party (as "RESPONDING PARTY") shall within ten (10)
days after written notice from the other Party (the "REQUESTING PARTY") execute,
acknowledge and deliver to the Requesting Party a statement in writing in form
similar to the then most current "ESTOPPEL CERTIFICATE" form published by the
American Industrial Real Estate Association, plus such additional information,
confirmation and/or statements as may be reasonably requested by the Requesting
Party.

                (b) If the Responding Party shall fail to execute or deliver the
Estoppel Certificate within such ten day period, the Requesting Party may
execute an Estoppel Certificate stating that: (i) the Lease is in full force and
effect without modification except as may be represented by the Requesting
Party, (ii) there are no uncured defaults in the Requesting Party's performance,
and (iii) if Lessor is the Requesting Party, not more than one month's Rent has
been paid in advance. Prospective purchasers and encumbrancers may rely upon the
Requesting Party's Estoppel Certificate, and the Responding Party shall be
estopped from denying the truth of the facts contained in said Certificate.



                                     PAGE 9

                (c) If Lessor desires to finance, refinance, or sell the
Premises, or any part thereof, Lessee and all Guarantors shall deliver to any
potential lender or purchaser designated by Lessor such financial statements as
may be reasonably required by such lender or purchaser, including but not
limited to Lessee's financial statements for the past three (3) years. All such
financial statements shall be received by Lessor and such lender or purchaser in
confidence and shall be used only for the purposes herein set forth.

17.     DEFINITION OF LESSOR. The term "LESSOR" as used herein shall mean the
owner or owners at the time in question of the fee title to the Premises, or, if
this is a sublease, of the Lessee's interest in the prior lease. In the event of
a transfer of Lessor's title or interest in the Premises or this Lease, Lessor
shall deliver to the transferee or assignee (in cash or by credit) any unused
Security Deposit held by Lessor. Except as provided in Paragraph 15, upon such
transfer or assignment and delivery of the Security Deposit, as aforesaid, the
prior Lessor shall be relieved of all liability with respect to the obligations
and/or covenants under this Lease thereafter to be performed by the Lessor.
Subject to the foregoing, the obligations and/or covenants in this Lease to be
performed by the Lessor shall be binding only upon the Lessor as hereinabove
defined. Notwithstanding the above, and subject to the provisions of Paragraph
20 below, the original Lessor under this Lease, and all subsequent holders of
the Lessor's interest in this Lease shall remain liable and responsible with
regard to the potential duties and liabilities of Lessor pertaining to Hazardous
Substances as outlined in Paragraph 6 above.

18.     SEVERABILITY. The invalidity of any provision of this Lease, as
determined by a court of competent jurisdiction, shall in no way affect the
validity of any other provision hereof.

19.     DAYS. Unless otherwise specifically indicated to the contrary, the word
"days" as used in this Lease shall mean and refer to calendar days.

20.     LIMITATION ON LIABILITY. Subject to the provisions of Paragraph 17
above, the obligations of Lessor under this Lease shall not constitute personal
obligations of Lessor, the individual partners of Lessor or its or their
individual partners, directors, officers or shareholders, and Lessee shall look
to the Premises, and to no other assets of Lessor, for the satisfaction of any
liability of Lessor with respect to this Lease, and shall not seek recourse
against the individual partners of Lessor, or its or their individual partners,
directors, officers or shareholders, or any of their personal assets for such
satisfaction.

21.     TIME OF ESSENCE. Time is of the essence with respect to the performance
of all obligations to be performed or observed by the Parties under this Lease.

22.     NO PRIOR OR OTHER AGREEMENTS; BROKER DISCLAIMER. This Lease contains all
agreements between the Parties with respect to any matter mentioned herein, and
no other prior or contemporaneous agreement or understanding shall be effective.
Lessor and Lessee each represents and warrants to the Brokers that it has made,
and is relying solely upon, its own investigation as to the nature, quality,
character and financial responsibility of the other Party to this Lease and as
to the nature, quality and character of the Premises. Brokers have no
responsibility with respect thereto or with respect to any default or breach
hereof by either Party. The liability (including court costs and Attorneys'
fees), of any Broker with respect to negotiation, execution, delivery or
performance by either Lessor or Lessee under this Lease or any amendment or
modification hereto shall be limited to an amount up to the fee received by such
Broker pursuant to this Lease; provided, however, that the foregoing limitation
on each Broker's liability shall not be applicable to any gross negligence or
willful misconduct of such Broker.

23.     NOTICES.

                23.1    NOTICE REQUIREMENTS. All notices required or permitted
by this Lease shall be in writing and may be delivered in person (by hand or by
courier) or may be sent by regular, certified or registered mail or U.S. Postal
Service Express Mail, with postage prepaid, or by facsimile transmission, and
shall be deemed sufficiently given if served in a manner specified in this
Paragraph 23. The addresses noted adjacent to a Party's signature on this Lease
shall be that Party's address for delivery or mailing of notices. Either Party
may by written notice to the other specify a different address for notice,
except that upon Lessee's taking possession of the Premises, the Premises shall
constitute Lessee's address for notice. A copy of all notices to Lessor shall be
concurrently transmitted to such party or parties at such addresses as Lessor
may from time to time hereafter designate in writing.

                23.2    DATE OF NOTICE. Any notice sent by registered or
certified mail, return receipt requested, shall be deemed given on the date of
delivery shown on the receipt card, or if no delivery date is shown, the
postmark thereon. If sent by regular mail the notice shall be deemed given
forty-eight (48) hours after the same is addressed as required herein and mailed
with postage prepaid. Notices delivered by United States Express Mail or
overnight courier that guarantee next day delivery shall be deemed given
twenty-four (24) hours after delivery of the same to the Postal Service or
courier. Notices transmitted by facsimile transmission or similar means shall be
deemed delivered upon telephone confirmation of receipt, provided a copy is also
delivered via delivery or mail. If notice is received on a Saturday, Sunday or
legal holiday, it shall be deemed received on the next business day.

24.     WAIVERS. No waiver by Lessor of the Default or Breach of any term,
covenant or condition hereof by Lessee, shall be deemed a waiver of any other
term, covenant or condition hereof, or of any subsequent Default or Breach by
Lessee of the same or of any other term, covenant or condition hereof. Lessor's
consent to, or approval of, any act shall not be deemed to render unnecessary
the obtaining of Lessor's consent to, or approval of, any subsequent or similar
act by Lessee, or be construed as the basis of an estoppel to enforce the
provision or provisions of this Lease requiring such consent. The acceptance of
Rent by Lessor shall not be a waiver of any Default or Breach by Lessee. Any
payment by Lessee may be accepted by Lessor on account of monies or damages due
Lessor, notwithstanding any qualifying statements or conditions made by Lessee
in connection therewith, which such statements and/or conditions shall be of no
force or effect whatsoever unless specifically agreed to in writing by Lessor at
or before the time of deposit of such payment.

25.     RECORDING. Either Lessor or Lessee shall, upon request of the other,
execute, acknowledge and deliver to the other a short form memorandum of this
Lease for recording purposes. The Party requesting recordation shall be
responsible for payment of any fees applicable thereto.

26.     NO RIGHT TO HOLDOVER. Lessee has no right to retain possession of the
Premises or any part thereof beyond the expiration or termination of this Lease.
In the event that Lessee holds over, then the Base Rent shall be increased to
one hundred fifty percent (150%) of the Base Rent applicable during the month
immediately preceding the expiration or termination. Nothing contained herein
shall be construed as consent by Lessor to any holding over by Lessee.

27.     CUMULATIVE REMEDIES. No remedy or election hereunder shall be deemed
exclusive but shall, wherever possible, be cumulative with all other remedies at
law or in equity.

28.     COVENANTS AND CONDITIONS; CONSTRUCTION OF AGREEMENT. All provisions of
this Lease to be observed or performed by Lessee are both covenants and
conditions. In construing this Lease, all headings and titles are for the
convenience of the parties only and shall not be considered a part of this
Lease. Whenever required by the context, the singular shall include the plural
and vice versa. This Lease shall not be construed as if prepared by one of the
Parties, but rather according to its fair meaning as a whole, as if both parties
had prepared it.

29.     BINDING EFFECT; CHOICE OF LAW. This Lease shall be binding upon the
parties, their personal representatives, successors and assigns and be governed
by the laws of the State in which the Premises are located. Any litigation
between the Parties hereto concerning this Lease shall be initiated in the
county in which the Premises are located.

30.     SUBORDINATION; ATTORNMENT; NON-DISTURBANCE.

        30.1    SUBORDINATION. This Lease and any Option granted hereby shall be
subject and subordinate to any ground lease, mortgage, deed of trust, or other
hypothecation or security device (collectively, "SECURITY DEVICE"), now or
hereafter placed upon the Premises, to any and all advances made on the security
thereof, and to all renewals, modifications, and extensions thereof. Lessee
agrees that the holders of any such Security Devices (in this Lease together
referred to as "Lessor's Lender") shall have no liability or obligation to
perform any of the obligations of Lessor under this Lease. Any Lender may elect
to have this Lease and/or any Option granted hereby superior to the lien of its
Security Device by giving written notice thereof to Lessee, whereupon this Lease
and such Options shall be deemed prior to such Security Device, notwithstanding
the relative dates of the documentation or recordation thereof.

        30.2    ATTORNMENT. Subject to the non-disturbance provisions of
Paragraph 30.3, Lessee agrees to attorn to a Lender or any other party who
acquires ownership of the Premises by reason of a foreclosure of a Security
Device, and that in the event of such foreclosure,



                                    PAGE 10



such new owner shall not: (i) be liable for any act or omission of any prior
lessor or with respect to events occurring prior to acquisition of ownership;
(ii) be subject to any offsets or defenses which Lessee might have against any
prior lessor; or (iii) be bound by prepayment of more than one (1) month's rent.

        30.3    NON-DISTURBANCE. With respect to Security Devices entered into
by Lessor after the execution of this Lease, Lessee's subordination of this
Lease shall be subject to receiving a commercially reasonable non-disturbance
agreement (a "NON-DISTURBANCE AGREEMENT") from the Lender which Non-Disturbance
Agreement provides that Lessee's possession of the Premises, and this Lease,
including any options to extend the term hereof, will not be disturbed so long
as Lessee is not in Breach hereof and attorns to the record owner of the
Premises. Further, within sixty (60) days after the execution of this Lease,
Lessor shall use its commercially reasonable efforts to obtain a Non-Disturbance
Agreement from the holder of any pre-existing Security Device which is secured
by the Premises. In the event that Lessor is unable to provide the
Non-Disturbance Agreement within said sixty (60) days, then Lessee may, at
Lessee's option, directly contact Lessor's lender and attempt to negotiate for
the execution and delivery of a Non-Disturbance Agreement.

        30.4    SELF-EXECUTING. The agreements contained in this Paragraph 30
shall be effective without the execution of any further documents; provided,
however, that, upon written request from Lessor or a Lender in connection with a
sale, financing or refinancing of the Premises, Lessee and Lessor shall execute
such further writings as may be reasonably required to separately document any
subordination, attornment and/or Non-Disturbance Agreement provided for herein.

31.     ATTORNEYS' FEES. If any Party or Broker brings an action or proceeding
involving the Premises to enforce the terms hereof or to declare rights
hereunder, the Prevailing Party (as hereafter defined) in any such proceeding,
action, or appeal thereon, shall be entitled to reasonable attorneys' fees. Such
fees may be awarded in the same suit or recovered in a separate suit, whether or
not such action or proceeding is pursued to decision or judgment. The term,
"PREVAILING PARTY" shall include, without limitation, a Party or Broker who
substantially obtains or defeats the relief sought, as the case may be, whether
by compromise, settlement, judgment, or the abandonment by the other Party or
Broker of its claim or defense. The attorneys' fees award shall not be computed
in accordance with any court fee schedule, but shall be such as to fully
reimburse all attorneys' fees reasonably incurred. In addition, Lessor shall be
entitled to attorneys' fees, costs and expenses incurred in the preparation and
service of notices of Default and consultations in connection therewith, whether
or not a legal action is subsequently commenced in connection with such Default
or resulting Breach.

32.     LESSOR'S ACCESS; SHOWING PREMISES; REPAIRS. Lessor and Lessor's agents
shall have the right to enter the Premises at any time, in the case of an
emergency, and otherwise at reasonable times for the purpose of showing the same
to prospective purchasers, lenders, or lessees, and making such alterations,
repairs, improvements or additions to the Premises as Lessor may deem necessary.
All such activities shall be without abatement of rent or liability to Lessee.
Lessor may at any time place on the Premises any ordinary "FOR SALE" signs and
Lessor may during the last six (6) months of the term hereof place on the
Premises any ordinary "FOR LEASE" signs. Lessee may at any time place on or
about the Premises any ordinary "FOR SUBLEASE" sign.

33.     AUCTIONS. Lessee shall not conduct, nor permit to be conducted, any
auction upon the Premises without Lessor's prior written consent. Lessor shall
not be obligated to exercise any standard of reasonableness in determining
whether to permit an auction.

34.     SIGNS. Except for ordinary "For Sublease" signs, Lessee shall not place
any sign upon the Premises without Lessor's prior written consent. All signs
must comply with all Applicable Requirements.

35.     TERMINATION; MERGER. Unless specifically stated otherwise in writing by
Lessor, the voluntary or other surrender of this Lease by Lessee, the mutual
termination or cancellation hereof, or a termination hereof by Lessor for Breach
by Lessee, shall automatically terminate any sublease or lesser estate in the
Premises; provided, however, that Lessor may elect to continue any one or all
existing subtenancies. Lessor's failure within ten (10) days following any such
event to elect to the contrary by written notice to the holder of any such
lesser interest, shall constitute Lessor's election to have such event
constitute the termination of such interest.

36.     CONSENTS. Except as otherwise provided herein, wherever in this Lease
the consent of a Party is required to an act by or for the other Party, such
consent shall not be unreasonably withheld or delayed. Lessor's actual
reasonable costs and expenses (including, but not limited to, architects',
attorneys', engineers' and other consultants' fees) incurred in the
consideration of, or response to, a request by Lessee for any Lessor consent,
including, but not limited to, consents to an assignment, a subletting or the
presence or use of a Hazardous Substance, shall be paid by Lessee upon receipt
of an invoice and supporting documentation therefor. Lessor's consent to any
act, assignment or subletting shall not constitute an acknowledgment that no
Default or Breach by Lessee of this Lease exists, nor shall such consent be
deemed a waiver of any then existing Default or Breach, except as may be
otherwise specifically stated in writing by Lessor at the time of such consent.
The failure to specify herein any particular condition to Lessor's consent shall
not preclude the imposition by Lessor at the time of consent of such further or
other conditions as are then reasonable with reference to the particular matter
for which consent is being given. In the event that either Party disagrees with
any determination made by the other hereunder and reasonably requests the
reasons for such determination, the determining party shall furnish its reasons
in writing and in reasonable detail within ten (10) business days following such
request.

37.     GUARANTOR.

        37.1    EXECUTION. The Guarantors, if any, shall each execute a guaranty
in the form most recently published by the American Industrial Real Estate
Association, and each such Guarantor shall have the same obligations as Lessee
under this Lease.

        37.2    DEFAULT. It shall constitute a Default of the Lessee if any
Guarantor fails or refuses, upon request to provide: (a) evidence of the
execution of the guaranty, including the authority of the party signing on
Guarantor's behalf to obligate Guarantor, and in the case of a corporate
Guarantor, a certified copy of a resolution of its board of directors
authorizing the making of such guaranty, (b) current financial statements, (c) a
Tenancy Statement, or (d) written confirmation that the guaranty is still in
effect.

38.     QUIET POSSESSION. Subject to payment by Lessee of the Rent and
performance of all of the covenants, conditions and provisions on Lessee's part
to be observed and performed under this Lease, Lessee shall have quiet
possession and quiet enjoyment of the Premises during the term hereof.

39.     OPTIONS.

        39.1    DEFINITION. "OPTION" shall mean: (a) the right to extend the
term of or renew this Lease or to extend or renew any lease that Lessee has on
other property of Lessor; (b) the right of first refusal or first offer to lease
either the Premises or other property of Lessor; (c) the right to purchase or
the right of first refusal to purchase the Premises or other property of Lessor.

        39.2    OPTIONS PERSONAL TO ORIGINAL LESSEE. Each Option granted to
Lessee in this Lease is personal to the original Lessee, and cannot be assigned
or exercised by anyone other than said original Lessee and only while the
original Lessee is in full possession of the Premises and, if requested by
Lessor, with Lessee certifying that Lessee has no intention of thereafter
assigning or subletting.

        39.3    MULTIPLE OPTIONS. In the event that Lessee has any multiple
Options to extend or renew this Lease, a later Option cannot be exercised unless
the prior Options have been validly exercised.

        39.4    EFFECT OF DEFAULT ON OPTIONS.

                (a) Lessee shall have no right to exercise an Option: (i) during
the period commencing with the giving of any notice of Default and continuing
until said Default is cured, (ii) during the period of time any Rent is unpaid
(without regard to whether notice thereof is given Lessee), (iii) during the
time Lessee is in Breach of this Lease, or (iv) in the event that Lessee has
been given three (3) or more notices of separate Default, whether or not the
Defaults are cured, during the twelve (12) month period immediately preceding
the exercise of the Option.

                (b) The period of time within which an Option may be exercised
shall not be extended or enlarged by reason of Lessee's inability to exercise an
Option because of the provisions of Paragraph 39.4(a).

                (c) An Option shall terminate and be of no further force or
effect, notwithstanding Lessee's due and timely exercise of the Option, if,
after such exercise and prior to the commencement of the extended term, (i)
Lessee fails to pay Rent for a period of thirty (30) days after such Rent
becomes due (without any necessity of Lessor to give notice thereof), (ii)
Lessor gives to Lessee three (3) or more notices of separate Default during any
twelve (12) month period, whether or not the Defaults are cured, or (iii) if
Lessee commits a Breach of this Lease.

40.     MULTIPLE BUILDINGS. If the Premises are a part of a group of buildings
controlled by Lessor, Lessee agrees that it will observe all reasonable rules
and regulations which Lessor may make from time to time for the management,
safety, and care of said properties, including


                                    PAGE 11



the care and cleanliness of the grounds and including the parking, loading and
unloading of vehicles, and that Lessee will pay its fair share of common
expenses incurred in connection therewith.

41.     SECURITY MEASURES. Lessee hereby acknowledges that the rental payable to
Lessor hereunder does not include the cost of guard service or other security
measures, and that Lessor shall have no obligation whatsoever to provide same.
Lessee assumes all responsibility for the protection of the Premises, Lessee,
its agents and invitees and their property from the acts of third parties.

42.     RESERVATIONS. Lessor reserves to itself the right, from time to time, to
grant, without the consent or joinder of Lessee, such easements, rights and
dedications that Lessor deems necessary, and to cause the recordation of parcel
maps and restrictions, so long as such easements, rights, dedications, maps and
restrictions do not unreasonably interfere with the use of the Premises by
Lessee. Lessee agrees to sign any documents reasonably requested by Lessor to
effectuate any such easement rights, dedication, map or restrictions.

43.     PERFORMANCE UNDER PROTEST. If at any time a dispute shall arise as to
any amount or sum of money to be paid by one Party to the other under the
provisions hereof, the Party against whom the obligation to pay the money is
asserted shall have the right to make payment "under protest" and such payment
shall not be regarded as a voluntary payment and there shall survive the right
on the part of said Party to institute suit for recovery of such sum. If it
shall be adjudged that there was no legal obligation on the part of said Party
to pay such sum or any part thereof, said Party shall be entitled to recover
such sum or so much thereof as it was not legally required to pay.

44.     AUTHORITY. If either Party hereto is a corporation, trust, limited
liability company, partnership, or similar entity, each individual executing
this Lease on behalf of such entity represents and warrants that he or she is
duly authorized to execute and deliver this Lease on its behalf. Each Party
shall, within thirty (30) days after request, deliver to the other Party
satisfactory evidence of such authority.

45.     CONFLICT. Any conflict between the printed provisions of this Lease and
the typewritten or handwritten provisions shall be controlled by the typewritten
or handwritten provisions.

46.     OFFER. Preparation of this Lease by either Party or their agent and
submission of same to the other Party shall not be deemed an offer to lease to
the other Party. This Lease is not intended to be binding until executed and
delivered by all Parties hereto.

47.     AMENDMENTS. This Lease may be modified only in writing, signed by the
Parties in interest at the time of the modification. As long as they do not
materially change Lessee's obligations hereunder, Lessee agrees to make such
reasonable non-monetary modifications to this Lease as may be reasonably
required by a Lender in connection with the obtaining of normal financing or
refinancing of the Premises.

48.     MULTIPLE PARTIES. If more than one person or entity is named herein as
either Lessor or Lessee, such multiple Parties shall have joint and several
responsibility to comply with the terms of this Lease.

49.     MEDIATION AND ARBITRATION OF DISPUTES. An Addendum requiring the
Mediation and/or the Arbitration of all disputes between the Parties and/or
Brokers arising out of this Lease [ ] IS  [X] IS NOT attached to this Lease.

LESSOR AND LESSEE HAVE CAREFULLY READ AND REVIEWED THIS LEASE AND EACH TERM AND
PROVISION CONTAINED HEREIN, AND BY THE EXECUTION OF THIS LEASE SHOW THEIR
INFORMED AND VOLUNTARY CONSENT THERETO. THE PARTIES HEREBY AGREE THAT, AT THE
TIME THIS LEASE IS EXECUTED, THE TERMS OF THIS LEASE ARE COMMERCIALLY REASONABLE
AND EFFECTUATE THE INTENT AND PURPOSE OF LESSOR AND LESSEE WITH RESPECT TO THE
PREMISES.

________________________________________________________________________________

ATTENTION: NO REPRESENTATION OR RECOMMENDATION IS MADE BY THE AMERICAN
INDUSTRIAL REAL ESTATE ASSOCIATION OR BY ANY BROKER AS TO THE LEGAL SUFFICIENCY,
LEGAL EFFECT, OR TAX CONSEQUENCES OF THIS LEASE OR THE TRANSACTION TO WHICH IT
RELATES. THE PARTIES ARE URGED TO:

1.   SEEK ADVICE OF COUNSEL AS TO THE LEGAL AND TAX CONSEQUENCES OF THIS LEASE.

2.   RETAIN APPROPRIATE CONSULTANTS TO REVIEW AND INVESTIGATE THE CONDITION OF
THE PREMISES. SAID INVESTIGATION SHOULD INCLUDE BUT NOT BE LIMITED TO: THE
POSSIBLE PRESENCE OF HAZARDOUS SUBSTANCES, THE ZONING OF THE PREMISES, THE
STRUCTURAL INTEGRITY, THE CONDITION OF THE ROOF AND OPERATING SYSTEMS, AND THE
SUITABILITY OF THE PREMISES FOR LESSEE'S INTENDED USE.

WARNING: IF THE PREMISES IS LOCATED IN A STATE OTHER THAN CALIFORNIA, CERTAIN
PROVISIONS OF THE LEASE MAY NEED TO BE REVISED TO COMPLY WITH THE LAWS OF THE
STATE IN WHICH THE PREMISES IS LOCATED.
________________________________________________________________________________


The parties hereto have executed this Lease at the place and on the dates
specified above their respective signatures.

Executed at: BEVERLY HILLS, CALIFORNIA   Executed at: CHATSWORTH, CALIFORNIA
            --------------------------               ---------------------------

on:          December 27, 2001           on:          December   , 2001
   -----------------------------------      ------------------------------------

By LESSOR:                               By LESSEE:   INTERNATIONAL REMOTE
             NORTHPARK INDUSTRIAL                     IMAGING SYSTEMS, INC.
- --------------------------------------   ---------------------------------------

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

By:          /s/ Gary Siegel             By:          /s/ J.Y. Caloz
   -----------------------------------      ------------------------------------

Name Printed:    GARY SIEGEL             Name Printed:    J.Y. CALOZ
             -------------------------                --------------------------

Title:           PARTNER                 Title:           CFO
      --------------------------------         ---------------------------------


By:          /s/ Thomas L. Horner        By:          /s/ Achille M. Bigliardi
   -----------------------------------      ------------------------------------

Name Printed:    THOMAS L. HORNER        Name Printed:    ACHILLE M. BIGLIARDI
             -------------------------                --------------------------

       West America Construction Corp.
Title: Vice-President                    Title: President, Iris Diagnostics
      --------------------------------         ---------------------------------

Address:     8929 Wilshire Blvd., #400   Address:     9162 Eton Avenue
        ------------------------------           -------------------------------
             Beverly Hills, CA  90211                 Chatsworth, CA  91311
        ------------------------------           -------------------------------

Telephone: (310) 652-8288                Telephone: (818) 709-1244
          ----------------------------             -----------------------------

Facsimile: (310) 652-4972                Facsimile: (818)
          ----------------------------             -----------------------------

Federal ID No.   95-3146812              Federal ID No.
              ------------------------                 -------------------------


NOTE: These forms are often modified to meet changing requirements of law and
      industry needs. Always write or call to make sure you are utilizing the
      most current form: AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION, 700 So.
      Flower Street, Suite 600, Los Angeles, California 90017. (213) 687-8777.
      Fax No. (213) 687-8616


                                    PAGE 12

                        STANDARD ADDENDUM TO LEASE - NET


         Lease dated: November 28, 2001
                      ----------------------------------------------------------
         Lessor:      NORTHPARK INDUSTRIAL
                ----------------------------------------------------------------
         Lessee:      INTERNATIONAL REMOTE IMAGING SYSTEMS. INC.
                ----------------------------------------------------------------


        IN THE EVENT OF ANY CONFLICT BETWEEN THE PRINTED PROVISIONS OF THE LEASE
        AND THIS ADDENDUM, THE PROVISIONS OF THIS ADDENDUM SHALL CONTROL

50)     BASE RENT (PARAGRAPH 1.5, CONTINUED): In addition to the base rent that
        Lessee is obligated to pay under Paragraphs 1.5 and 4, Lessee will also
        be obligated to pay Lessor the sum of $1,275.00 per month as Lessor's
        monthly estimate for Lessee's share of Real Property Taxes, insurance,
        landscaping and irrigation system maintenance. The current average
        monthly costs for Real Property Taxes, insurance, landscaping and
        irrigation for the subject Premises are $925.00, $150.00, and $200.00,
        respectively. Every year of this Lease, during the month of July, and
        during the month immediately following the termination of this Lease,
        Lessor will prepare an accounting of all actual Real Property Taxes,
        insurance, landscaping and irrigation system maintenance for the just
        concluded twelve-month period. Any differences between the actual
        expenses and Lessor's estimates shall be either immediately refunded to
        Lessee or immediately due by the Lessee, whichever the case may be.

        Lessee or its authorized agent shall have the right, upon five (5) days
        prior written notice to Lessor, to inspect, at Lessor's main accounting
        offices, Lessor's unaudited books and records regarding these expenses.

        The monthly base rent shall be increased annually and paid in accordance
        with the following rent schedule:

        The rent payable for the period of January 1, 2002 through December 31,
        2002 shall be $11,999.00 per month.

        The rent payable for the period of January 1, 2003 through December 31,
        2003 shall be $12,359.00 per month.

        The rent payable for the period of January 1, 2004 through December 31,
        2004 shall be $12,730.00 per month.

        The rent payable for the period of January 1, 2005 through December 31,
        2005 shall be $13,112.00 per month.

        The rent payable for the period of January 1, 2006 through December 31,
        2006 shall be $13,505.00 per month.

51)     VEHICLE PARKING (PARAGRAPH 2.6, CONTINUED): Lessee shall be entitled to
        forty (40) parking spaces designated by Lessor as parking spaces for the
        leased Premises.

        Lessee or Lessee's employees, visitors, customers, or guests shall not
        park in driveways, alleyways, easement ways or other areas not
        specifically marked as parking spaces.

        No automotive repair, car washing, waxing and detailing, or covered
        parking is permitted at any time.

        Prohibited vehicles are not permitted; examples of prohibited vehicles
        shall include, but shall not be limited to, trailers, campers,
        recreational vehicles, boats, "dead automobiles" or automobiles parked
        longer than 48 hours.

        If Lessee permits or allows parking other than in designated parking
        spaces or permits or allows any of the aforedescribed prohibited
        vehicles to park on any portion of the parking areas or anywhere else
        within the Premises, then Lessor shall have the right, without notice,
        in addition to other rights and remedies it may have, to remove or tow
        away the vehicle involved and charge the cost to Lessee, which cost
        shall be immediately payable by Lessee upon demand by Lessor.

        In addition to, and not in limitation of any of Lessor's rights under
        this Lease, Lessor shall have the right, at any time and from time to
        time, to relocate, modify, adjust, redesign and otherwise change the
        common areas available for parking within the Premises, provided the
        total number of parking spaces is not reduced, notwithstanding that some
        of Lessee's parking space(s) may be used as location for its trash
        containers, and establish, modify, amend and enforce rules, regulations
        and restrictions with respect thereto, including, but not limited to,
        time limits, for example, such as temporary loading zones or areas,
        redesigning parking spaces from diagonal or vertical, or vice versa, and
        changing the traffic patterns within the Premises.

52)     SECURITY DEPOSIT (PARAGRAPH 5, CONTINUED) The security deposit shall be
        used and may be refunded only in accordance with Paragraph 5 and in
        connection with this paragraph. Lessee may not use any portion of the
        security deposit to satisfy any of Lessee's rental obligations hereunder
        including the last month's rental payment. Any failure of Lessee to pay
        any of Lessee's rental obligations when due constitutes a material
        breach of this Lease for which Lessor may re-enter and take possession
        of the Premises in accordance with law, notwithstanding the fact that
        Lessor may have possession of a security deposit.

53)     USE (PARAGRAPH 6.1, CONTINUED) Lessee understands that there are no
        restrictions contained in this Lease as to the type of business which
        may be conducted by any other present or future tenant of any building
        located near or adjacent to the building in which the Premises are
        located, and that Lessor may lease space to other tenants whose business
        is the same or competitive with that of Lessee.


        Lessor                              Lessee

        /s/ GS                              /s/ [ILLEGIBLE]
        ---------------                     ---------------
        Initial Here                        Initial Here






                        STANDARD ADDENDUM TO LEASE - NET
                                   PAGE 2 OF 4

        NO OUTSIDE STORAGE. Under no circumstances shall Lessee be permitted to
        use the exterior areas of the Premises, including driveways, alleyways
        or easement ways or anywhere else outside the building, for the
        temporary or permanent storage of any property, including but not
        limited to inventory, parts, work in process, pallets, or the
        installation of any type of equipment, including but not limited to air
        compressors or any other equipment. In the event that any unauthorized
        storage or installation of equipment or property shall occur, then
        Lessor shall have the right, without notice, in addition to such other
        rights and remedies that it may have, to remove the property and/or
        equipment at Lessee's expense, which shall be paid by Lessee upon demand
        by Lessor. No unauthorized seating areas, lunch areas or compressor
        sheds are permitted anywhere in the driveways, alleyways or easement
        ways, alleys or anywhere else outside the building.

        INGRESS AND EGRESS; LOADING AND UNLOADING. It is understood and agreed
        that the exterior portion of the premises and property are to be used by
        Lessee solely for ingress and egress and for the parking of vehicles as
        authorized by Lessor. The exterior portions of the premises at no time
        will be used by Lessee for loading or unloading, except at the loading
        dock. It is the parties' intention that Lessee will neither cause nor
        permit anything which will detract from keeping the exterior of the
        building and premises in a clean, orderly, and uncluttered condition
        fully in keeping with the highest standards and reflecting an image of
        the highest quality and standards.

        EXTERIOR WATER USE LIMITATIONS. Except for irrigation purposes, Lessee
        shall not use any water either from exterior sources or from sources
        within the building, on or about the exterior area of the Premises for
        any purpose whatsoever without Lessor's prior written consent. Any of
        Lessee's procedures, processes or other work which require the use of
        water shall be done solely within the confines of the building, and no
        water shall be allowed to drain onto the exterior area of the Premises.

54)     MAINTENANCE; REPAIRS, UTILITY INSTALLATIONS; TRADE FIXTURES AND
        ALTERATIONS (PARAGRAPH 7, CONTINUED) Notwithstanding anything to the
        contrary in Paragraph 7.1(b), in order to maintain a cohesive
        landscaping appearance throughout the business park, Lessor shall
        maintain all landscaping and irrigation system contracts, and Lessee
        shall reimburse Lessor for those costs pursuant to Paragraph 50.

        ROOF. Lessee shall inform Lessor of any work anticipated on the roof, in
        conjunction with its operation and obtain permission to do same prior to
        commencement of same. Lessee shall not make any alterations,
        improvements or additions to the Premises, without Lessor's prior
        written consent. Should Lessee make any alterations, etc. without the
        prior written consent of Lessor, Lessor may, at any time during the term
        of this Lease or upon its termination, require that Lessee, at its
        expense, remove any or all of the same and that Lessee pay to Lessor the
        amount of any damage to the roof caused by Lessee, or Lessor may remove
        same at Lessee's expense.

        UNAUTHORIZED ALTERATIONS. Lessee shall obtain Lessor's prior written
        approval for the installation of any interior or exterior window
        coverings, including but not limited to drapes, blinds, sunshades,
        sunscreens, holiday or other decorations or any type of film window
        treatment. No exterior painting is permitted. In the event that any such
        unauthorized installations or alterations occur, then Lessor shall have
        the right, without notice, in addition to such other rights and remedies
        that it may have, to remove all of the same at Lessee's expense, which
        shall be paid by Lessee upon demand by Lessor.

        SECURITY. Security bars or other security measures installed by Lessee
        require prior written consent of Lessor. Such installations, except for
        electronic security systems, shall remain as part of the Premises upon
        termination of the Lease unless Lessor requests removal of such
        installations and restoration of the Premises in accordance with
        Paragraph 7.4.

55)     OWNERSHIP; REMOVAL; SURRENDER; AND RESTORATION (PARAGRAPH 7.4,
        CONTINUED) Lessor's right under Paragraph 7.4(b) to require that any or
        all Lessee Owned Alterations or Utility Installations be removed by
        Lessee by the expiration or earlier termination of this Lease applies to
        all tenant improvements, including but not limited to improvements which
        were made to the Premises by Lessor at the request of Lessee and
        improvements the cost of which was amortized over the Lease term or a
        portion thereof in the form of additional rent. If Lessee desires to
        install wallpaper in the Premises, Lessor may require the removal and
        restoration of the walls upon Lessee's vacancy of the Premises, which
        shall be done at Lessee's sole cost and expense.

56)     REPLACEMENT COST (PARAGRAPH 8.3(a), CONTINUED) With reference to the
        property insurance required by Paragraph 8.3(a), Lessor and Lessee agree
        that the full replacement cost of the Premises will be not less than
        $1,016,900.00 as of the Commencement Date of the term of this Lease.

57)     ASSIGNMENT AND SUBLETTING (PARAGRAPH 12, CONTINUED) Subject to the
        provisions of Paragraph 12, Lessee may sublease the Premises upon
        Lessor's written consent. Within five (5) days of Lessee entering into
        a sublease of the Premises, Lessee shall deliver to Lessor a copy of any
        written sublease.

        Except as provided in Paragraph 12.2(e) in the case of Lessor's consent
        to an assignment or subletting and notwithstanding anything to the
        contrary contained in Paragraph 12, in the event that Lessee requests
        Lessor's signature or consent to any action or on any document,
        including but not limited to loan or security documents relating to loan
        transactions in which Lessee is taking part, Lessor may require Lessee
        to pay to Lessor an initial minimum fee of $350.00 to cover Lessor's
        legal and other fees and costs in reviewing and responding to each such
        request, and Lessee agrees to pay additional legal fees as are actually
        incurred by Lessor in reviewing and responding thereto.


        Lessor                                 Lessee

        /s/ [ILLEGIBLE]                        /s/ [ILLEGIBLE]
        ---------------                        ---------------
        Initial Here                           Initial Here




                        STANDARD ADDENDUM TO LEASE - NET
                                   PAGE 3 OF 4

58)     HOLDOVER (PARAGRAPH 26, CONTINUED) If Lessee remains in possession of
        the Premises after the expiration of the Lease term, without Lessor's
        written consent, then Lessee's occupancy of the Premises shall be deemed
        to be a holdover tenancy upon all of the provisions of this Lease
        pertaining to obligations of Lessee, but not including any options or
        rights of first refusal, if any, granted to Lessee under this Lease. If
        Lessee's hold-over tenancy exceeds ten (10) days, Lessee may terminate
        the tenancy only by giving sixty (60) days written notice of termination
        to Lessor, whereas Lessor may terminate the tenancy or change the terms
        of the Lease upon giving to Lessee sixty (60) days written notice
        thereof. The termination date shall be the last day of the month in
        which the notice requirement has been met.

        Notwithstanding anything to the contrary contained in Paragraphs 1.3,
        1.5, 3.1, 4 or elsewhere in this Lease, Lessee's obligation to pay rent
        shall continue until (i) Lessee has removed all of its property from the
        Premises, (ii) Lessee has made any repairs required under Paragraph
        7.4(c), (iii) Lessee has removed all Alterations, improvements,
        additions and Utility Installations which Lessor requires Lessee to
        remove pursuant to Paragraph 7.4(b), and (iv) Lessee has notified Lessor
        in writing that all of the items (i) through (iii) of this paragraph, to
        the extent applicable, have been accomplished.

59)     DECLARATION OF COVENANTS, CONDITIONS AND RESTRICTIONS FOR NORTHPARK
        INDUSTRIAL CENTER. Lessee acknowledges receipt of a copy of the
        Declaration of Covenants, Conditions and Restrictions for Northpark
        Industrial Center recorded with the County of Los Angeles as document
        numbers 79-760182 and 85-1324915. Lessee has reviewed and approved said
        documents and agrees to be bound by all the terms and conditions
        therein. Lessee further agrees that said Covenants, Conditions and
        Restrictions shall be binding upon Lessee and any sublessee, successor
        and assigns which they may have.

60)     TENANT IMPROVEMENTS (LESSOR'S COST): Lessor shall, at Lessor's cost, cut
        one (1) opening in the south wall of the office area (and shall cut one
        opening in the northern wall of the office area in the premises located
        at 9162 Eton Avenue) to connect the premises located at 9172 Eton Avenue
        with the premises located at 9162 Eton Avenue . Said openings shall be a
        3'0 x 6'8" cased opening. Upon Lessee's vacancy of either (or both)
        buildings, Lessee shall, at Lessee's cost, close said openings, which
        shall be done so as to create a similar condition to that prior to the
        cut-outs. Lessor shall credit Lessee with $750.00 for ceiling tile
        replacement and filling the interior atriums with concrete.

        Lessee may, at Lessee's cost, build a shed for the air compressor
        outside at the north end of the building on an existing concrete pad and
        build an enclosure at the sound end landing for a de-ionized water
        system.

61)     PARAGRAPH 12.1 B (CONTINUED): For purposes of this Lease, a "change in
        the control of Lessee" means the happening of any of the following
        events:

        (i)     When any "person" as such term is used in Sections 13(d) and
                14(d) of the Securities Exchange Act of 1934 (the "Exchange
                Act") becomes the "beneficial owner" (as defined in Rule 13d-3
                under the Exchange Act), directly or indirectly, of securities
                of the Lessee fifty percent (50%) or more of the combined voting
                power of the Lessee's then outstanding securities entitled to
                vote generally in the election of directors; or

        (ii)    The stockholders of the Lessee approve a merger, consolidation
                or sale of substantially all the assets of the Lessee with or to
                any other corporation, other than a merger, consolidation or
                sale of substantially all the assets which would result in the
                voting securities of the Lessee outstanding immediately prior
                thereto continuing to represent (either by remaining outstanding
                or by being converted into voting securities of the surviving
                entity) more than fifty percent (50%) of the total voting power
                represented by the voting securities of the Lessee or such
                surviving entity outstanding immediately after such merger,
                consolidation or sale of substantially all the assets of the
                Lessee; or

        (iii)   A change in the composition of the Board of Directors of the
                Lessee, as a result of which fewer than a majority of the
                directors are Incumbent Directors. "Incumbent Directors" shall
                mean directors who either (a) are directors of the Lessee as of
                the date of the commencement of this Lease or any applicable
                extension or renewal, or (b) are elected, or nominated for
                election to the Board of Directors of the Lessee with the
                affirmative votes of at least a majority of the Incumbent
                Directors at the time of such election or nomination (but shall
                not include an individual whose election or nomination is in
                connection with an actual or threatened proxy contest relation
                to the election of directors to the Lessee)

62)     PARAGRAPH 12.1 C (CONTINUED): The involvement of Lessee or its assets in
        any merger, bulk sale or leveraged buy-out, whether in a single
        transaction or series of related transactions and whether or not a
        formal assignment or hypothecation of this Lease or Lessee's assets
        occurs, which results or will result in a reduction of the Net Worth of
        Lessee by an amount greater than 25% of such Net Worth as it was
        represented at the time of the execution of this Lease or at the time of
        the most recent assignment to which Lessor has consented, or as it
        exists immediately prior to said transaction or transactions
        constituting such reduction, whichever was or is greater, shall be
        considered an assignment of this Lease requiring Lessor's consent which
        shall be unreasonably withheld. "Net Worth of Lessee" shall mean the net
        worth of Lessee (excluding any guarantors) established under generally
        accepted accounting principles as currently in effect on the date
        hereof.


        Lessor                                 Lessee

        /s/ [ILLEGIBLE]                        /s/ [ILLEGIBLE]
        ---------------                        ---------------
        Initial Here                           Initial Here




                        STANDARD ADDENDUM TO LEASE - NET
                                   PAGE 4 OF 4

63)     OPTION TO EXTEND

        A. Lessor hereby grants to Lessee the option to extend the term of this
        Lease for a Five (5) year period commencing when the prior term expires
        upon each and all of the following terms and conditions:

               (i) Lessee gives to Lessor and Lessor receives written notice of
        the exercise of the option to extend this Lease for said additional term
        no earlier than nine months and no later than six months prior to the
        time that the option period would commence if the option were exercised,
        time being of the essence. If said notification of the exercise of said
        option is not so given and received, this option shall automatically
        expire;

               (ii) The provisions of paragraph 39, including the provision
        relating to default of Lessee set forth in paragraph 39.4 of this Lease
        are conditions of this Option;

               (iii) All of the terms and conditions of this Lease except where
        specifically modified by this option shall apply;

               (iv) On January 1, 2007 , the monthly rent payable under
        paragraph 1.5 and 4 of the attached Lease shall be adjusted by the
        increase, if any, from the date this Lease commenced in the C.P.I. As
        used herein, the term "C.P.I. shall mean the Consumer Price Index of the
        Bureau of Labor Statistics of the U.S. Department of Labor for All Urban
        Consumers, Los Angeles-Anaheim-Riverside, California (1982/84=100), "All
        Items", herein referred to as "C.P.I."

                      a. The monthly rent payable in accordance with paragraph
        A(iv) of this Addendum shall be calculated as follows: the rent payable
        for the first month of the term of this Lease, as set forth in paragraph
        4 of the attached Lease, shall be multiplied by a fraction the numerator
        of which shall be the C.P.I. of the calendar month immediately preceding
        the effective date of the subject rent escalation, and the denominator
        of which shall be the C.P.I. for the calendar month in which the
        original Lease term commenced. The sum so calculated shall constitute
        the new monthly rent hereunder, but, in no event, shall such new monthly
        rent be less than 103% of the rent payable for the month immediately
        preceding the date for rent adjustment.

                      b. In the event the compilation and/or publication of the
        C.P.I. shall be discontinued, then the index most nearly the same as the
        C.P.I. shall be used to make such calculation. In the event that Lessor
        and Lessee cannot agree on such alternative index, then the matter shall
        be submitted for decision to the American Arbitration Association in
        accordance with the rules of said association and the decision of the
        arbitrators shall be binding upon the parties. The cost of said
        Arbitrators shall be paid equally be Lessor and Lessee.

                      c. Lessor shall notify Lessee of any rental increases
        pursuant to this paragraph as soon as practicable after the relevant
        C.P.I. figures have been released. Until such notification, Lessee shall
        continue to pay the rent in effect during the prior rental period. After
        notification of a rental increase, Lessee shall commence making rental
        payments in the increased amount and shall, within ten (10) days after
        such notification, pay to Lessor the amount of any rental increases due
        for previous months.

        B. If this option to extend is exercised, the option term shall commence
        on January 1, 2007 and shall end on December 31, 2011

        C. On January 1 2008, January 1, 2009, January 1, 2010 and again on
        January 1, 2011 , the monthly rent payable shall be adjusted upward by
        3% over the rent payable for the month immediately preceding each rental
        adjustment.

LESSOR:                                       LESSEE:

NORTHPARK INDUSTRIAL                          INTERNATIONAL REMOTE IMAGING
                                              SYSTEMS INC.


By: /s/ [ILLEGIBLE]                           By: /s/ [ILLEGIBLE]
   -----------------------------                 -------------------------------


By: /s/ [ILLEGIBLE]                           By: /s/ [ILLEGIBLE]
   -----------------------------                 -------------------------------





                                PARKING AGREEMENT

This Parking Agreement, dated November 29, 2001 , for reference purposes only,
is made by and between NORTHPARK INDUSTRIAL (herein called "Lessor") and
INTERNATIONAL REMOTE IMAGING SYSTEMS, INC. (herein called "Lessee"). Lessor
leases to Lessee under a separate written Lease the Premises known as 9162 Eton
Avenue, Chatsworth, California, and the Agreements of the parties in this
Parking Agreement are in addition to the agreements of the parties in said
Lease.

1. Subject to the terms and conditions contained in this Agreement, Lessor
hereby agrees that Lessee and persons designated by Lessee may use 21 parking
spaces in the Parking Garage located at 9151 Eton Ave., Chatsworth, California
(hereinafter the "Garage"). The parking spaces hereunder shall be provided on an
unreserved "first come, first served" basis.

2. The term of this Agreement shall be concurrent with the term of this Lease
Agreement ("Lease").

3. Lessee shall at all times comply with all applicable ordinances, rules,
regulations, codes, laws, statutes and requirements of all federal, state,
county and municipal governmental bodies or their subdivisions respecting the
use of the Garage. Lessee shall extend all of its insurance policies required
under the Lease to include vehicles to be parked in the Garage hereunder and
personal property located therein or thereon. Upon request, Lessee shall provide
Lessor with certificates or other satisfactory evidence of such insurance.
Lessor reserves the right to adopt, modify, and enforce reasonable Rules
governing the use of the Garage from time to time, including any card-key,
sticker or other identification or entrance system, and hours of operation. The
Rules set forth hereinafter are currently in effect. Lessor may refuse to permit
any person who violates such Rules to park in the Garage, and any violation of
the Rules shall subject the car to removal from the Garage.

4. Lessee acknowledges receipt of one card-key for each parking space provided.
Lessee shall be responsible for the return of said card-key upon its vacancy of
the Garage. A replacement fee of $25.00 will be charged for any lost or damaged
card-key.

5. Except for intentional acts of gross negligence by Lessor, Lessor shall have
no liability whatsoever for any damage to property or any other items located in
the Garage, nor for any personal injuries or death arising out of any incident
or matter relating to the Garage. In all events, Lessee agrees to look first to
its insurance carrier for payment of any losses sustained in connection with
Lessee's use of the Garage. Lessee hereby waives on behalf of its insurance
carriers all rights of subrogation against Lessor. Lessor reserves the right to
assign specific spaces and to reserve spaces for visitors, small cars,
handicapped persons and for other lessees, and Lessee and persons designated by
Lessee shall not park in any such assigned or reserved spaces. Lessor also
reserves the right to close all or any portion of the Garage in order to make
repairs or perform maintenance services, or to alter, modify, re-stripe the
Garage, or if required by casualty, strike, condemnation, act of God,
governmental law or other reason beyond Lessor's reasonable control. In such
event, Lessor shall refund any prepaid parking rent hereunder, pro-rated on a
per diem basis.

6. Prior to furnishing any card-keys to any person, Lessee shall provide Lessor
with a list including all names, type of automobile, year of manufacture,
drivers license number and automobile license number for all persons using the
Garage at any time.

7. If Lessee shall default under this Agreement, Lessor shall have the right to
cancel this Agreement on ten (10) days written notice, unless within such ten
(10) day period Lessee cures such default. If Lessee shall default under this
Agreement a second time after receiving prior written notice for the same
offense, Lessor shall have the right to cancel this Agreement on ten (10) days
written notice. Lessor shall have the right to remove from the Garage any
vehicles hereunder which are in breach of this Agreement or Rules contained
herein, without any liability whatsoever. Accordingly, Lessor may then
deactivate the respective card-key(s) with ten (10) days notice as stated above.

8. LESSEE ACKNOWLEDGES RECEIPT OF A COPY OF THE DECLARATION OF COVENANTS,
CONDITIONS AND RESTRICTIONS FOR NORTHPARK INDUSTRIAL CENTER RECORDED WITH THE
COUNTY OF LOS ANGELES AS DOCUMENT NUMBERS 79-760182 AND 85-1324915. LESSEE HAS
REVIEWED AND APPROVED SAID DOCUMENTS AND AGREES TO BE BOUND BY ALL THE TERMS AND
CONDITIONS THEREIN. LESSEE FURTHER AGREES THAT SAID COVENANTS, CONDITIONS AND
RESTRICTIONS SHALL BE BINDING UPON LESSEE AND ANY SUBLESSEE, SUCCESSOR AND
ASSIGNS WHICH THEY MAY HAVE.

                                      RULES

a.      Lessee agrees to acquaint all persons to whom Lessee assigns parking
        space of these Rules.

b.      Garage hours: Twenty-four (24) hours, seven (7) days a week.

c.      Cars must be parked entirely within the stall lines painted on the
        floor, and only small cars may be parked in areas reserved for compacts.
        All cars must be parked head-in only.

d.      All directional signs and arrows must be observed.

e.      Speed limit shall be 5 miles per hour.

f.      Parking is prohibited in all areas not expressly designated for parking,
        including without limitation:

        1.     Aisles.
        2.     Loading zones.
        3.     Areas not striped for parking.
        4.     Areas where "No Parking" signs are posted.
        5.     Ramps, right side up - left side down.

g.      Spaces reserved for handicapped parking must be used only by vehicles
        properly designated.


        Lessor Initial Here                    Lessee Initial Here

        [GS] [ILLEGIBLE]                       [ILLEGIBLE] [ILLEGIBLE]




                                PARKING AGREEMENT
                                   (continued)

h.      Parking stickers, card-key or any other devices or forms of
        identification or entry supplied by Lessor shall remain the property of
        Lessor. Such devices must be displayed as requested and may not be
        mutilated in any manner. The serial number of the parking identification
        device may not be obliterated. Devices are not transferable and any
        device in the possession of any unauthorized holder will be void.

i.      Monthly fees shall be payable in advance prior to the first day of each
        month. Failure to do so will automatically cancel parking privileges and
        the card-keys used by Lessee will be voided on the fifth (5th) day of
        the month. No deductions or allowances from the monthly rate will be
        made for days on which the Garage is not used by Lessee or its
        designees.

j.      Garage managers or personnel are not authorized to make or allow any
        exceptions to these Rules.

k.      Each driver of a vehicle is required to drive and park safely, and lock
        and secure their own vehicle.

l.      Loss or theft of parking identification, card-keys or other such devices
        must be reported to Lessor immediately. Any parking devices reported
        lost or stolen found on any unauthorized car will be confiscated and the
        illegal holder will be fined at the then prevailing written rate. Lost
        or stolen devices found by Lessee or its employees must be returned to
        Lessor.

m.      Washing, waxing, cleaning or servicing of any vehicle by Lessee or its
        employees or agents is prohibited. Parking spaces may only be used for
        parking automobiles.

n.      Parking spaces shall be used only for parking by vehicles no larger than
        full size passenger automobiles or pick-up trucks. Prohibited vehicles
        are not permitted; examples of prohibited vehicles shall include, but
        shall not be limited to, vehicles exceeding 6' 6" in height, trucks or
        trucking equipment, trailers, campers, recreational vehicles, boats,
        "dead automobiles" or automobiles parked longer than 24 hours. No
        automotive repair or work is permitted. If Lessee permits or allows any
        of the aforedescribed prohibited vehicles to park on any portion of the
        parking areas, then Lessor shall have the right, without notice, in
        addition to other rights and remedies it may have, to remove or tow away
        the vehicle involved and charge the cost to Lessee which cost shall be
        immediately payable by Lessee upon demand by Lessor.

o.      Other prohibitions include but are not limited to: eating in Garage,
        loitering, throwing trash, leaky vehicles, damage to gates, arms,
        card-key readers, entry or exit equipment, other vehicles, real or
        personal property, fences, rails or walls.

p.      Lessor may prohibit violators of Rules from using parking spaces
        provided to Lessee hereunder. In such case, Lessor shall void the
        violator's card-key and notify Lessee in writing. Said individual(s)
        would be prohibited from using Garage, but Lessee would continue leasing
        same until a fine of $75.00 is paid or until Lessor agrees to reinstate
        the violator, at Lessor's option.

LESSOR:                                       LESSEE:

NORTHPARK INDUSTRIAL                          INTERNATIONAL REMOTE IMAGING
                                              SYSTEMS INC.


By: /s/ [SIGNATURE ILLEGIBLE]                 By: /s/ [SIGNATURE ILLEGIBLE]
   -----------------------------                 -------------------------------


By: /s/ [SIGNATURE ILLEGIBLE]                 By: /s/ [SIGNATURE ILLEGIBLE]
   -----------------------------                 -------------------------------

EX-11.1(A)

                                                                 EXHIBIT 11.1(a)

                     BUSINESS LOAN AGREEMENT (ASSET BASED)



- ----------------------------------------------------------------------------------------------------------------------
  PRINCIPAL      LOAN DATE      MATURITY      LOAN NO      CALL/COLL     ACCOUNT       OFFICER       INITIALS
                                                                                
$6,500,000.00    02-07-2002    06-30-2004   932900001-1                932900001-1      22163     [INITIALS ILLEGIBLE]
- ----------------------------------------------------------------------------------------------------------------------
References in the shaded area are for Lender's use only and do not limit the applicability of this document
to any particular loan or item. Any item above containing "***" has been omitted due to text length limitations.
- ----------------------------------------------------------------------------------------------------------------------



BORROWER:  INTERNATIONAL REMOTE        LENDER:  CALIFORNIA BANK & TRUST
              IMAGING SYSTEMS, INC.             COMMERCIAL LOAN CENTER
           9162 ETON AVENUE                     550 SOUTH HOPE STREET, SUITE 300
           CHATSWORTH, CA 91311                 LOS ANGELES, CA 90071
================================================================================

THIS BUSINESS LOAN AGREEMENT (ASSET BASED) DATED FEBRUARY 7, 2002, IS MADE AND
EXECUTED BETWEEN INTERNATIONAL REMOTE IMAGING SYSTEMS, INC. ("BORROWER") AND
CALIFORNIA BANK & TRUST ("LENDER") ON THE FOLLOWING TERMS AND CONDITIONS.
BORROWER HAS RECEIVED PRIOR COMMERCIAL LOANS FROM LENDER OR HAS APPLIED TO
LENDER FOR A COMMERCIAL LOAN OR LOANS OR OTHER FINANCIAL ACCOMMODATIONS,
INCLUDING THOSE WHICH MAY BE DESCRIBED ON ANY EXHIBIT OR SCHEDULE ATTACHED TO
THIS AGREEMENT ("LOAN"). BORROWER UNDERSTANDS AND AGREES THAT: (A) IN GRANTING,
RENEWING, OR EXTENDING ANY LOAN, LENDER IS RELYING UPON BORROWER'S
REPRESENTATIONS, WARRANTIES, AND AGREEMENTS AS SET FORTH IN THIS AGREEMENT; (B)
THE GRANTING, RENEWING, OR EXTENDING OF ANY LOAN BY LENDER AT ALL TIMES SHALL BE
SUBJECT TO LENDER'S SOLE JUDGMENT AND DISCRETION; AND (C) ALL SUCH LOANS SHALL
BE AND REMAIN SUBJECT TO THE TERMS AND CONDITIONS OF THIS AGREEMENT.

TERM. This Agreement shall be effective as of February 7, 2002, and shall
continue in full force and effect until such time as all of Borrower's Loans in
favor of Lender have been paid in full, including principal, interest, costs,
expenses, attorneys' fees, and other fees and charges, or until such time as the
parties may agree in writing to terminate this Agreement.

ADVANCE AUTHORITY. The following persons currently are authorized to request
advances and authorize payments under the line of credit until Lender receives
from Borrower, at Lender's address shown above, written notice of revocation of
their authority: DR. JOHN A. O'MALLEY, CEO/CHAIRMAN OF INTERNATIONAL REMOTE
IMAGING SYSTEMS, INC.; JOHN CALOZ, CFO/SECRETARY OF INTERNATIONAL REMOTE IMAGING
SYSTEMS, INC.; AND DONALD HORACEK, CONTROLLER.

LINE OF CREDIT. Lender agrees to make Advances to Borrower from time to time
from the date of this Agreement to the Expiration Date, provided the aggregate
amount of such Advances outstanding at any time does not exceed the Borrowing
Base. Within the foregoing limits, Borrower may borrow, partially or wholly
prepay, and reborrow under this Agreement as follows:

      CONDITIONS PRECEDENT TO EACH ADVANCE. Lender's obligation to make any
      Advance to or for the account of Borrower under this Agreement is subject
      to the following conditions precedent, with all documents, instruments,
      opinions, reports, and other items required under this Agreement to be in
      form and substance satisfactory to Lender:

            (1) Lender shall have received evidence that this Agreement and all
            Related Documents have been duly authorized, executed, and delivered
            by Borrower to Lender.

            (2) Lender shall have received such opinions of counsel,
            supplemental opinions, and documents as Lender may request.

            (3) The security interests in the Collateral shall have been duly
            authorized, created, and perfected with first lien priority and
            shall be in full force and effect.

            (4) All guaranties required by Lender for the credit facility(ies)
            shall have been executed by each Guarantor, delivered to Lender, and
            be in full force and effect.

            (5) Lender, at its option and for its sole benefit, shall have
            conducted an audit of Borrower's Accounts, Inventory, books,
            records, and operations, and Lender shall be satisfied as to their
            condition.

            (6) Borrower shall have paid to Lender all fees, costs, and expenses
            specified in this Agreement and the Related Documents as are then
            due and payable.

            (7) There shall not exist at the time of any Advance a condition
            which would constitute an Event of Default under this Agreement, and
            Borrower shall have delivered to Lender the compliance certificate
            called for in the paragraph below titled "Compliance Certificate."

      MAKING LOAN ADVANCES. Advances under this credit facility, as well as
      directions for payment from Borrower's accounts, may be requested orally
      or in writing by authorized persons. Lender may, but need not, require
      that all oral requests be confirmed in writing. Each Advance shall be
      conclusively deemed to have been made at the request of and for the
      benefit of Borrower (1) when credited to any deposit account of Borrower
      maintained with Lender or (2) when advanced in accordance with the
      instructions of an authorized person. Lender, at its option, may set a
      cutoff time, after which all requests for Advances will be treated as
      having been requested on the next succeeding Business Day.

      MANDATORY LOAN REPAYMENTS. If at any time the aggregate principal amount
      of the outstanding Advances shall exceed the applicable Borrowing Base,
      Borrower, immediately upon written or oral notice from Lender, shall pay
      to Lender an amount equal to the difference between the outstanding
      principal balance of the Advances and the Borrowing Base. On the
      Expiration Date, Borrower shall pay to Lender in full the aggregate unpaid
      principal amount of all Advances then outstanding and all accrued unpaid
      interest, together with all other applicable fees, costs and charges, if
      any, not yet paid.

      LOAN ACCOUNT. Lender shall maintain on its books a record of account in
      which Lender shall make entries for each Advance and such other debits and
      credits as shall be appropriate in connection with the credit facility.
      Lender shall provide Borrower with periodic statements of Borrower's
      account, which statements shall be considered to be correct and
      conclusively binding on Borrower unless Borrower notifies Lender to the
      contrary within thirty (30) days after Borrower's receipt of any such
      statement which Borrower deems to be incorrect.

COLLATERAL. To secure payment of the Primary Credit Facility and performance of
all other Loan, obligations and duties owed by. Borrower to Lender, Borrower
(and others, if required) shall grant to Lender Security Interests in such
property and assets as Lender may require. Lender's Security Interests in the
Collateral shall be continuing liens and shall include the proceeds and products
of the Collateral, including without limitation the proceeds of any insurance.
With respect to the Collateral, Borrower agrees and represents and warrants to
Lender:

      PERFECTION OF SECURITY INTERESTS. Borrower agrees to execute financing
      statements and all documents perfecting Lender's Security Interest and to
      take whatever other actions are requested by Lender to perfect and
      continue Lender's Security Interests in the Collateral. Upon request of
      Lender, Borrower will deliver to Lender any and all of the documents
      evidencing or constituting the Collateral, and Borrower will note Lender's
      interest upon any and all chattel paper and instruments if not delivered
      to Lender for possession by Lender. Contemporaneous with the execution of
      this Agreement, Borrower will execute one or more UCC financing statements
      and any similar statements as may be required by applicable law, and
      Lender will file such financing statements and all such similar statements
      in the appropriate location or locations. Borrower hereby appoints Lender
      as its irrevocable attorney-in-fact for the purpose of executing any
      documents necessary to perfect or to continue any Security Interest.
      Lender may at any time, and without further authorization from Borrower,
      file a carbon, photograph, facsimile, or other reproduction of any




                      BUSINESS LOAN AGREEMENT (ASSET BASED)
LOAN NO: 932900001-1               (CONTINUED)                            PAGE 2

================================================================================

      financing statement for use as a financing statement. Borrower will
      reimburse Lender for all expenses for the perfection, termination, and the
      continuation of the perfection of Lender's security interest in the
      Collateral. Borrower promptly will notify Lender before any change in
      Borrower's name including any change to the assumed business names of
      Borrower. Borrower also promptly will notify Lender before any change in
      Borrower's Social Security Number or Employer Identification Number.
      Borrower further agrees to notify Lender in writing prior to any change in
      address or location of Borrower's principal governance office or should
      Borrower merge or consolidate with any other entity.

      COLLATERAL RECORDS. Borrower does now, and at all times hereafter shall,
      keep correct and accurate records of the Collateral, all of which records
      shall be available to Lender or Lender's representative upon demand for
      inspection and copying at any reasonable time. With respect to the
      Accounts, Borrower agrees to keep and maintain such records as Lender may
      require, including without limitation information concerning Eligible
      Accounts and Account balances and agings. Records related to Accounts
      (Receivables) are or will be located at *. With respect to the Inventory,
      Borrower agrees to keep and maintain such records as Lender may require,
      including without limitation information concerning Eligible Inventory and
      records itemizing and describing the kind, type, quality, and quantity of
      Inventory, Borrower's Inventory costs and selling prices, and the daily
      withdrawals and additions to Inventory. Records related to Inventory are
      or will be located at *. The above is an accurate and complete list of all
      locations at which Borrower keeps or maintains business records concerning
      Borrower's collateral. *Borrower and its subsidiaries.

      COLLATERAL SCHEDULES. Concurrently with the execution and delivery of this
      Agreement, Borrower shall execute and deliver to Lender schedules of
      Accounts and Inventory and schedules of Eligible Accounts and Eligible
      Inventory in form and substance satisfactory to the Lender. Thereafter
      supplemental schedules shall be delivered according to the following
      schedule:

      REPRESENTATIONS AND WARRANTIES CONCERNING ACCOUNTS. With respect to the
      Accounts, Borrower represents and warrants to Lender: (1) Each Account
      represented by Borrower to be an Eligible Account for purposes of this
      Agreement conforms to the requirements of the definition of an Eligible
      Account; (2) All Account information listed on schedules delivered to
      Lender will be true and correct, subject to immaterial variance; and (3)
      Lender, its assigns, or agents shall have the right at any time and at
      Borrower's expense to inspect, examine, and audit Borrower's records and
      to confirm with Account Debtors the accuracy of such Accounts.

      REPRESENTATIONS AND WARRANTIES CONCERNING INVENTORY. With respect to the
      Inventory, Borrower represents and warrants to Lender: (1) All Inventory
      represented by Borrower to be Eligible Inventory for purposes of this
      Agreement conforms to the requirements of the definition of Eligible
      Inventory; (2) All Inventory values listed on schedules delivered to
      Lender will be true and correct, subject to immaterial variance; (3) The
      value of the Inventory will be determined on a consistent accounting
      basis; (4) Except as agreed to the contrary by Lender in writing, all
      Eligible Inventory is now and at all times hereafter will be in Borrower's
      physical possession and shall not be held by others on consignment, sale
      on approval, or sale or return; (5) Except as reflected in the Inventory
      schedules delivered to Lender, all Eligible Inventory is now and at all
      times hereafter will be of good and merchantable quality, free from
      defects; (6) Eligible Inventory is not now and will not at any time
      hereafter be stored with a bailee, warehouseman, or similar party without
      Lender's prior written consent, and, in such event, Borrower will
      concurrently at the time of bailment cause any such bailee, warehouseman,
      or similar party to issue and deliver to Lender, in form acceptable to
      Lender, warehouse receipts in Lender name evidencing the storage of
      Inventory; and (7) Lender, its assigns, or agents shall have the right at
      any time and at Borrower's expense to inspect and examine the Inventory
      and to check and test the same as to quality, quantity, value, and
      condition.

CONDITIONS PRECEDENT TO EACH ADVANCE. Lender's obligation to make the initial
Advance and each subsequent Advance under this Agreement shall be subject to the
fulfillment to Lender's satisfaction of all of the conditions set forth in this
Agreement and in the Related Documents.

      LOAN DOCUMENTS. Borrower shall provide to Lender the following documents
      for the Loan: (1) the Note; (2) Security Agreements granting to Lender
      security interests in the Collateral; (3) financing statements and all
      other documents perfecting Lender's Security Interests; (4) evidence of
      insurance as required below; (5) guaranties; (6) subordinations; (7)
      together with all such Related Documents as Lender may require for the
      Loan; all in form and substance satisfactory to Lender and Lender's
      counsel.

      BORROWER'S AUTHORIZATION. Borrower shall have provided in form and
      substance satisfactory to Lender properly certified resolutions, duly
      authorizing the execution and delivery of this Agreement, the Note and the
      Related Documents. In addition, Borrower shall have provided such other
      resolutions, authorizations, documents and instruments as Lender or its
      counsel, may require.

      FEES AND EXPENSES UNDER THIS AGREEMENT. Borrower shall have paid to Lender
      all fees, costs, and expenses specified in this Agreement and the Related
      Documents as are then due and payable.

      REPRESENTATIONS AND WARRANTIES. The representations and warranties set
      forth in this Agreement, in the Related Documents, and in any document or
      certificate delivered to Lender under this Agreement are true and correct.

      NO EVENT OF DEFAULT. There shall not exist at the time of any Advance a
      condition which would constitute an Event of Default under this Agreement
      or under any Related Document.

REPRESENTATIONS AND WARRANTIES. Borrower represents and warrants to Lender, as
of the date of this Agreement, as of the date of each disbursement of loan
proceeds, as of the date of any renewal, extension or modification of any Loan,
and at all times any Indebtedness exists:

      ORGANIZATION. Borrower is a corporation for profit which is, and at all
      times shall be, duly organized, validly existing, and in good standing
      under and by virtue of the laws of the State of Delaware. Borrower is duly
      authorized to transact business in the State of California and all other
      states in which Borrower is doing business, having obtained all necessary
      filings, governmental licenses and approvals for each state in which
      Borrower is doing business. Specifically, Borrower is, and at all times
      shall be, duly qualified as a foreign corporation in all states in which
      the failure to so qualify would have a material adverse effect on its
      business or financial condition. Borrower has the full power and authority
      to own its properties and to transact the business in which it is
      presently engaged or presently proposes to engage. Borrower maintains an
      office at 9162 Eton Avenue, Chatsworth, CA 91311. Unless Borrower has
      designated otherwise in writing, the principal office is the office at
      which Borrower keeps its books and records including its records
      concerning the Collateral. Borrower will notify Lender prior to any change
      in the location of Borrower's state of organization or any change in
      Borrower's name. Borrower shall do all things necessary to preserve and to
      keep in full force and effect its existence, rights and privileges, and
      shall comply with all regulations, rules, ordinances, statutes, orders and
      decrees of any governmental or quasi-governmental authority or court
      applicable to Borrower and Borrower's business activities.

      ASSUMED BUSINESS NAMES. Borrower has filed or recorded all documents or
      filings required by law relating to all assumed business names used by
      Borrower. Excluding the name of Borrower, the following is a complete list
      of all assumed business names under which Borrower does business: IRIS and
      IRIS Diagnostics.

      AUTHORIZATION. Borrower's execution, delivery, and performance of the
      agreement and all the Related Documents have been duly authorized by all
      necessary action by Borrower and do not conflict with, result in a
      violation of, or constitute a default under (1) any provision of
      Borrower's articles of incorporation or organization, or bylaws, or any
      agreement other instrument binding upon Borrower or (2) any law,
      governmental regulation, court decree, or order applicable to Borrower or
      to Borrower's properties.

      FINANCIAL INFORMATION. Each of Borrower's financial statements supplied to
      Lender truly and completely disclosed Borrower's financial condition as of
      the date of the statement, and there has been no material adverse change
      in Borrower's financial condition subsequent to the date of the most
      recent financial statement supplied to Lender. Borrower has no material
      contingent obligations except as disclosed in such financial statements.




                      BUSINESS LOAN AGREEMENT (ASSET BASED)
LOAN NO: 932900001-1               (CONTINUED)                            PAGE 3

================================================================================

      LEGAL EFFECT. This Agreement constitutes, and any instrument or agreement
      Borrower is required to give under this Agreement when delivered will
      constitute legal, valid, and binding obligations of Borrower enforceable
      against Borrower in accordance with their respective terms.

      PROPERTIES. Except as contemplated by this Agreement or as previously
      disclosed in Borrower's financial statements or in writing to Lender and
      as accepted by Lender, and except for property tax liens for taxes not
      presently due and payable, Borrower owns and has good title to all of
      Borrower's properties free and clear of all Security Interests, and has
      not executed any security documents or financing statements relating to
      such properties. All of Borrower's properties are titled in Borrower's
      legal name, and Borrower has not used or filed a financing statement under
      any other name for at least the last five (5) years.

      HAZARDOUS SUBSTANCES. Except as disclosed to and acknowledged by Lender in
      writing, Borrower represents and warrants that: (1) During the period of
      Borrower's ownership of Borrower's Collateral, there has been no use,
      generation, manufacture, storage, treatment, disposal, release or
      threatened release of any Hazardous Substance by any person on, under,
      about or from any of the Collateral. (2) Borrower has no knowledge of, or
      reason to believe that there has been (a) any breach or violation of any
      Environmental Laws; (b) any use, generation, manufacture, storage,
      treatment, disposal, release or threatened release of any Hazardous
      Substance on, under, about or from the Collateral by any prior owners or
      occupants of any of the Collateral; or (c) any actual or threatened
      litigation or claims of any kind by any person relating to such matters.
      (3) Neither Borrower nor any tenant, contractor, agent or other authorized
      user of any of the Collateral shall use, generate, manufacture, store,
      treat, dispose of or release any Hazardous Substance on, under, about or
      from any of the Collateral; and any such activity shall be conducted in
      compliance with all applicable federal, state, and local laws,
      regulations, and ordinances, including without limitation all
      Environmental Laws. Borrower authorizes Lender and its agents to enter
      upon the Collateral to make such inspections and tests as Lender may deem
      appropriate to determine compliance of the Collateral with this section of
      the Agreement. Any inspections or tests made by Lender shall be at
      Borrower's expense and for Lender's purposes only and shall not be
      construed to create any responsibility or liability on the part of Lender
      to Borrower or to any other person. The representations and warranties
      contained herein are based on Borrower's due diligence in investigating
      the Collateral for hazardous waste and Hazardous Substances. Borrower
      hereby (1) releases and waives any future claims against Lender for
      indemnity or contribution in the event Borrower becomes liable for cleanup
      or other costs under any such laws, and (2) agrees to indemnify and hold
      harmless Lender against any and all claims, losses, liabilities, damages,
      penalties, and expenses which Lender may directly or indirectly sustain or
      suffer resulting from a breach of this section of the Agreement or as a
      consequence of any use, generation, manufacture, storage, disposal,
      release or threatened release of a hazardous waste or substance on the
      Collateral. The provisions of this section of the Agreement, including the
      obligation to indemnify, shall survive the payment of the Indebtedness and
      the termination, expiration or satisfaction of this Agreement and shall
      not be affected by Lender's acquisition of any interest in any of the
      Collateral, whether by foreclosure or otherwise.

      LITIGATION AND CLAIMS. No litigation, claim, investigation, administrative
      proceeding or similar action (including those for unpaid taxes) against
      Borrower is pending or threatened, and no other event has occurred which
      may materially adversely affect Borrower's financial condition or
      properties, other than litigation, claims, or other events, if any, that
      have been disclosed to and acknowledged by Lender in writing.

      TAXES. To the best of Borrower's knowledge, all of Borrower's tax returns
      and reports that are or were required to be filed, have been filed, and
      all taxes, assessments and other governmental charges have been paid in
      full, except those presently being or to be contested by Borrower in good
      faith in the ordinary course of business and for which adequate reserves
      have been provided.

      LIEN PRIORITY. Unless otherwise previously disclosed to Lender in writing,
      Borrower has not entered into or granted any Security Agreements, or
      permitted the filing or attachment of any Security Interests on or
      affecting any of the Collateral directly or indirectly securing repayment
      of Borrower's Loan and Note, that would be prior or that may in any way be
      superior to Lender's Security Interests and rights in and to such
      Collateral.

      BINDING EFFECT. This Agreement, the Note, all Security Agreements (if
      any), and all Related Documents are binding upon the signers thereof, as
      well as upon their successors, representatives and assigns, and are
      legally enforceable in accordance with their respective terms.

AFFIRMATIVE COVENANTS. Borrower covenants and agrees with Lender that, so long
as this Agreement remains in effect, Borrower will:

      NOTICES OF CLAIMS AND LITIGATION. Promptly inform Lender in writing of (1)
      all material adverse changes in Borrower's financial condition, and (2)
      all existing and all threatened litigation, claims, investigations,
      administrative proceedings or similar actions affecting Borrower or any
      Guarantor which could materially affect the financial condition of
      Borrower or the financial condition of any Guarantor.

      FINANCIAL RECORDS. Maintain its books and records in accordance with GAAP,
      applied on a consistent basis, and permit Lender to examine and audit
      Borrower's books and records at all reasonable times.

      FINANCIAL STATEMENTS. Furnish Lender with the following:

            ANNUAL STATEMENTS. As soon as available, but in no event later than
            one-hundred-twenty (120) days after the end of each fiscal year,
            Borrower's balance sheet and income statement for the year ended,
            audited by a certified public accountant satisfactory to Lender.

            INTERIM STATEMENTS. As soon as available, but in no event later than
            sixty (60) days after the end of each fiscal quarter, Borrower's
            balance sheet and profit and loss statement for the period ended,
            prepared by Borrower.

            TAX RETURNS. As soon as available, but in no event later than thirty
            (30) days after the applicable filing date for the tax reporting
            period ended, Federal and other governmental tax returns, prepared
            by Borrower.

      All financial reports required to be provided under this Agreement shall
      be prepared in accordance with GAAP, applied on a consistent basis, and
      certified by Borrower as being true and correct.

      ADDITIONAL INFORMATION. Furnish such additional information and
      statements, as Lender may request from time to time.

      INSURANCE. Maintain fire and other risk insurance, public liability
      insurance, and such other insurance as Lender may require with respect to
      Borrower's properties and operations, in form, amounts, coverages and with
      insurance companies acceptable to Lender. Borrower, upon request of
      Lender, will deliver to Lender from time to time the policies or
      certificates of insurance in form satisfactory to Lender, including
      stipulations that coverages will not be cancelled or diminished without at
      least ten (10) days prior written notice to Lender. Each insurance policy
      also shall include an endorsement providing that coverage in favor of
      Lender will not be impaired in any way by any act, omission or default of
      Borrower or any other person. In connection with all policies covering
      assets in which Lender holds or is offered a security interest for the
      Loans, Borrower will provide Lender with such lender's loss payable or
      other endorsements as Lender may require.

      INSURANCE REPORTS. Furnish to Lender, upon request of Lender, reports on
      each existing insurance policy showing such information as Lender may
      reasonably request, including without limitation the following: (1) the
      name of the insurer; (2) the risks insured; (3) the amount of the policy;
      (4) the properties insured; (5) the then current property values on the
      basis of which insurance has been obtained, and the manner of determining
      those values; and (6) the expiration date of the policy. In addition, upon
      request of Lender (however not more often than annually), Borrower will
      have an independent appraiser satisfactory to Lender determine, as
      applicable, the actual cash value or replacement cost of any Collateral.
      The cost of such appraisal shall be paid by Borrower.

      GUARANTIES. Prior to disbursement of any Loan proceeds, furnish executed
      guaranties of the Loans in favor of Lender, executed by the guarantors




                      BUSINESS LOAN AGREEMENT (ASSET BASED)
LOAN NO: 932900001-1               (CONTINUED)                            PAGE 4

================================================================================

      named below, on Lender's forms, and in the amounts and under the
      conditions set forth in those guaranties.



              NAMES OF GUARANTORS                                  AMOUNTS
              -------------------                                  -------
                                                             
              ADVANCED DIGITAL IMAGING RESEARCH, LLC            $8,000,000.00
              STATSPIN, INC.                                    $8,000,000.00


      SUBORDINATION. Prior to disbursement of any Loan proceeds, deliver to
      Lender a subordination agreement on Lender's forms, executed by Borrower's
      creditor named below, subordinating all of Borrower's indebtedness to such
      creditor, or such lesser amount as may be agreed to by Lender in writing,
      and any security interests in collateral securing that indebtedness to the
      Loans and security interests of Lender.



              NAME OF CREDITOR                               TOTAL AMOUNT OF DEBT
              ----------------                               --------------------
                                                          
              DIGITAL IMAGING TECHNOLOGIES, INC.                $7,000,000.00


      OTHER AGREEMENTS. Comply with all terms and conditions of all other
      agreements, whether now or a hereafter existing, between Borrower and any
      other party and notify Lender immediately in writing of any default in
      connection with any other such agreements.

      LOAN PROCEEDS. Use all Loan proceeds solely for Borrower's and
      subsidiaries' business operations, unless specifically consented to the
      contrary by Lender in writing.

      TAXES, CHARGES AND LIENS. Pay and discharge when due all of its
      indebtedness and obligations, including without limitation all
      assessments, taxes, governmental charges, levies and liens, of every kind
      and nature, imposed upon Borrower or it properties, income, or profits,
      prior to the date on which penalties would attach, and all lawful claims
      that, if unpaid, might become a lien or charge upon any of Borrower's
      properties, income, or profits.

      PERFORMANCE. Perform and comply, in a timely manner, with all terms,
      conditions, and provisions set forth in this Agreement, in the Related
      Documents, and in all other instruments and agreements between Borrower
      and Lender. Borrower shall notify Lender immediately in writing of any
      default in connection with any agreement.

      OPERATIONS. Maintain executive and management personnel with substantially
      the same qualifications and experience as the present executive and
      management personnel; provide written notice to Lender of any change in
      executive and management personnel; conduct its business affairs in a
      reasonable and prudent manner.

      ENVIRONMENTAL STUDIES. Promptly conduct and complete, at Borrower's
      expense, all such investigations, studies, samplings and testings as may
      be requested by Lender or any governmental authority relative to any
      substance, or any waste or by-product of any substance defined as toxic or
      a hazardous substance under applicable federal, state, or local law, rule,
      regulation, order or directive, at or affecting any property or any
      facility owned, leased or used by Borrower.

      COMPLIANCE WITH GOVERNMENTAL REQUIREMENTS. Comply with all laws,
      ordinances, and regulations, now or hereafter in effect, of all
      governmental authorities applicable to the conduct of Borrower's
      properties, businesses and operations, and to the use or occupancy of the
      Collateral, including without limitation, the Americans With Disabilities
      Act. Borrower may contest in good faith any such law, ordinance, or
      regulation and withhold compliance during any proceeding, including
      appropriate appeals, so long as Borrower has notified Lender in writing
      prior to doing so and so long as, in Lender's sole opinion, Lender's
      interests in the Collateral are not jeopardized. Lender may require
      Borrower to post adequate security or a surety bond, reasonably
      satisfactory to Lender, to protect Lender's interest.

      INSPECTION. Permit employees or agents of Lender at any reasonable time to
      inspect any and all Collateral for the Loan or Loans and Borrower's other
      properties and to examine or audit Borrower's books, accounts, and records
      and to make copies and memoranda of Borrower's books, accounts, and
      records. If Borrower now or at any time hereafter maintains any records
      (including without limitation computer generated records and computer
      software programs for the generation of such records) in the possession of
      a third party, Borrower, upon request of Lender, shall notify such party
      to permit Lender free access to such records at all reasonable times and
      to provide Lender with copies of any records it may request, all at
      Borrower's expense.

      COMPLIANCE CERTIFICATES. Unless waived in writing by Lender, provide
      Lender at least annually, with a certificate executed by Borrower's chief
      financial officer, or other officer or person acceptable to Lender,
      certifying that the representations and warranties set forth in this
      Agreement are true and correct as of the date of the certificate and
      further certifying that, as of the date of the certificate, no Event of
      Default exists under this Agreement.

      ENVIRONMENTAL COMPLIANCE AND REPORTS. Borrower shall comply in all
      respects with any and all Environmental Laws; not cause or permit to
      exist, as a result of an intentional or unintentional action or omission
      on Borrower's part or on the part of any third party, on property owned
      and/or occupied by Borrower, any environmental activity where damage may
      result to the environment, unless such environmental activity is pursuant
      to and in compliance with the conditions of a permit issued by the
      appropriate federal, state or local governmental authorities; shall
      furnish to Lender promptly and in any event within thirty (30) days after
      receipt thereof a copy of any notice, summons, lien, citation, directive,
      letter or other communication from any governmental agency or
      instrumentality concerning any intentional or unintentional action or
      omission on Borrower's part in connection with any environmental activity
      whether or not there is damage to the environment and/or other natural
      resources.

      ADDITIONAL ASSURANCES. Make, execute and deliver to Lender such promissory
      notes, mortgages, deeds of trust, security agreements, assignments,
      financing statements, instruments, documents and other agreements as
      Lender or its attorneys may reasonably request to evidence and secure the
      Loans and to perfect all Security Interests.

LENDER'S EXPENDITURES. If any action or proceeding is commenced that would
materially affect Lender's interest in the Collateral or if Borrower fails to
comply with any provision of this Agreement or any Related Documents, including
but not limited to Borrower's failure to discharge or pay when due any amounts
Borrower is required to discharge or pay under this Agreement or any Related
Documents, Lender on Borrower's behalf may (but shall not be obligated to) take
any action that Lender deems appropriate, including but not limited to
discharging or paying all taxes, liens, security interests, encumbrances and
other claims, at any time levied or placed on any Collateral and paying all
costs for insuring, maintaining and preserving any Collateral. All such
expenditures incurred or paid by Lender for such purposes will then bear
interest at the rate charged under the Note from the date incurred or paid by
Lender to the date of repayment by Borrower. All such expenses will become a
part of the Indebtedness and, at Lender's option, will (A) be payable on demand;
(B) be added to the balance of the Note and be apportioned among and be payable
with any installment payments to become due during either (1) the term of any
applicable insurance policy; or (2) the remaining term of the Note; or (C) be
treated as a balloon payment which will be due and payable at the Note's
maturity.

NEGATIVE COVENANTS. Borrower covenants and agrees with Lender that while this
Agreement is in effect, Borrower shall not, without the prior written consent of
Lender:

      INDEBTEDNESS AND LIENS. (1) Except for trade debt incurred in the normal
      course of business and indebtedness to Lender contemplated by this
      Agreement, create, incur or assume indebtedness for borrowed money,
      including capital leases, (2) sell, transfer, mortgage, assign, pledge,
      lease, grant a security interest in, or encumber any of Borrower's assets
      (except as allowed as Permitted Liens), or (3) sell with recourse any of
      Borrower's accounts, except to Lender.

                     BUSINESS LOAN AGREEMENT (ASSET BASED)
LOAN NO:932900001-1                         (CONTINUED)                  Page 5
===============================================================================

     CONTINUITY OF OPERATIONS. (1) Engage in any business activities
     substantially different than those in which Borrow is presently engaged,
     (2) cease operations, liquidate, merge, transfer or consolidate with any
     other entity, change its name, dissolve or transfer or sell Collateral out
     of the ordinary course of business, or (3) pay any dividends on Borrower's
     stock (other than dividends payable in its stock), provided, however that
     notwithstanding the foregoing, but only so long as no Event of Default has
     occurred and is continuing or would result from the payment of dividends,
     if Borrower is a "Subchapter S Corporation" (as defined in the Internal
     Revenue Code of 1986, as amended), Borrower may pay cash dividends on its
     stock to its shareholders from time to time in amounts necessary to enable
     the shareholders to pay income taxes and make estimated income tax payments
     to satisfy their liabilities under federal and state law which arise solely
     from their status as Shareholders of a Subchapter S Corporation because of
     their ownership of shares of Borrower's stock, or purchase or retire any of
     Borrower's outstanding shares or alter or amend Borrower's capital
     structure.

     LOANS, ACQUISITIONS AND GUARANTIES.

     CESSATION OF ADVANCES. If Lender has made any commitment to make any Loan
     to Borrower, whether under this Agreement or under any other agreement,
     Lender shall have no obligation to make Loan Advances or to disburse Loan
     proceeds if: (A) Borrower or any Guarantor is in default under the terms of
     this Agreement or any of the Related Documents or any other agreement that
     Borrower or any Guarantor has with Lender; (B) Borrower or any Guarantor
     dies, becomes incompetent or becomes insolvent, files a petition in
     bankruptcy or similar proceedings, or is adjudged a bankrupt; (C) there
     occurs a material adverse change in Borrower's financial condition, in the
     financial condition of any Guarantor, or in the value of any Collateral
     securing any Loan; or (D) any Guarantor seeks, claims or otherwise attempts
     to limit, modify or revoke such Guarantor's guaranty of the Loan or any
     other loan with Lender; or (E) Lender in good faith deems itself insecure,
     even though no Event of Default shall have occurred.

     DEFAULT. Each of the following shall constitute an Event of Default under
     this Agreement:

     PAYMENT DEFAULT. Borrower fails to make any payment when due under the
     Loan.

     OTHER DEFAULTS. Borrower fails to comply with or to perform any other term,
     obligation, covenant or condition contained in this Agreement or in any of
     the Related Documents or to comply with or to perform any term, obligation,
     covenant or condition contained in any other agreement between Lender and
     Borrower.

     DEFAULT IN FAVOR OF THIRD PARTIES.  Borrower or any Grantor defaults under
     any loan, extension of credit, security agreement, purchase or sales
     agreement, or any other agreement, in favor of any other creditor or person
     that may materially affect any of Borrower's or any Grantor's property or
     Borrower's or any Grantor's ability to repay the Loans or perform their
     respective obligations under this Agreement or any of the Related
     Documents.

     FALSE STATEMENTS. Any warranty, representation or statement made or
     furnished to Lender by Borrower or on Borrower's behalf under this
     Agreement or the Related Documents is false or misleading in any material
     respect, either now or at the time made or furnished or becomes false or
     misleading at any time thereafter.

     INSOLVENCY. The dissolution or termination of Borrower's existence as a
     going business, the insolvency of Borrower, the appointment of a receiver
     for any part of Borrower's property, any assignment for the benefit of
     creditors, any type of creditor workout, or the commencement of any
     proceeding under any bankruptcy or insolvency laws by or against Borrower.

     DEFECTIVE COLLATERALIZATION. This Agreement or any of the Related Documents
     ceases to be in full force and effect (including failure of any collateral
     document to create a valid and perfected security interest or lien) at any
     time and for any reason.

     CREDITOR OF FORFEITURE PROCEEDINGS. Commencement of foreclosure or
     forfeiture proceedings, whether by judicial proceeding, self-help,
     repossession or any other method, by any creditor of Borrower or by any
     governmental agency against any collateral securing the Loan.  This
     includes a garnishment of any of Borrower's accounts, including deposit
     accounts, with Lender. However, this Event of Default shall not apply if
     there is a good faith dispute by Borrower as to the validity or
     reasonableness of the claim which is the basis of the creditor or
     forfeiture proceeding and if Borrower gives Lender written notice of the
     creditor or forfeiture proceeding and deposits with Lender monies or a
     surety bond for the creditor or forfeiture proceeding, in an amount
     determined by Lender, in its sole discretion, as being an adequate reserve
     or bond for the dispute.

     EVENTS AFFECTING GUARANTOR. any of the preceding events occurs with respect
     to any Guarantor of any of the Indebtedness or any Guarantor dies or
     becomes incompetent, or revokes or disputes the validity of, or liability
     under, any Guaranty of the Indebtedness.  In the event of a death, Lender,
     at its option, may, but shall not be required to, permit the Guarantor's
     estate to assume unconditionally the obligations arising under the guaranty
     in a manner satisfactory to Lender, and, in doing so, cure any Event of
     Default.

     CHANGE IN OWNERSHIP. **

     ADVERSE CHANGE. A material adverse change occurs in Borrower's financial
     condition, or Lender believes the prospect of payment or performance of the
     Loan is impaired.

     INSECURITY. Lender in good faith believes itself insecure.

     RIGHT TO CURE. If any default, other than a default on Indebtedness,
     is curable and if Borrower or Grantor, as the case may be, has not been
     given a notice of a similar default within the preceding twelve (12)
     months, it may be cured (and no Event of Default will have occurred) if
     Borrower or grantor, as the case may be, after receiving written notice
     from Lender demanding cure of such default: (1) cure the default within
     fifteen (15) days; or (2) if the cure requires more than fifteen (15) days,
     immediately initiate steps which Lender deems in Lender's sole discretion
     to be sufficient to cure the default and thereafter continue and complete
     all reasonable and necessary steps sufficient to produce compliance as soon
     as reasonably practical.

EFFECT OF AN EVENT OF DEFAULT.  If any Event of Default shall occur, except
where otherwise provided in this Agreement or the Related Documents, all
commitments and obligations of Lender under this Agreement or the Related
Documents or any other agreement immediately will terminate (including any
obligation to make further Loan Advances or disbursements), and, at Lender's
option, all Indebtedness immediately will become due and payable, all without
notice of any kind to Borrower, except that in the case of an Event of Default
of the type described in the "Insolvency" subsection above, such acceleration
shall be automatic and not optional.  In addition, Lender shall have all the
rights and remedies provided in the Related Documents or available at law, in
equity, or otherwise. Except as may be prohibited by applicable law, all of
Lender's rights and remedies shall be cumulative and may be exercised
singularly or concurrently. Election by Lender to pursue any remedy shall not
exclude pursuit of any other remedy, and an election to make expenditures or
to take action to perform an obligation of Borrower or of any Grantor shall not
affect Lender's right to declare a default and to exercise its rights and
remedies.

DEPOSIT AGREEMENT SECURITY. Borrower hereby grants a security interest to
Lender in any and all deposit accounts (checking, savings, money market or time)
of Borrower at Lender, now existing or hereinafter opened, to secure the
Indebtedness. This includes all deposit accounts Borrower holds jointly with
someone else.

BORROWING BASE CERTIFICATE. Unless waived in writing by Lender, provide
Lender within 20 days of each month end and at the time of each disbursement of
Loan proceeds with a certificate executed by Borrower's chief financial officer,
or other officer or person acceptable to Lender.

                      BUSINESS LOAN AGREEMENT (ASSET BASED)

Loan No: 932900001-1               (Continued)                            PAGE 6
================================================================================

certifying that the representations and warranties set forth in this Agreement
are true and correct as of the date of the certificate and further certifying
that, as of the date of the certificate, no Event of Default or Potential Event
of Default exists under this Agreement.

ADDITIONAL INFORMATION. Borrower covenants and agrees with Lender that, while
this Agreement is in effect, Borrower will furnish such additional information
and statements, list of assets and liabilities, agings of receivables and
payables, inventory schedules, budgets, forecasts, tax returns, and other
reports with respect to Borrower's financial condition and business operations
as Lender may reasonably request from time to time, including without
limitation: (a) detailed Accounts Receivable and Payable agings, as soon as
available, but in no event later than twenty (20) days of each month end; (b)
detailed Inventory Report, as soon as available, but in no event later than
twenty (20) days of each month end.

COLLATERAL EXAM. Borrower covenants and agrees with Lender that, while this
Agreement is in effect, Borrower will permit employees or agents of Lender at
any reasonable time, but at least annually, prior to renewal, to inspect any and
all Collateral for the Loan or Loans, as well as Borrower's other properties and
to examine or audit Borrower's books, accounts, and records and to make copies
and memoranda of Borrower's books, accounts, and records as may be deemed
necessary. Any such inspection or examination shall be at Borrower's expense.

ADDITIONAL NEGATIVE COVENANT. For transactions in excess of $1,000,000.00,
Borrower shall not, without prior written consent from Bank, loan, advance,
invest, purchase or otherwise acquire the assets or business of any person or
other entity; or merge, consolidate, or commence any proceedings thereof; or
sell any assets except in the ordinary and normal course of its business as now
conducted.

FINANCIAL COVENANTS AND RATIOS. Borrower covenants and agrees with Lender that,
while this Agreement is in effect, Borrower will comply with the following
financial covenants and ratios:

WORKING CAPITAL. Maintain Working Capital in excess of $6,250,000.00, effective
for the quarter prior to California Bank & Trust funding and then changing to
$4,500,000.00, effective for the immediate quarter subsequent to California Bank
& Trust funding, to be monitored on a quarterly basis.

TANGIBLE NET WORTH. Maintain a minimum Tangible Net Worth of not less than
$10,750,000.00, to be monitored on a quarterly basis.

DEBT/TANGIBLE NET WORTH RATIO. Maintain a ratio of Debt/Tangible Net Worth of
not less than 1.25 to 1.00, to be monitored on a quarterly basis.

EARNINGS BEFORE INTEREST, TAXES DEPRECIATION AND AMORTIZATION/(CURRENT PORTION
OF LONG-TERM DEBT + INTEREST EXPENSE) RATIO. Maintain a ratio of Earnings before
Interest, Taxes Depreciation and Amortization/(Current Portion of Long-Term Debt
+ Interest Expense) Ratio of not less than 1.25 to 1.00 effective for the fiscal
year end December 31, 2001 and for every quarter through September 30, 2002 and
then changing to 1.50 to 1.00 effective for the fiscal year end December 31,
2002 and for every quarter thereafter. Covenant to be reviewed quarterly with
the Earnings before Interest, Taxes Depreciation and Amortization and interest
expense based upon a cumulative rolling 12-month basis.

ADDENDUM TO ELIGIBLE ACCOUNTS SECTION. Item number (12) in the "Eligible
Accounts" section is hereby amended to include the following additional
information: The concentration levels of Fisher Scientific International (CMS)
and IDAXX Laba, Inc. shall be calculated on a combined basis of all the A/R
(i.e. IDAXX/IRIS + Statspin).

MISCELLANEOUS PROVISIONS. The following miscellaneous provisions are a part of
this Agreement:

        AMENDMENTS. This Agreement, together with any Related Documents,
        constitutes the entire understanding and agreement of the parties as to
        the matters set forth in this Agreement. No alteration of or amendment
        to this Agreement shall be effective unless given in writing and signed
        by the party or parties sought to be charged or bound by the alteration
        or amendment.

        ATTORNEYS' FEES; EXPENSES. Borrower agrees to pay upon demand all of
        Lender's costs and expenses, including Lender's attorneys' fees and
        Lender's legal expenses, incurred in connection with the enforcement of
        this Agreement. Lender may hire or pay someone else to help enforce this
        Agreement, and Borrower shall pay the costs and expenses of such
        enforcement. Costs and expenses include Lender's attorneys' fees and
        legal expenses whether or not there is a lawsuit, including attorneys'
        fees and legal expenses for bankruptcy proceedings (including efforts to
        modify or vacate any automatic stay or injunction), appeals, and any
        anticipated post-judgment collection services. Borrower also shall pay
        all court costs and such additional fees as may be directed by the
        court.

        CAPTION HEADINGS. Caption headings in this Agreement are for convenience
        purposes only and are not to be used to interpret or define the
        provisions of this Agreement.

        CONSENT TO LOAN PARTICIPATION. Borrower agrees and consents to Lender's
        sale or transfer, whether now or later, of one or more participation
        interests in the Loan to one or more purchasers, whether related or
        unrelated to Lender. Lender may provide, without any limitation
        whatsoever, to any one or more purchasers, or potential purchasers, any
        information or knowledge Lender may have about Borrower or about any
        other matter relating to the Loan, and Borrower hereby waives any rights
        to privacy Borrower may have with respect to such matters. Borrower
        additionally waives any and all notices of sale of participation
        interests, as well as all notices of any repurchase of such
        participation interests. Borrower also agrees that the purchasers of any
        such participation interests will be considered as the absolute owners
        of such interests in the Loan and will have all the rights granted under
        the participation agreement or agreements governing the sale of such
        participation interests. Borrower further waives all rights of offset or
        counterclaim that it may have now or later against Lender or against any
        purchaser of such a participation interest and unconditionally agrees
        that either Lender or such purchaser may enforce Borrower's obligation
        under the Loan irrespective of the failure or insolvency of any holder
        of any interest in the Loan. Borrower further agrees that the purchaser
        of any such participation interests may enforce its interests
        irrespective of any personal claims or defenses that Borrower may have
        against Lender.

        GOVERNING LAW. THIS AGREEMENT WILL BE GOVERNED BY, CONSTRUED AND
        ENFORCED IN ACCORDANCE WITH FEDERAL LAW AND THE LAWS OF THE STATE OF
        CALIFORNIA. THIS AGREEMENT HAS BEEN ACCEPTED BY LENDER IN THE STATE OF
        CALIFORNIA.

        CHOICE OF VENUE. If there is a lawsuit, Borrower agrees upon Lender's
        request to submit to the jurisdiction of the courts of Los Angeles
        County, State of California.

        NO WAIVER BY LENDER. Lender shall not be deemed to have waived any
        rights under this Agreement unless such waiver is given in writing and
        signed by Lender. No delay or omission on the part of Lender in
        exercising any right shall operate as a waiver of such right or any
        other right. A waiver by Lender of a provision of this Agreement shall
        not prejudice or constitute a waiver of Lender's right otherwise to
        demand strict compliance with that provision or any other provision of
        this Agreement. No prior waiver by Lender, nor any course of dealing
        between Lender and Borrower, or between Lender and any Grantor, shall
        constitute a waiver of any of Lender's rights or of any of Borrower's or
        any Grantor's obligations as to any future transactions. Whenever the
        consent of Lender is required under this Agreement, the granting of such
        consent by Lender in any instance shall not constitute continuing
        consent to subsequent instances where such consent is required and in
        all cases such consent may be granted or withheld in the sole discretion
        of Lender.

        NOTICES. Any notice required to be given under this Agreement shall be
        given in writing, and shall be effective when actually delivered, when
        actually received by telefacsimile (unless otherwise required by law),
        when deposited with a nationally recognized overnight courier, or, if
        mailed, when deposited in the United States mail, as first class,
        certified or registered mail postage prepaid, directed to the addresses
        shown near the beginning of this Agreement. Any party may change its
        address for notices under this Agreement by giving formal written notice
        to the other parties, specifying that the purpose of the notice is to
        change the party's address. For notice purposes, Borrower agrees to keep
        Lender informed at all times of Borrower's current address. Unless
        otherwise provided or required by law, if there is more than one
        Borrower, any notice given by


                     BUSINESS LOAN AGREEMENT (ASSET BASED)
LOAN NO: 932900001-1                   (CONTINUED)                        PAGE 7
================================================================================
     Lender to any Borrower is deemed to be notice given to all Borrowers.

     SEVERABILITY. If a court of competent jurisdiction finds any provision of
     this Agreement to be illegal, invalid, or unenforceable as to any
     circumstance, that finding shall not make the offending provision illegal,
     invalid, or unenforceable as to any other circumstance. If feasible, the
     offending provision shall be considered modified so that it becomes legal,
     valid and enforceable. If the offending provision cannot be so modified, it
     shall be considered deleted from this Agreement. Unless otherwise required
     by law, the illegality, invalidity, or unenforceability of any provision of
     this Agreement shall not affect the legality, validity or enforceability of
     any other provision of this Agreement.

     SUBSIDIARIES AND AFFILIATES OF BORROWER. To the extent the context of any
     provisions of this Agreement makes it appropriate, including without
     limitation any representation, warranty or covenant, the word "Borrower" as
     used in this Agreement shall include all of Borrower's subsidiaries and
     affiliates. Notwithstanding the foregoing however, under no circumstances
     shall this Agreement be construed to require Lender to make any Loan or
     other financial accommodation to any of Borrower's subsidiaries or
     affiliates.

     SUCCESSORS AND ASSIGNS. All covenants and agreements contained by or on
     behalf of Borrower shall bind Borrower's successors and assigns and shall
     inure to the benefit of Lender and its successors and assigns. Borrower
     shall not, however, have the right to assign Borrower's rights under this
     Agreement or any interest therein, without the prior written consent of
     Lender.

     SURVIVAL OF REPRESENTATIONS AND WARRANTIES. Borrower understands and agrees
     that in extending Loan Advances, Lender is relying on all representations,
     warranties, and covenants made by Borrower in this Agreement or in any
     certificate or other instrument delivered by Borrower to Lender under this
     Agreement or the Related Documents. Borrower further agrees that regardless
     of any investigation made by Lender, all such representations, warranties
     and covenants will survive the extension of Loan Advances and delivery to
     Lender of the Related Documents, shall be continuing in nature, shall be
     deemed made and redated by Borrower at the time each Loan Advance is made,
     and shall remain in full force and effect until such time as Borrower's
     Indebtedness shall be paid in full, or until this Agreement shall be
     terminated in the manner provided above, whichever is the last to occur.

     TIME IS OF THE ESSENCE. Time is of the essence in the performance of this
     Agreement.

     WAIVE JURY. ALL PARTIES TO THIS AGREEMENT HEREBY WAIVE THE RIGHT TO ANY
     JURY TRIAL IN ANY ACTION, PROCEEDING, OR COUNTERCLAIM BROUGHT BY ANY PARTY
     AGAINST ANY OTHER PARTY.

DEFINITIONS. The following capitalized words and terms shall have the following
meanings when used in this Agreement. Unless specifically stated to the
contrary, all references to dollar amounts shall mean amounts in lawful money
of the United States of America. Words and terms used in the singular shall
include the plural, and the plural shall include the singular, as the context
may require. Words and terms not otherwise defined in this Agreement shall have
the meanings attributed to such terms in the Uniform Commercial Code.
Accounting words and terms not otherwise defined in this Agreement shall have
the meanings assigned to them in accordance with generally accepted accounting
principles as in effect on the date of this Agreement:

     ACCOUNT. The word "Account" means a trade account, account receivable,
     other receivable, or other right to payment for goods sold or services
     rendered owing to Borrower (or to a third party grantor acceptable to
     Lender).

     ADVANCE. The word "Advance" means a disbursement of Loan funds made, or to
     be made, to Borrower or on Borrower's behalf under the terms and conditions
     of this Agreement.

     AGREEMENT. The word "Agreement" means this Business Loan Agreement (Asset
     Based), as this Business Loan Agreement (Asset Based) may be amended or
     modified from time to time, together with all exhibits and schedules
     attached to this Business Loan Agreement (Asset Based) from time to time.

     BORROWER. The word "Borrower" means international Remote Imaging Systems,
     Inc., and all other persons and entities signing the Note in whatever
     capacity.

     BORROWING BASE. The words "Borrowing Base" mean as determined by Lender
     from time to time, the lesser of (1) $6,500,000.00 or (2) the sum of (a)
     80.000% of the aggregate amount of Eligible Accounts, 60 DAYS or less from
     the due date for domestic Accounts Receivable, and 90 DAYS or less from the
     due date for Foreign Accounts Receivable with sufficient Accounts
     Receivable insurance coverage or L/C support (not to exceed in
     corresponding Loan amount based on Eligible Accounts $6,500,000.00), plus
     (b) 30.000% of the aggregate amount of Eligible Raw Material Inventory and
     30.000% of Eligible Finished Goods Inventory (not to exceed $1,500,000.00).
     ***

     BUSINESS DAY. The words "Business Day" mean a day on which commercial banks
     are open in the State of California.

     COLLATERAL. The word "Collateral" means all property and assets granted as
     collateral security for a loan, whether real or personal property, whether
     granted directly or indirectly, whether granted now or in the future, and
     whether granted in the form of a security interest, mortgage, collateral
     mortgage, deed of trust, assignment, pledge, crop pledge, chattel mortgage,
     collateral chattel mortgage, chattel trust, factor's lien, equipment trust,
     conditional sale, trust receipt, lien, charge, lien or title retention
     contract, lease or consignment intended as a security device, or any other
     security or lien interest whatsoever, whether created by law, contract, or
     otherwise. The word Collateral also includes without limitation all
     collateral described in the Collateral section of this Agreement.

     ELIGIBLE ACCOUNTS. The words "Eligible Accounts" mean at any time, all of
     Borrower's Accounts which contain selling terms and conditions acceptable
     to Lender. The net amount of any Eligible Account against which Borrower
     may borrow shall exclude all returns, discounts, credits, and offsets of
     any nature. Unless otherwise agreed to by Lender in writing, Eligible
     Accounts do not include:

          (1) Accounts with respect to which the Account Debtor is employee or
          agent of Borrower.

          (2) Accounts with respect to which the Account Debtor is a subsidiary
          of, or affiliated with Borrower or its shareholders, officers, or
          directors.

          (3) Accounts with respect to which goods are placed on consignment,
          guaranteed sale, or other terms by reason of which the payment by the
          Account Debtor may be conditional.

          (4) Accounts with respect to which the Account Debtor is not a
          resident of the United States, except to the extent such Accounts are
          supported by insurance, bonds or other assurances satisfactory to
          Lender.

          (5) Accounts with respect to which Borrower is or may become liable to
          the Account Debtor for goods sold or services rendered by the Account
          Debtor to Borrower.

          (6) Accounts which are subject to dispute, counterclaim, or setoff.

          (7) Accounts with respect to which the goods have not been shipped or
          delivered, or the services have not been rendered, to the Account
          Debtor.

          (8) Accounts with respect to which Lender, in its sole discretion,
          deems the creditworthiness or financial condition of the Account
          Debtor to be unsatisfactory.

                     BUSINESS LOAN AGREEMENT (ASSET BASED)
LOAN NO: 932900001-1              (CONTINUED)                             PAGE 8
================================================================================
     (9)  Accounts of any Account Debtor who has filed or has had filed against
     it a petition in bankruptcy or an application for relief under any
     provision of any state or federal bankruptcy, insolvency, or debtor-in-
     relief acts; or who has had appointed trustee, custodian, or receiver for
     the assets of such Account Debtor; or who has made an assignment for the
     benefit of creditors or has become insolvent of fails generally to pay
     its debt (including its payrolls) as such debts become due.

     (10) Account with respect to which the Account Debtor is the United States
     government or any department or agency of the United States.

     (11) Accounts which have not been paid in full within 60 DAYS from the due
     date. The entire balance of any Account of any single Account Debtor will
     be in eligible whenever the portion of the Account which has not been paid
     within 60 DAYS from the due date is in excess of 25.000% of the total
     amount outstanding on the Account.

     (12) That portion of the Accounts of any single Account Debtor which
     exceeds 25.000% of all of Borrower's Accounts.

ELIGIBLE INVENTORY. The words "Eligible Inventory" mean at any time, all of
Borrower's Inventory as defined below except:

     (1)  Inventory which is not owned by Borrower free and clear of all
     security interests, liens, encumbrances, and claims of third parties.

     (2)  Inventory which Lender, in its sole discretion, deems to be obsolete,
     unsalable, damaged, defective, or unfit for further processing.

     (3)  Work in progress

     (4)  Items held in showroom and inventory located in a 3rd party warehouse.

ENVIRONMENTAL LAWS. The word "Environmental Laws" mean any and all state,
federal and local statutes, regulations and ordinances relating to the
protection of human health of the environment, including without limitation the
Comprehensive Environment Response, Compensation, and Liability Act of 1980,
as amended, 42 U.S.C. Section 9601, et seq. ("CERCLA"), the Superfund
Amendments and Reauthorization Act of 1986, Pub. L. No. 99-499 ("SARA"), the
Hazardous Materials Transportation Act, 49 U.S.C. Section 1801, et seq., the
Resource Conservation and Recovery Act, 42 U.S.C. Section 6901, et seq.,
Chapters 6.5 through 7.7 of Division 20 of the California Health and Safety
Code, Section 25100, et seq., or other applicable state or federal laws, rules,
or regulations adopted pursuant thereto.

EVENT OF DEFAULT. The words "Event of Default" mean any of the events of
default set forth in this Agreement if the default section of this Agreement.

EXPIRATION DATE. The words "Expiration Date mean the date of termination of
Lender's commitment to lend under this Agreement.

GAAP. The word "GAAP" means generally accepted accounting principles.

GRANTOR. The word "Grantor" means each and all to the persons or entities
granting a Security Interest in an Collateral for the Loan, including without
limitation all Borrowers granting such a Security Interest.

GUARANTOR. The word "Guarantor" means any guarantor, surely, or accommodation
party of any or all of the loan.

GUARANTY. The work "Guaranty" means the guaranty from Guarantor to Lender,
including without limitation a guaranty of all or part of the Note.

HAZARDOUS SUBSTANCES. The word "Hazardous Substances' mean materials that,
because of their quantity, concentration or physical, chemical or infectious
characteristics, may cause or pose a present or potential hazard to human
health of the environment when improperly used, treated, stored, disposed of,
generated, manufactured, transported or otherwise handled. The words "Hazardous
Substances" are used in their very broadest sense and include without
limitation any and all hazardous or toxic substances, materials or waste as
defined by or listed under the Environmental Laws. The term "Hazardous
Substances" also includes, without limitation, petroleum and petroleum
by-products or any fraction thereof and asbestos.

INDEBTEDNESS. The word "Indebtedness" means the indebtedness evidenced by
the Note or Related Documents, including all principal and interest together
with all other indebtedness and costs and expenses for which Borrowers is
responsible under this Agreement or under any of the Related Documents.

INVENTORY. The word "Inventory means all of Borrower's raw materials, work in
process, finished goods, merchandise, parts and supplies, of every kind and
description, and goods held for sale or lease or furnished under contracts of
service in which Borrower now has or hereafter acquires any right, whether held
by Borrower or others, and all documents of title, warehouse receipts, bills of
lading, and all other documents of every type covering all or any part of the
foregoing. Inventory includes inventory temporarily out of Borrower's custody
or possession and all returns on Accounts.

LENDER. The word "Lender" means California Bank & Trust, its successors and
assigns.

LOAN. The word "Loan" means any and all loans and financial accommodations from
Lender to Borrower whether now or hereafter existing, and however evidenced,
including without limitation those loans and financial accommodations described
herein or described on any exhibit or schedule attached to this Agreement from
time to time.

NOTE. The word "Note" means the Note executed by International Remote Imaging
Systems, Inc. in the principal amount of $6,500,000.00 dated February 7, 2002,
together with all renewals of, extensions of, modifications of, refinancings of,
consolidations of, and substitutions for the note or credit agreement.

PERMITTED LIENS. The words "Permitted Liens" mean (1) liens and security
interests securing indebtedness owed by Borrower to Lender; (2) liens for taxes,
assessments, or similar charges either not yet due or being contested in good
faith; (3) liens of materialmen, mechanics, warehousemen, or carriers, or other
like liens arising in the ordinary course of business and securing obligations
which are not yet delinquent; (4) purchase money liens or purchase money
security interests upon or in any property acquired or held by Borrower in the
ordinary course of business to secure indebtedness outstanding on the date of
this Agreement or permitted to be incurred under the paragraph of this Agreement
titled "Indebtedness and Liens"; (5) liens and security interests which, as of
the date of this Agreement, have been disclosed to and approved by the Lender in
writing; and (6) those liens and security interests which in the aggregate
constitute an immaterial and insignificant monetary amount with respect to the
net value of Borrower's assets.

PRIMARY CREDIT FACILITY. The words "Primary Credit Facility" mean the credit
facility described in the Line of Credit section of this Agreement.

RELATED DOCUMENTS. The words "Related Documents" mean all promissory notes,
credit agreements, loan agreements, environmental agreements, guaranties,
security agreements, mortgages, deeds of trust, security deeds, collateral
mortgages, and all other instruments, agreements and documents, whether now or
hereafter existing, executed in connection with the Loan.

SECURITY AGREEMENT. The word "Security Agreement" mean and include without
limitation any agreements, promises, covenants, arrangements, understandings or
other agreements, whether created by law, contract, or otherwise, evidencing,
governing, representing, or creating a Security Interest.

SECURITY INTEREST. The words "Security Interest" mean, without limitation, any
and all types of collateral security, present and future, whether in the

                     BUSINESS LOAN AGREEMENT (ASSET BASED)
LOAN NO: 932900001-1                   (CONTINUED)                        PAGE 9
================================================================================
     form of a lien, charge, encumbrance, mortgage, deed of trust, security
     deed, assignment, pledge, crop pledge, chattel mortgage, collateral chattel
     mortgage, chattel trust, factor's lien, equipment trust, conditional sale,
     trust receipt, lien or title retention contract, lease or consignment
     intended as a security device, or any other security or lien interest
     whatsoever whether created by law, contract, or otherwise.

BORROWER ACKNOWLEDGES HAVING READ ALL THE PROVISIONS OF THIS BUSINESS LOAN
AGREEMENT (ASSET BASED) AND BORROWER AGREES TO ITS TERMS. THIS BUSINESS LOAN
AGREEMENT (ASSET BASED) IS DATED FEBRUARY 7, 2002.

BORROWER:
            BY: /s/ John A. O'Malley           BY: /s/ John Caloz
               -----------------------------      ----------------------------
LENDER:        DR. JOHN A. O'MALLEY               JOHN CALOZ
               CEO OF INTERNATIONAL REMOTE        CFO/SECRETARY OF INTERNATIONAL
               IMAGING SYSTEMS, INC.              REMOTE IMAGING, INC.

CALIFORNIA BANK & TRUST


By:  [SIGNATURE ILLEGIBLE]
   ------------------------------
        AUTHORIZED SIGNER
- --------------------------------------------------------------------------------

**  Any acquisition of Borrower's common stock by merger, new issuance, or
    otherwise, that results in one holder owning twenty-five (25%) percent or
    more of such common stock.

*** For Purposes of calculating the Borrowing Base, the numbers and percentages
    described above shall use the combined figures of Borrower and its
    subsidiary Statspin, Inc.

                            BUSINESS LOAN AGREEMENT



- ---------------------------------------------------------------------------------------------------------------------
 PRINCIPAL     LOAN DATE      MATURITY      LOAN NO      CALL/COLL      ACCOUNT       OFFICER          INITIALS
                                                                                
$500,000.00    02-07-2002    01-31-2007   932900001-3                 932900001-3     22163      [INITIALS ILLEGIBLE]
- ---------------------------------------------------------------------------------------------------------------------
References in the shaded area are for Lender's use only and do not limit the applicability of this document to any
particular loan or item. Any item above containing "***" has been omitted due to text length limitations.
- ---------------------------------------------------------------------------------------------------------------------


BORROWER: INTERNATIONAL REMOTE          LENDER: CALIFORNIA BANK & TRUST
            IMAGING SYSTEMS, INC.               COMMERCIAL LOAN CENTER
          9162 ETON AVENUE                      550 SOUTH HOPE STREET, SUITE 300
          CHATSWORTH, CA  91311                 LOS ANGELES, CA  90071

================================================================================

THIS BUSINESS LOAN AGREEMENT DATED FEBRUARY 7, 2002, IS MADE AND EXECUTED
BETWEEN INTERNATIONAL REMOTE IMAGING SYSTEMS, INC. ("BORROWER") AND CALIFORNIA
BANK & TRUST ("LENDER") ON THE FOLLOWING TERMS AND CONDITIONS. BORROWER HAS
RECEIVED PRIOR COMMERCIAL LOANS FROM LENDER OR HAS APPLIED TO LENDER FOR A
COMMERCIAL LOAN OR LOANS OR OTHER FINANCIAL ACCOMMODATIONS, INCLUDING THOSE
WHICH MAY BE DESCRIBED ON ANY EXHIBIT OR SCHEDULE ATTACHED TO THIS AGREEMENT
("LOAN"). BORROWER UNDERSTANDS AND AGREES THAT: (A) IN GRANTING, RENEWING, OR
EXTENDING ANY LOAN, LENDER IS RELYING UPON BORROWER'S REPRESENTATIONS,
WARRANTIES, AND AGREEMENTS AS SET FORTH IN THIS AGREEMENT; (B) THE GRANTING,
RENEWING, OR EXTENDING OF ANY LOAN BY LENDER AT ALL TIMES SHALL BE SUBJECT TO
LENDER'S SOLE JUDGMENT AND DISCRETION; AND (C) ALL SUCH LOANS SHALL BE AND
REMAIN SUBJECT TO THE TERMS AND CONDITIONS OF THIS AGREEMENT.

TERM. This Agreement shall be effective as of February 7, 2002, and shall
continue in full force and effect until such time as all of Borrower's Loans in
favor of Lender have been paid in full, including principal, interest, costs,
expenses, attorneys' fees, and other fees and charges, or until such time as
the parties may agree in writing to terminate this Agreement.

CONDITIONS PRECEDENT TO EACH ADVANCE. Lender's obligation to make the initial
Advance and each subsequent Advance under this Agreement shall be subject to
the fulfillment to Lender's satisfaction of all of the conditions set forth in
this Agreement and in the Related Documents.

     LOAN DOCUMENTS. Borrower shall provide to Lender the following documents
     for the Loan: (1) the Note; (2) Security Agreements granting to Lender
     security interests in the Collateral; (3) financing statements and all
     other documents perfecting Lender's Security Interests; (4) evidence of
     insurance as required below; (5) guaranties; (6) together with all such
     Related Documents as Lender may require for the Loan; all in form and
     substance satisfactory to Lender and Lender's counsel.

     BORROWER'S AUTHORIZATION. Borrower shall have provided in form and
     substance satisfactory to Lender properly certified resolutions, duly
     authorizing the execution and delivery of this Agreement, the Note and the
     Related Documents. In addition, Borrower shall have provided such other
     resolutions, authorizations, documents and instruments as Lender or its
     counsel, may require.

     PAYMENT OF FEES AND EXPENSES. Borrower shall have paid to Lender all fees,
     charges, and other expenses which are then due and payable as specified in
     this Agreement or any Related Document.

     REPRESENTATIONS AND WARRANTIES. The representations and warranties set
     forth in this Agreement, in the Related Documents, and in any document or
     certificate delivered to Lender under this Agreement are true and correct.

     NO EVENT OF DEFAULT. There shall not exist at the time of any Advance a
     condition which would constitute an Event of Default under this Agreement
     or under any Related Document.

REPRESENTATIONS AND WARRANTIES. Borrower represents and warrants to Lender as
of the date of this Agreement, as of the date of each disbursement of loan
proceeds, as of the date of any renewal, extension or modification of any Loan,
and at all times any indebtedness exists:

     ORGANIZATION. Borrower is a corporation for profit which is, and at all
     times shall be, duly organized, validly existing, and in good standing
     under and by virtue of the laws of the State of Delaware. Borrower is duly
     authorized to transact business in the State of California and all other
     states in which Borrower is doing business, having obtained all necessary
     filings, governmental licenses and approvals for each state in which the
     failure to so qualify would have a material adverse effect on its business
     or financial condition. Borrower has the full power and authority to own
     its properties and to transact the business in which it is presently
     engaged or presently proposes to engage. Borrower maintains an office at
     9162 Eton Avenue, Chatsworth, CA  91311. Unless Borrower has designated
     otherwise in writing, the principal office is the office at which Borrower
     keeps its books and records including its records concerning the
     Collateral. Borrower will notify Lender prior to any change in the location
     of Borrower's state of organization or any change in Borrower's name.
     Borrower shall do all things necessary to preserve and to keep in full
     force and effect its existence, rights and privileges, and shall comply
     with all regulations, rules, ordinances, statutes, orders and decrees of
     any governmental or quasi-governmental authority or court applicable to
     Borrower and Borrower's business activities.

     ASSUMED BUSINESS NAMES. Borrower has filed or recorded all documents or
     filings required by law relating to all assumed business names used by
     Borrower. Excluding the name of Borrower, the following is a complete list
     of all assumed business names under which Borrower does business: IRIS and
     IRIS Diagnostics.

     AUTHORIZATION. Borrower's execution, delivery, and performance of this
     Agreement and all the Related Documents have been duly authorized by all
     necessary action by Borrower and do not conflict with, result in a
     violation of, or constitute a default under (1) any provision of Borrower's
     articles of incorporation or organization, or bylaws, or any agreement or
     other instrument binding upon Borrower or (2) any law, governmental
     regulation, court decree or order applicable to Borrower or to Borrower's
     properties.

     FINANCIAL INFORMATION. Each of Borrower's financial statements supplied to
     Lender truly and completely disclosed Borrower's financial condition as of
     the date of the statement, and there has been no material adverse change in
     Borrower's financial condition subsequent to the date of the most recent
     financial statement supplied to Lender. Borrower has no material contingent
     obligations except as disclosed in such financial statements.

     LEGAL EFFECT. This Agreement constitutes, and any instrument or agreement
     Borrower is required to give under this Agreement when delivered will
     constitute legal, valid, and binding obligations of Borrower enforceable
     against Borrower in accordance with their respective terms.

     PROPERTIES. Except as contemplated by this Agreement or as previously
     disclosed in Borrower's financial statements or in writing to Lender and as
     accepted by Lender, and except for property tax liens for taxes not
     presently due and payable, Borrower owns and has good title to all of
     Borrower's properties free and clear of all Security Interests, and has not
     executed any security documents or financing statements relating to such
     properties. All of Borrower's properties are titled in Borrower's legal
     name, and Borrower has not used or filed a financing statement under any
     other name for at least the last five (5) years.

     HAZARDOUS SUBSTANCES. Except as disclosed to and acknowledged by Lender in
     writing, Borrower represents and warrants that: (1) During the period of
     Borrower's ownership of Borrower's Collateral, there has been no use,
     generation, manufacture, storage, treatment, disposal, release or
     threatened release of any Hazardous Substance by any person on, under,
     about or from any of the Collateral. (2) Borrower has no knowledge of, or
     reason to believe that there has been (a) any breach or violation of any
     Environmental Laws; (b) any use, generation, manufacture, storage,


                             BUSINESS LOAN AGREEMENT
Loan No: 932900001-3               (CONTINUED)                           PAGE 2
================================================================================

        treatment, disposal, release or threatened release of any Hazardous
        Substance on, under, about or from the Collateral by any prior owners or
        occupants of any of the Collateral; or (c) any actual or threatened
        litigation or claims of any kind by any person relating to such matters.
        (3) Neither Borrower nor any tenant, contractor, agent or other
        authorized user of any of the Collateral shall use, generate,
        manufacture, store, treat, dispose of or release any Hazardous Substance
        on, under, about or from any of the Collateral; and any such activity
        shall be conducted in compliance with all applicable federal, state, and
        local laws, regulations, and ordinances, including without limitation
        all Environmental Laws. Borrower authorizes Lender and its agents to
        enter upon the Collateral to make such inspections and tests as Lender
        may deem appropriate to determine compliance of the Collateral with this
        section of the Agreement. Any inspections or tests made by Lender shall
        be at Borrower's expense and for Lender's purposes only and shall not be
        construed to create any responsibility or liability on the part of
        Lender to Borrower or to any other person. The representations and
        warranties contained herein are based on Borrower's due diligence in
        investigating the Collateral for hazardous waste and Hazardous
        Substances. Borrower hereby (1) releases and waives any future claims
        against Lender for indemnity or contribution in the event Borrower
        becomes liable for cleanup or other costs under any such laws, and (2)
        agrees to indemnify and hold harmless Lender against any and all claims,
        losses, liabilities, damages, penalties, and expenses which Lender may
        directly or indirectly sustain or suffer resulting from a breach of this
        section of the Agreement or as a consequence of any use, generation,
        manufacture, storage, disposal, release or threatened release of a
        hazardous waste or substance on the Collateral. The provisions of this
        section of the Agreement, including the obligation to indemnify, shall
        survive the payment of the Indebtedness and the termination, expiration
        or satisfaction of this Agreement and shall not be affected by Lender's
        acquisition of any interest in any of the Collateral, whether by
        foreclosure or otherwise.

        LITIGATION AND CLAIMS. No litigation, claim, investigation,
        administrative proceeding or similar action (including those for unpaid
        taxes) against Borrower is pending or threatened, and no other event has
        occurred which may materially adversely affect Borrower's financial
        condition or properties, other than litigation, claims, or other events,
        if any, that have been disclosed to and acknowledged by Lender in
        writing.

        TAXES. To the best of Borrower's knowledge, all of Borrower's tax
        returns and reports that are or were required to be filed, have been
        filed, and all taxes, assessments and other governmental charges have
        been paid in full, except those presently being or to be contested by
        Borrower in good faith in the ordinary course of business and for which
        adequate reserves have been provided.

        LIEN PRIORITY. Unless otherwise previously disclosed to Lender in
        writing, Borrower has not entered into or granted any Security
        Agreements, or permitted the filing or attachment of any Security
        Interests on or affecting any of the Collateral directly or indirectly
        securing repayment of Borrower's Loan and Note, that would be prior or
        that may in any way be superior to Lender's Security Interests and
        rights in and to such Collateral.

        BINDING EFFECT. This Agreement, the Note, all Security Agreements (if
        any), and all Related Documents are binding upon the signers thereof, as
        well as upon their successors, representatives and assigns, and are
        legally enforceable in accordance with their respective terms.

AFFIRMATIVE COVENANTS. Borrower covenants and agrees with Lender that, so long
as this Agreement remains in effect, Borrower will:

        NOTICES OF CLAIMS AND LITIGATION. Promptly inform Lender in writing of
        (1) all material adverse changes in Borrower's financial condition, and
        (2) all existing and all threatened litigation, claims, investigations,
        administrative proceedings or similar actions affecting Borrower or any
        Guarantor which could materially affect the financial condition of
        Borrower or the financial condition of any Guarantor.

        FINANCIAL RECORDS. Maintain its books and records in accordance with
        GAAP, applied on a consistent basis, and permit Lender to examine and
        audit Borrower's books and records at all reasonable times.

        FINANCIAL STATEMENTS. Furnish Lender with the following:

               ANNUAL STATEMENTS. As soon as available, but in no event later
               than one-hundred-twenty (120) days after the end of each fiscal
               year, Borrower's balance sheet and income statement for the year
               ended, audited by a certified public accountant satisfactory to
               Lender.

               INTERIM STATEMENTS. As soon as available, but in no event later
               than sixty (60) days after the end of each fiscal quarter,
               Borrower's balance sheet and profit and loss statement for the
               period ended, prepared by Borrower.

               TAX RETURNS. As soon as available, but in no event later than
               thirty (30) days after the applicable filing date for the tax
               reporting period ended, Federal and other governmental tax
               returns, prepared by Borrower.

        All financial reports required to be provided under this Agreement shall
        be prepared in accordance with GAAP, applied on a consistent basis, and
        certified by Borrower as being true and correct.

        ADDITIONAL INFORMATION. Furnish such additional information and
        statements, as Lender may request from time to time.

        INSURANCE. Maintain fire and other risk insurance, public liability
        insurance, and such other insurance as Lender may require with respect
        to Borrower's properties and operations, in form, amounts, coverages and
        with insurance companies acceptable to Lender. Borrower, upon request of
        Lender, will deliver to Lender from time to time the policies or
        certificates of insurance in form satisfactory to Lender, including
        stipulations that coverages will not be cancelled or diminished without
        at least ten (10) days prior written notice to Lender. Each insurance
        policy also shall include an endorsement providing that coverage in
        favor of Lender will not be impaired in any way by any act, omission or
        default of Borrower or any other person. In connection with all policies
        covering assets in which Lender holds or is offered a security interest
        for the Loans, Borrower will provide Lender with such lender's loss
        payable or other endorsements as Lender may require.

        INSURANCE REPORTS. Furnish to Lender, upon request of Lender, reports on
        each existing insurance policy showing such information as Lender may
        reasonably request, including without limitation the following: (1) the
        name of the insurer; (2) the risks insured; (3) the amount of the
        policy; (4) the properties insured; (5) the then current property values
        on the basis of which insurance has been obtained, and the manner of
        determining those values; and (6) the expiration date of the policy. In
        addition, upon request of Lender (however not more often than annually),
        Borrower will have an independent appraiser satisfactory to Lender
        determine, as applicable, the actual cash value or replacement cost of
        any Collateral. The cost of such appraisal shall be paid by Borrower.

        GUARANTIES. Prior to disbursement of any Loan proceeds, furnish executed
        guaranties of the Loans in favor of Lender, executed by the guarantors
        named below, on Lender's forms, and in the amounts and under the
        conditions set forth in those guaranties.

                NAMES OF GUARANTORS                                   AMOUNTS
                -------------------                                -----------
                ADVANCED DIGITAL IMAGING RESEARCH, LLC             8,000,000.00
                STATSPIN, INC.                                    $8,000,000.00

        OTHER AGREEMENTS. Comply with all terms and conditions of all other
        agreements, whether now or hereafter existing, between Borrower and any
        other party and notify Lender immediately in writing of any default in
        connection with any other such agreements.

        LOAN PROCEEDS. Use all Loan proceeds solely for Borrower's and
        subsidiaries' business operations specifically consented to the contrary
        by Lender in writing.

        TAXES, CHARGES AND LIENS. Pay and discharge when due all of its
        indebtedness and obligations, including without limitation all
        assessments, taxes, governmental charges, levies and liens, of every
        kind and nature, imposed upon Borrower or its properties, income, or
        profits, prior to the




                            BUSINESS LOAN AGREEMENT
LOAN NO: 932900001-3                  (CONTINUED)                         PAGE 3
================================================================================

     date on which penalties would attach, and all lawful claims that, if
     unpaid, might become a lien or charge upon any of Borrower's properties,
     income, or profits.

     PERFORMANCE. Perform and comply, in a timely manner, with all terms,
     conditions, and provisions set forth in this Agreement, in the Related
     Documents, and in all other instruments and agreements between Borrower and
     Lender. Borrower shall notify Lender immediately in writing of any default
     in connection with any agreement.

     OPERATIONS. Maintain executive and management personnel with substantially
     the same qualifications and experience as the present executive and
     management personnel; provide written notice to Lender of any change in
     executive and management personnel; conduct its business affairs in a
     reasonable and prudent manner.

     ENVIRONMENTAL STUDIES. Promptly conduct and complete, at Borrower's
     expense, all such investigations, studies, samplings and testings as may be
     requested by Lender or any governmental authority relative to any
     substance, or any waste or by-product of any substance defined as toxic or
     a hazardous substance under applicable federal, state, or local law, rule,
     regulation, order or directive, at or affecting any property or any
     facility owned, leased or used by Borrower.

     COMPLIANCE WITH GOVERNMENTAL REQUIREMENTS. Comply with all laws,
     ordinances, and regulations, now or hereafter in effect, of all
     governmental authorities applicable to the conduct of Borrower's
     properties, business and operations, and to the use or occupancy of the
     Collateral, including without limitation, the Americans With Disabilities
     Act. Borrower may contest in good faith any such law, ordinance, or
     regulation and withhold compliance during any proceeding, including
     appropriate appeals, so long as Borrower has notified Lender in writing
     prior to doing so and so long as, in Lender's sole opinion, Lender's
     interests in the Collateral are not jeopardized. Lender may require
     Borrower to post adequate security or a surety bond, reasonably
     satisfactory to Lender, to protect Lender's interest.

     INSPECTION. Permit employees or agents of Lender at any reasonable time to
     inspect any and all Collateral for the Loan or Loans and Borrower's other
     properties and to examine or audit Borrower's books, accounts, and records
     and to make copies and memoranda of Borrower's books, accounts, and
     records. If Borrower now or at any time hereafter maintains any records
     (including without limitation computer generated records and computer
     software programs for the generation of such records) in the possession of
     a third party, Borrower, upon request of Lender, shall notify such party to
     permit Lender free access to such records at all reasonable times and to
     provide Lender with copies of any records it may request, all at Borrower's
     expense.

     COMPLIANCE CERTIFICATES.  Unless waived in writing by Lender, provide
     Lender at least annually, with a certificate executed by Borrower's chief
     financial officer, or other officer or person acceptable to Lender,
     certifying that the representations and warranties set forth in this
     Agreement are true and correct as of the date of the certificate and
     further certifying that, as of the date of the certificate, no Event of
     Default exists under this Agreement.

     ENVIRONMENTAL COMPLIANCE AND REPORTS. Borrower shall comply in all respects
     with any and all Environmental Laws; not cause or permit to exist, as a
     result of an intentional or unintentional action or omission on Borrower's
     part or on the part of any third party, on property owned and/or occupied
     by Borrower, any environmental activity where damage may result to the
     environment, unless such environmental activity is pursuant to and in
     compliance with the conditions of a permit issued by the appropriate
     federal, state or local governmental authorities; shall furnish to Lender
     promptly and in any event within thirty (30) days after receipt thereof a
     copy of any notice, summons, lien, citation, directive, letter or other
     communication from any governmental agency or instrumentality concerning
     any intentional or unintentional action or omission on Borrower's part in
     connection from any environmental activity whether or not there is damage
     to the environment and/or other natural resources.

     ADDITIONAL ASSURANCES. Make, execute and deliver to Lender such promissory
     notes, mortgages, deeds of trust, security agreements, assignments,
     financing statements, instruments, documents and other agreements as Lender
     or its attorneys may reasonably request to evidence and secure the Loans
     and to perfect all Security Interests.

Lender'S EXPENDITURES. If any action or proceeding is commenced that would
materially affect Lender's interest in the Collateral or if Borrower fails to
comply with any provision of this Agreement or any Related Documents, including
but not limited to Borrower's failure to discharge or pay when due any amounts
Borrower is required to discharge or pay under this Agreement or any Related
Documents, Lender on Borrower's behalf may (but shall not be obligated to) take
any action that Lender deems appropriate, including but not limited to
discharging or paying all taxes, liens, security interests, encumbrances and
other claims, at any time levied or placed on any Collateral and paying all
costs for insuring, maintaining and preserving any Collateral. All such
expenditures incurred or paid by Lender for such purposes will then bear
interest at the rate charged under the Note from the date incurred or paid by
Lender to the date of repayment by Borrower. All such expenses will become a
part of the Indebtedness and, at Lender's option, will (A) be payable on
demand; (B) be added to the balance of the Note and be apportioned among and be
payable with any installment payments to become due during either (1) the term
of any applicable insurance policy; or (2) the remaining term of the Note; or
(C) be treated as a balloon payment which will be due and payable at the Note's
maturity.


NEGATIVE COVENANTS.  Borrower covenants and agrees with Lender that while
this Agreement is in effect, Borrower shall not, without the prior written
consent of Lender:

     INDEBTEDNESS AND LIENS. (1) Except for trade debt incurred in the normal
     course of business and indebtedness to Lender contemplated by this
     Agreement, create, incur or assume indebtedness for borrowed money,
     including capital leases, (2) sell, transfer, mortgage, assign, pledge,
     lease, grant a security interest in, or encumber any of Borrower's assets
     (except as allowed as Permitted Liens), or (3) sell with recourse any of
     Borrower's accounts, except to Lender.

     CONTINUITY OF OPERATIONS. (1) Engage in any business activities
     substantially different than those in which Borrower is presently engaged,
     (2) cease operations, liquidate, merge, transfer or consolidate with any
     other entity, change its name, dissolve or transfer or sell Collateral out
     of the ordinary course of business, or  (3) pay any dividends on Borrower's
     stock (other than dividends payable in its stock), provided, however that
     notwithstanding the foregoing, but only so long as no Event of Default has
     occurred and is continuing or would result from the payment of dividends,
     if Borrower is a "Subchapter S Corporation" (as defined in the Internal
     Revenue Code of 1986, as amended), Borrower may pay cash dividends on its
     stock to its shareholders from time to time in amounts necessary to enable
     the shareholders to pay income taxes and make estimated income tax payments
     to satisfy their liabilities under federal and state law which arise solely
     from their status as Shareholders of a Subchapter S Corporation because of
     their ownership of shares of Borrower's stock, or purchase or retire any of
     Borrower's outstanding shares or alter or amend Borrower's capital
     structure.

     LOANS, ACQUISITIONS AND GUARANTIES.

CESSATION OF ADVANCES. If Lender has made any commitment to make any Loan to
Borrower, whether under this Agreement or under any other agreement, Lender
shall have no obligation to make Loan Advances or to disburse Loan proceeds if:
(A) Borrower or any Guarantor is in default under the terms of this Agreement
or any of the Related Documents or any other agreement that Borrower or any
Guarantor has with Lender; (B) Borrower or any Guarantor dies, becomes
incompetent or becomes insolvent, files a petition in bankruptcy or similar
proceedings, or is adjudged a bankrupt; (C) there occurs a material adverse
change in Borrower's financial condition, in the financial condition of any
Guarantor, or in the value of any Collateral securing any Loan; or (D) any
Guarantor seeks, claims or otherwise attempts to limit, modify or revoke such
Guarantor's guaranty of the

                            BUSINESS LOAN AGREEMENT
LOAN NO:932900001-3                (CONTINUED)                          PAGE 4
==============================================================================

Loan or any other loan with Lender; or (E) Lender in good faith deems itself
insecure, even though no Event of Default shall have occurred.

DEFAULT. Each of the following shall constitute an Event of Default under this
Agreement:

     PAYMENT DEFAULT. Borrower fails to make any payment when due under the
     Loan.

     OTHER DEFAULTS. Borrower fails to comply with or to perform any other term,
     obligation, covenant or condition contained in this Agreement or in any of
     the Related Documents or to comply with or to perform any term, obligation,
     covenant or condition in any other Agreement between lender and Borrower.

     DEFAULT IN FAVOR OF THIRD PARTIES. Borrower or any Grantor defaults under
     any loan, extension of credit, security agreement, purchase or sales
     agreement, or any other agreement, in favor of any other creditor or person
     that may materially affect any of Borrower's or any Grantor's property of
     Borrower's or any Grantor's ability to repay the Loans or perform their
     respective obligations under this Agreement or any of the Related
     Documents.

     FALSE STATEMENTS. Any warranty, representation or statement made or
     furnished to Lender by Borrower or on Borrower's behalf under this
     Agreement of the Related Documents is false or misleading in any material
     respect, either now or at the time made or furnished or becomes false or
     misleading at any time thereafter.

     INSOLVENCY. The dissolution or termination of Borrower's existence as a
     going business, the insolvency of Borrower, the appointment of a receiver
     for any part of Borrower's property, any assignment for the benefit of
     creditors, any type of creditor workout, or the commencement of any
     proceeding under any bankruptcy or insolvency laws by or against Borrower.

     DEFECTIVE COLLATERALIZATION. This Agreement or any of the Related Documents
     ceases to be in full force and effect (including failure of any collateral
     document to create a valid and perfected security interest or lien) at any
     time and for any reason.

     CREDITOR OR FORFEITURE PROCEEDINGS. Commencement of foreclosure or
     forfeiture proceedings, whether by judicial proceeding, self-help,
     repossession or any other method, by and creditor of Borrower or by any
     governmental agency against any collateral securing the Loan. This includes
     a garnishment of any of Borrower's accounts, including deposit accounts,
     with Lender. However, this Event of Default shall not apply if there is a
     good faith dispute by Borrower as to the validity or reasonableness of the
     claim which is the basis of the creditor or forfeiture proceeding and if
     Borrower gives Lender written notice of the creditor or forfeiture
     proceeding and deposits with Lender monies or a surety bond for the
     creditor or forfeiture proceeding, in an amount determined by Lender, in
     its sole discretion, as being an adequate reserve or bond for the dispute.

     EVENTS AFFECTING GUARANTOR. Any of the preceding events occurs with respect
     to any Guarantor of any of the Indebtedness or any Guarantor dies or
     becomes incompetent, or revokes or disputes the validity of, or liability
     under, any Guaranty of the Indebtedness. In the event of a death, Lender,
     at its option, may, but shall not be required to, permit the Guarantor's
     estate to assume unconditionally the obligations arising under the guaranty
     in a manner satisfactory to Lender, and, in doing so, cure any Event of
     Default.

     CHANGE IN OWNERSHIP.**

     ADVERSE CHANGE. A material adverse change occurs in Borrower's financial
     condition, or Lender believes the prospect of payment or performance of the
     Loan is impaired.

     INSECURITY. Lender in good faith believes itself insecure.

     RIGHT TO CURE. If any default, other than a default on Indebtedness, is
     curable and if Borrower or Grantor, as the case may be, has not been given
     a notice of a similar default within the preceding twelve (12) months, it
     may be cured (and no Event of Default will have occurred) if Borrower or
     Grantor, as the case may be, after receiving written notice from Lender
     demanding cure of such default: (1) cure the default within fifteen (15)
     days; or (2) if the cure requires more than fifteen (15) days, immediately
     initiate steps which Lender deems in Lender's sole discretion to be
     sufficient to cure the default and thereafter continue and complete all
     reasonable and necessary steps sufficient to produce compliance as soon as
     reasonably practical.

EFFECT OF AN EVENT OF DEFAULT. If any Event of Default shall occur, except
where otherwise provided in this Agreement or the Related Documents, all
commitments and obligations of Lender under this Agreement or the Related
Documents or any other agreement immediately will terminate (including any
obligation to make further Loan Advances or disbursements), and, at Lender's
option, all Indebtedness immediately will become due and payable, all without
notice of any kind to Borrower, except that in the case of an Event of Default
of the type described in the "Insolvency" subsection above, such acceleration
shall be automatic and not optional. In addition, Lender shall have all the
rights and remedies provided in the Related Documents or available at law, in
equity, or otherwise. Except as may be prohibited by applicable law, all of
Lender's rights and remedies shall be cumulative and may be exercised
singularly or concurrently. Election by Lender to pursue any remedy shall not
exclude pursuit of any other remedy, and an election to make expenditures or to
take action to perform an obligation of Borrower or of any Grantor shall not
affect Lender's right to declare a default and to exercise its rights and
remedies.

DEPOSIT AGREEMENT SECURITY. Borrower hereby grants a security interest to
Lender in any and all deposit accounts (checking, savings, money market or
time) of Borrower at Lender, now existing or hereinafter opened, to secure the
Indebtedness. this includes all deposit accounts Borrower holds jointly with
someone else.

FINANCIAL COVENANTS AND RATIOS. Borrower covenants and agrees with Lender that,
while this Agreement is in effect, Borrower will comply with the following
financial covenants and ratios:

WORKING CAPITAL. Maintain Working Capital in excess of $6,250,000.00 effective
for the quarter prior to California Bank & Trust funding and then changing to
$4,500,000.00, effective for the immediate quarter subsequent to California Bank
& Trust funding, to be monitored on a quarterly basis.

TANGIBLE NET WORTH. Maintain a minimum Tangible Net Worth of not less than
$10,750,000.00, to be monitored on a quarterly basis.

DEBT/TANGIBLE NET WORTH RATIO. Maintain a ratio of Debt/Tangible Net Worth of
not less than 1.25 to 1.00, to be monitored on a quarterly basis.

EARNINGS BEFORE INTEREST, TAXES DEPRECIATION AND AMORTIZATION (CURRENT PORTION
OF LONG-TERM DEBT + INTEREST EXPENSE) RATIO. Maintain a ration of Earnings
before Interest, Taxes Depreciation and Amortization/(Current Portion of
Long-Term Debt Interest Expense) Ratio of not less than 1.25 to 1.00
effective for the fiscal year end December 31, 2001 and for every quarter
through September 30, 2002 and then changing to 1.50 to 1.00 effective for the
fiscal year end December 31, 2002 and for every quarter thereafter. Covenant to
be reviewed quarterly with the Earnings before Interest, Taxes Depreciation and
Amortization and interest expense based upon a cumulative rolling 12-month
basis.

ADDITIONAL NEGATIVE COVENANT. For transactions in excess of $1,000,000.00,
Borrower shall not, without prior written consent from Bank, loan, advance,
invest, purchase or otherwise acquire the assets or business of any person or
other entity; or merge, consolidate, or commence any proceedings thereof; or
sell any assets except in the ordinary and normal course of its business as now
conducted.

MISCELLANEOUS PROVISIONS. The following miscellaneous provisions are part of
this Agreement.

     AMENDMENTS. This Agreement, together with any Related Documents,
     constitutes the entire understanding and agreement of the parties as to the

                             BUSINESS LOAN AGREEMENT
Loan No: 932900001-3               (CONTINUED)                            Page 5
================================================================================

        matters set forth in this Agreement. No alteration of or amendment to
        this Agreement shall be effective unless given in writing and signed by
        the party or parties sought to be charged or bound by the alteration or
        amendment.

        ATTORNEYS' FEES; EXPENSES. Borrower agrees to pay upon demand all of
        Lender's costs and expenses, including Lender's attorneys' fees and
        Lender's legal expenses, incurred in connection with the enforcement of
        this Agreement. Lender may hire or pay someone else to help enforce this
        Agreement, and Borrower shall pay the costs and expenses of such
        enforcement. Costs and expenses include Lender's attorneys' fees and
        legal expenses whether or not there is a lawsuit, including attorneys'
        fees and legal expenses for bankruptcy proceedings (including efforts to
        modify or vacate any automatic stay or injunction), appeals, and any
        anticipated post-judgment collection services. Borrower also shall pay
        all court costs and such additional fees as may be directed by the
        court.

        CAPTION HEADINGS. Caption headings in this Agreement are for convenience
        purposes only and are not to be used to interpret or define the
        provisions of this Agreement.

        CONSENT TO LOAN PARTICIPATION. Borrower agrees and consents to Lender's
        sale or transfer, whether now or later, of one or more participation
        interests in the Loan to one or more purchasers, whether related or
        unrelated to Lender. Lender may provide, without any limitation
        whatsoever, to any one or more purchasers, or potential purchasers, any
        information or knowledge Lender may have about Borrower or about any
        other matter relating to the Loan, and Borrower hereby waives any rights
        to privacy Borrower may have with respect to such matters. Borrower
        additionally waives any and all notices of sale of participation
        interests, as well as all notices of any repurchase of such
        participation interests. Borrower also agrees that the purchasers of any
        such participation interests will be considered as the absolute owners
        of such interests in the Loan and will have all the rights granted under
        the participation agreement or agreements governing the sale of such
        participation interests. Borrower further waives all rights of offset or
        counterclaim that it may have now or later against Lender or against any
        purchaser of such a participation interest and unconditionally agrees
        that either Lender or such purchaser may enforce Borrower's obligation
        under the Loan irrespective of the failure or insolvency of any holder
        of any interest in the Loan. Borrower further agrees that the purchaser
        of any such participation interests may enforce its interests
        irrespective of any personal claims or defenses that Borrower may have
        against Lender.

        GOVERNING LAW. THIS AGREEMENT WILL BE GOVERNED BY, CONSTRUED AND
        ENFORCED IN ACCORDANCE WITH FEDERAL LAW AND THE LAWS OF THE STATE OF
        CALIFORNIA. THIS AGREEMENT HAS BEEN ACCEPTED BY LENDER IN THE STATE OF
        CALIFORNIA.

        CHOICE OF VENUE. If there is a lawsuit, Borrower agrees upon Lender's
        request to submit to the jurisdiction of the courts of Los Angeles
        County, State of California.

        NO WAIVER BY LENDER. Lender shall not be deemed to have waived any
        rights under this Agreement unless such waiver is given in writing and
        signed by Lender. No delay or omission on the part of Lender in
        exercising any right shall operate as a waiver of such right or any
        other right. A waiver by Lender of a provision of this Agreement shall
        not prejudice or constitute a waiver of Lender's right otherwise to
        demand strict compliance with that provision or any other provision of
        this Agreement. No prior waiver by Lender, nor any course of dealing
        between Lender and Borrower, or between Lender and any Grantor, shall
        constitute a waiver of any of Lender's rights or of any of Borrower's or
        any Grantor's obligations as to any future transactions. Whenever the
        consent of Lender is required under this Agreement, the granting of such
        consent by Lender in any instance shall not constitute continuing
        consent to subsequent instances where such consent is required and in
        all cases such consent may be granted or withheld in the sole discretion
        of Lender.

        NOTICES. Any notice required to be given under this Agreement shall be
        given in writing, and shall be effective when actually delivered, when
        actually received by telefacsimile (unless otherwise required by law),
        when deposited with a nationally recognized overnight courier, or, if
        mailed, when deposited in the United States mail, as first class,
        certified or registered mail postage prepaid, directed to the addresses
        shown near the beginning of this Agreement. Any party may change its
        address for notices under this Agreement by giving formal written notice
        to the other parties, specifying that the purpose of the notice is to
        change the party's address. For notice purposes, Borrower agrees to keep
        Lender informed at all times of Borrower's current address. Unless
        otherwise provided or required by law, if there is more than one
        Borrower, any notice given by Lender to any Borrower is deemed to be
        notice given to all Borrowers.

        SEVERABILITY. If a court of competent jurisdiction finds any provision
        of this Agreement to be illegal, invalid, or unenforceable as to any
        circumstance, that finding shall not make the offending provision
        illegal, invalid, or unenforceable as to any other circumstance. If
        feasible, the offending provision shall be considered modified so that
        it becomes legal, valid and enforceable. If the offending provision
        cannot be so modified, it shall be considered deleted from this
        Agreement. Unless otherwise required by law, the illegality, invalidity,
        or unenforceability of any provision of this Agreement shall not affect
        the legality, validity or enforceability of any other provision of this
        Agreement.

        SUBSIDIARIES AND AFFILIATES OF BORROWER. To the extent the context of
        any provisions of this Agreement makes it appropriate, including without
        limitation any representation, warranty or covenant, the word "Borrower"
        as used in this Agreement shall include all of Borrower's subsidiaries
        and affiliates. Notwithstanding the foregoing however, under no
        circumstances shall this Agreement be construed to require Lender to
        make any Loan or other financial accommodation to any of Borrower's
        subsidiaries or affiliates.

        SUCCESSORS AND ASSIGNS. All covenants and agreements contained by or on
        behalf of Borrower shall bind Borrower's successors and assigns and
        shall inure to the benefit of Lender and its successors and assigns.
        Borrower shall not, however, have the right to assign Borrower's rights
        under this Agreement or any interest therein, without the prior written
        consent of Lender.

        SURVIVAL OF REPRESENTATIONS AND WARRANTIES. Borrower understands and
        agrees that in making the Loan, Lender is relying on all
        representations, warranties, and covenants made by Borrower in this
        Agreement or in any certificate or other instrument delivered by
        Borrower to Lender under this Agreement or the Related Documents.
        Borrower further agrees that regardless of any investigation made by
        Lender, all such representations, warranties and covenants will survive
        the making of the Loan and delivery to Lender of the Related Documents,
        shall be continuing in nature, and shall remain in full force and effect
        until such time as Borrower's Indebtedness shall be paid in full, or
        until this Agreement shall be terminated in the manner provided above,
        whichever is the last to occur.

        TIME IS OF THE ESSENCE. Time is of the essence in the performance of
        this Agreement.

        WAIVE JURY. ALL PARTIES TO THIS AGREEMENT HEREBY WAIVE THE RIGHT TO ANY
        JURY TRIAL IN ANY ACTION, PROCEEDING, OR COUNTERCLAIM BROUGHT BY ANY
        PARTY AGAINST ANY OTHER PARTY.

DEFINITIONS. The following capitalized words and terms shall have the following
meanings when used in this Agreement. Unless specifically stated to the
contrary, all references to dollar amounts shall mean amounts in lawful money of
the United States of America. Words and terms used in the singular shall include
the plural, and the plural shall include the singular, as the context may
require. Words and terms not otherwise defined in this Agreement shall have the
meanings attributed to such terms in the Uniform Commercial Code. Accounting
words and terms not otherwise defined in this Agreement shall have the meanings
assigned to them in accordance with generally accepted accounting principles as
in effect on the date of this Agreement:

        ADVANCE. The word "Advance" means a disbursement of Loan funds made, or
        to be made, to Borrower or on Borrower's behalf on a line of credit or
        multiple advance basis under the terms and conditions of this Agreement.

        AGREEMENT. The word "Agreement" means this Business Loan Agreement, as
        this Business Loan Agreement may be amended or modified from




                             BUSINESS LOAN AGREEMENT
Loan No: 932900001-3               (Continued)                            Page 6
================================================================================

        time to time, together with all exhibits and schedules attached to this
        Business Loan Agreement from time to time.

        BORROWER. The word "Borrower" means International Remote Imaging
        Systems, Inc., and all other persons and entities signing the Note in
        whatever capacity.

        COLLATERAL. The word "Collateral" means all property and assets granted
        as collateral security for a Loan, whether real or personal property,
        whether granted directly or indirectly, whether granted now or in the
        future, and whether granted in the form of a security interest,
        mortgage, collateral mortgage, deed of trust, assignment, pledge, crop
        pledge, chattel mortgage, collateral chattel mortgage, chattel trust,
        factor's lien, equipment trust, conditional sale, trust receipt, lien,
        charge, lien or title retention contract, lease or consignment intended
        as a security device, or any other security or lien interest whatsoever,
        whether created by law, contract, or otherwise.

        ENVIRONMENTAL LAWS. The words "Environmental Laws" mean any and all
        state, federal and local statutes, regulations and ordinances relating
        to the protection of human health or the environment, including without
        limitation the Comprehensive Environmental Response, Compensation, and
        Liability Act of 1980, as amended, 42 U.S.C. Section 9601, et seq.
        ("CERCLA"), the Superfund Amendments and Reauthorization Act of 1986,
        Pub. L. No. 99-499 ("SARA"), the Hazardous Materials Transportation Act,
        49 U.S.C. Section 1801, et seq., the Resource Conservation and Recovery
        Act, 42 U.S.C. Section 6901, et seq., Chapters 6.5 through 7.7 of
        Division 20 of the California Health and Safety Code, Section 25100, et
        seq., or other applicable state or federal laws, rules, or regulations
        adopted pursuant thereto.

        EVENT OF DEFAULT, The words "Event of Default" mean any of the events of
        default set forth in this Agreement in the default section of this
        Agreement.

        GAAP. The word "GAAP" means generally accepted accounting principles.

        GRANTOR. The word "Grantor" means each and all of the persons or
        entities granting a Security Interest in any Collateral for the Loan,
        including without limitation all Borrowers granting such a Security
        Interest.

        GUARANTOR. The word "Guarantor" means any guarantor, surety, or
        accommodation party of any or all of the Loan.

        GUARANTY. The word "Guaranty" means the guaranty from Guarantor to
        Lender, including without limitation a guaranty of all or part of the
        Note.

        HAZARDOUS SUBSTANCES. The words "Hazardous Substances" mean materials
        that, because of their quantity, concentration or physical, chemical or
        infectious characteristics, may cause or pose a present or potential
        hazard to human health or the environment when improperly used, treated,
        stored, disposed of, generated, manufactured, transported or otherwise
        handled. The words "Hazardous Substances" are used in their very
        broadest sense and include without limitation any and all hazardous or
        toxic substances, materials or waste as defined by or listed under the
        Environmental Laws. The term "Hazardous Substances" also includes,
        without limitation, petroleum and petroleum by-products or any fraction
        thereof and asbestos.

        INDEBTEDNESS. The word "Indebtedness" means the indebtedness evidenced
        by the Note or Related Documents, including all principal and interest
        together with all other indebtedness and costs and expenses for which
        Borrower is responsible under this Agreement or under any of the Related
        Documents.

        LENDER. The word "Lender" means California Bank & Trust, its successors
        and assigns.

        LOAN. The word "Loan" means any and all loans and financial
        accommodations from Lender to Borrower whether now or hereafter
        existing, and however evidenced, including without limitation those
        loans and financial accommodations described herein or described on any
        exhibit or schedule attached to this Agreement from time to time.

        NOTE. The word "Note" means the Note executed by International Remote
        Imaging Systems, Inc. in the principal amount of $500,000.00 dated
        February 7, 2002, together with all renewals of, extensions of,
        modifications of, refinancings of, consolidations of, and substitutions
        for the note or credit agreement.

        PERMITTED LIENS. The words "Permitted Liens" mean (1) liens and security
        interests securing Indebtedness owed by Borrower to Lender; (2) liens
        for taxes, assessments, or similar charges either not yet due or being
        contested in good faith; (3) liens of materialmen, mechanics,
        warehousemen, or carriers, or other like liens arising in the ordinary
        course of business and securing obligations which are not yet
        delinquent; (4) purchase money liens or purchase money security
        interests upon or in any property acquired or held by Borrower in the
        ordinary course of business to secure indebtedness outstanding on the
        date of this Agreement or permitted to be incurred under the paragraph
        of this Agreement titled "Indebtedness and Liens"; (5) liens and
        security interests which, as of the date of this Agreement, have been
        disclosed to and approved by the Lender in writing; and (6) those liens
        and security interests which in the aggregate constitute an immaterial
        and insignificant monetary amount with respect to the net value of
        Borrower's assets.

        RELATED DOCUMENTS. The words "Related Documents" mean all promissory
        notes, credit agreements, loan agreements, environmental agreements,
        guaranties, security agreements, mortgages, deeds of trust, security
        deeds, collateral mortgages, and all other instruments, agreements and
        documents, whether now or hereafter existing, executed in connection
        with the Loan.

        SECURITY AGREEMENT. The words "Security Agreement" mean and include
        without limitation any agreements, promises, covenants, arrangements,
        understandings or other agreements, whether created by law, contract, or
        otherwise, evidencing, governing, representing, or creating a Security
        Interest.

        SECURITY INTEREST. The words "Security Interest" mean, without
        limitation, any and all types of collateral security, present and
        future, whether in the form of a lien, charge, encumbrance, mortgage,
        deed of trust, security deed, assignment, pledge, crop pledge, chattel
        mortgage, collateral chattel mortgage, chattel trust, factor's lien,
        equipment trust, conditional sale, trust receipt, lien or title
        retention contract, lease or consignment intended as a security device,
        or any other security or lien interest whatsoever whether created by
        law, contract, or otherwise.


                            BUSINESS LOAN AGREEMENT
LOAN NO: 932900001-3                   (CONTINUED)                        PAGE 7
================================================================================

BORROWER ACKNOWLEDGES HAVING READ ALL THE PROVISIONS OF THIS BUSINESS LOAN
AGREEMENT AND BORROWER AGREES TO ITS TERMS. THIS BUSINESS LOAN AGREEMENT IS
DATED FEBRUARY 7, 2002.

BORROWER:



INTERNATIONAL REMOTE
  IMAGING SYSTEMS INC.

By: /s/ John A. O'Malley                     By: /s/ John Caloz
   --------------------------------              -------------------------------
   Dr. John A. O'Malley                          John Caloz
   CEO of International Remote                   CFO/Secretary of International
   Imaging Systems, Inc.                         Remote Imaging Systems, Inc.

LENDER:



CALIFORNIA BANK & TRUST

By: /s/ [SIGNATURE ILLEGIBLE]
   ---------------------------------
   AUTHORIZED SIGNER


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

**  Any acquisition of Borrower's common stock by merger, new issuance, or
    otherwise, that results in one holder owning twenty-five percent (25%) or
    more of such common stock.

EX-11.1(B)

                                                                 EXHIBIT 11.1(b)
                                 PROMISSORY NOTE



  PRINCIPAL       LOAN DATE      MATURITY         LOAN NO       CALL/COLL       ACCOUNT       OFFICER     INITIALS
                                                                                     
$6,500,000.00    02-07-2002     06-30-2004      932900001-1                   932900001-1      22163

    References in the shaded area are for Lender's use only and do not limit
     the applicability of this document to any particular loan or item. Any item
     above containing "***" has been omitted due to text length limitations.




                                                      
Borrower:  INTERNATIONAL REMOTE IMAGING SYSTEMS, INC.    Lender: CALIFORNIA BANK & TRUST
           9162 ETON AVENUE                                      COMMERCIAL LOAN CENTER
           CHATSWORTH, CA 91311                                  550 SOUTH HOPE STREET, SUITE 300
                                                                 LOS ANGELES, CA 90071

Principal Amount: $6,500,000.00    Initial Rate: 4.750%   Date of Note: February 7, 2002


PROMISE TO PAY. INTERNATIONAL REMOTE IMAGING SYSTEMS, INC. ("BORROWER") PROMISES
TO PAY TO CALIFORNIA BANK & TRUST ("LENDER"), OR ORDER, IN LAWFUL MONEY OF THE
UNITED STATES OF AMERICA, THE PRINCIPAL AMOUNT OF SIX MILLION FIVE HUNDRED
THOUSAND & 00/100 DOLLARS ($6,500,000.00) OR SO MUCH AS MAY BE OUTSTANDING,
TOGETHER WITH INTEREST ON THE UNPAID OUTSTANDING PRINCIPAL BALANCE OF EACH
ADVANCE. INTEREST SHALL BE CALCULATED FROM THE DATE OF EACH ADVANCE UNTIL
REPAYMENT OF EACH ADVANCE.

PAYMENT. BORROWER WILL PAY THIS LOAN IN ONE PAYMENT OF ALL OUTSTANDING PRINCIPAL
PLUS ALL ACCRUED UNPAID INTEREST ON JUNE 30, 2004. IN ADDITION, BORROWER WILL
PAY REGULAR MONTHLY PAYMENTS OF ALL ACCRUED UNPAID INTEREST DUE AS OF EACH
PAYMENT DATE, BEGINNING FEBRUARY 28, 2002, WITH ALL SUBSEQUENT INTEREST PAYMENTS
TO BE DUE ON THE LAST DAY OF EACH MONTH AFTER THAT. UNLESS OTHERWISE AGREED OR
REQUIRED BY APPLICABLE LAW, PAYMENTS WILL BE APPLIED FIRST TO ACCRUED UNPAID
INTEREST, THEN TO PRINCIPAL, AND ANY REMAINING AMOUNT TO ANY UNPAID COLLECTION
COSTS AND LATE CHARGES. THE ANNUAL INTEREST RATE FOR THIS NOTE IS COMPUTED ON A
365/360 BASIS; THAT IS, BY APPLYING THE RATIO OF THE ANNUAL INTEREST RATE OVER A
YEAR OF 360 DAYS, MULTIPLIED BY THE OUTSTANDING PRINCIPAL BALANCE, MULTIPLIED BY
THE ACTUAL NUMBER OF DAYS THE PRINCIPAL BALANCE IS OUTSTANDING. BORROWER WILL
PAY LENDER AT LENDER'S ADDRESS SHOWN ABOVE OR AT SUCH OTHER PLACE AS LENDER MAY
DESIGNATE IN WRITING.

VARIABLE INTEREST RATE. Subject to designation of a different interest rate
index by Borrower as provided below, the interest rate on this Note is subject
to change from time to time based on changes in an index which is the rate of
interest set from time to time by Bank as its Prime Rate. California Bank &
Trust Prime Rate is determined by Bank as a means of pricing credit extensions
to some customers and is neither tied to any external rate of interest or index
nor is it necessarily the lowest rate of interest charged by Bank at any given
time for any particular class of customers or credit extensions (the "Index").
The Index is not necessarily the lowest rate charged by Lender on its loans and
is set by Lender in its sole discretion. If the Index becomes unavailable during
the term of this loan, Lender may designate a substitute index after notifying
Borrower. Lender will tell Borrower the current Index rate upon Borrower's
request. The interest rate change will not occur more often than each day.
Borrower understands that Lender may make loans based on other rates as well.
THE INDEX CURRENTLY IS 4.750%. THE INTEREST RATE TO BE APPLIED TO THE UNPAID
PRINCIPAL BALANCE OF THIS NOTE WILL BE AT A RATE EQUAL TO THE INDEX, RESULTING
IN AN INITIAL RATE OF 4.750%. NOTICE: Under no circumstances will the interest
rate on this Note be more than the maximum rate allowed by applicable law.

INTEREST RATE OPTIONS. On the terms and subject to the conditions set forth
herein, Borrower will be able to select, from one of the following Rate Options,
an interest rate which will be applicable to a particular dollar increment of
amounts outstanding, or to be disbursed, under this Note. Principal shall be
payable as specified herein in the "Payment" section, and interest shall be
payable as specified for each Rate Option. The following Rate Options are
available to Borrower:

        (A) DEFAULT OPTION. The interest rate margin and index described in the
        "VARIABLE INTEREST RATE" paragraph herein (the "Default Option").

        (B) LONDON INTERBANK OFFERED RATE. A margin of 2.000 percentage points
        over London Interbank Offered Rate. For purposes of this Note, London
        Interbank Offered Rate shall mean the rate of interest at which deposits
        in U.S. Dollars for the relevant Interest Period is offered to first
        class banks in the London Interbank market as quoted for the mid-moving
        average LIBOR Rate as published by Telerate Systems, Inc. or such other
        publication of such rate as the holder of this Note shall reasonably
        select, two (2) Business Days prior to the commencement of the relevant
        Interest Period. An "Interest Period" is a one, two or three month
        period as selected by Borrower in a writing delivered to Lender as
        provided below. Interest based on this Rate Option is a floating rate
        and will change on and as of the date of a change in London Interbank
        Offered Rate (the "Interest Period"). Adjustments in the interest rate
        due to changes in the maximum nonusurious interest rate allowed (the
        "Highest Lawful Rate") shall be made on the effective day of any change
        in the Highest Lawful Rate. Under this Rate Option, Borrower shall make
        monthly interest payments on the same day of the month, with a final
        payment of all accrued and unpaid interest on the last day of such
        Interest Period and, in the case of an Interest Period greater than
        three (3) months, at three month (3 month) intervals after the first day
        of such Interest Period.

The following provisions concerning Rate Options are a part of this Note:

        SELECTION OF RATE OPTIONS. Provided Borrower is not in default under
        this Note, Borrower may request (a "Rate Request") that a $250,000.00
        increment or any amount in excess thereof (an "Increment") of the
        outstanding principal of, or amounts to be disbursed under, this Note
        bear interest at the selected rate. Borrower may make this Rate Request
        by telephonic notice, however no later than 10:00 AM PDT three (3)
        business days prior to the effective date of the Rate Request to permit
        Lender to quote the rate requested. *

        APPLICABLE INTEREST RATE. Borrower's Rate Request will become effective,
        and interest on the increment designated will be calculated at the rate
        (the "Effective Rate"), which Borrower requested, for the applicable
        Interest Period, subject to the following:

               (1) Notwithstanding any Rate Request, interest shall be
               calculated on the basis of the Default ion if (a) Lender, in good
               faith, is unable to ascertain the requested Rate Option by reason
               of circumstances then affecting the applicable money market or
               otherwise, (b) it becomes unlawful or impracticable for Lender to
               maintain loans based upon the requested Rate Option, or (c)
               Lender, in good faith, determines that it is impracticable to
               maintain loans based on the requested Rate Option because of
               increased taxes, regulatory costs, reserve requirements, expenses
               or any other costs or charges that affect such Rate Options. Upon
               the occurrence of any of the events described in this "Interest
               Rate Options" section, any increment to which a requested Rate
               Option applies shall be immediately (or at the option of Lender,
               at the end the current Interest Period), without further action
               of Lender or Borrower, converted to an increment to which the
               Default Option applies.

               (2) Borrower may have no more than a total of 3 Effective Rates
               applicable to amounts outstanding under this Note at any given
               time.

               (3) A Rate Request shall be effective as to amounts to be
               disbursed under this Note only if, on the effective date of the
               Rate Requests, such amounts are in fact disbursed to or for
               Borrower's account in accordance with the provisions of this Note
               and any related loan documents.

               (4) Any amounts of outstanding principal for which a Rate Request
               has not been made, or is otherwise not effective, shall bear
               interest until paid in full at the Default Option.

               (5) Any amounts of outstanding principal bearing interest based
               upon a Rate Option shall bear interest at such rate until the end
               of the Interest Period therefor, and thereafter shall bear
               interest based upon the Default Option unless a new Rate Request
               for a Rate Option complying with the terms hereof has been made
               and has become effective.

               (6) If Borrower is in default under this Note ("Default"), then
               Lender shall no longer be obligated to honor any Rate Requests.




                                 PROMISSORY NOTE
LOAN NO: 932900001-1               (CONTINUED)                            PAGE 2
================================================================================

               (7) No Interest Period shall extend beyond the maturity date of
               this Note.

        NOTICES: AUTHORITY TO ACT. Borrower acknowledges and agrees that the
        agreement of Lender herein to receive certain notices by telephone is
        solely for Borrower's convenience. Lender shall be entitled to rely on
        the authority of the person purporting to be a person authorized by
        Borrower to give such notice, and Lender shall have no liability to
        Borrower on account of any action taken by Lender in reliance upon such
        telephonic notice. Borrower's obligation to repay all sums owing under
        the Note shall not be affected in any way or to any extent by any
        failure by Lender to receive written confirmation of any telephonic
        notice or the receipt by Lender of a confirmation which is at variance
        with the terms understood by Lender to be contained in the telephonic
        notice.

PREPAYMENT; MINIMUM INTEREST CHARGE. In any event, even upon full prepayment of
this Note, Borrower understands that Lender is entitled to a MINIMUM INTEREST
CHARGE OF $200.00. Other than Borrower's obligation to pay any minimum interest
charge, Borrower may pay without penalty all or a portion of the amount owed
earlier than it is due. Early payments will not, unless agreed to by Lender in
writing, relieve Borrower of Borrower's obligation to continue to make payments
of accrued unpaid interest. Rather, early payments will reduce the principal
balance due. Borrower agrees not to send Lender payments marked "paid in full",
"without recourse", or similar language. If Borrower sends such a payment,
Lender may accept it without losing any of Lender's rights under this Note, and
Borrower will remain obligated to pay any further amount owed to Lender. All
written communications concerning disputed amounts, including any check or other
payment instrument that indicates that the payment constitutes "payment in full"
of the amount owed or that is tendered with other conditions or limitations or
as full satisfaction of a disputed amount must be mailed or delivered to:
California Bank & Trust, Commercial Loan Center, 550 South Hope Street, Suite
300, Los Angeles, CA 90071.

LATE CHARGE. If a payment is 15 days or more late, Borrower will be charged
6.000% OF THE REGULARLY SCHEDULED PAYMENT OR $500.00, WHICHEVER IS LESS.

INTEREST AFTER DEFAULT. Upon Borrower's failure to pay all amounts declared due
pursuant to this section, including failure to pay upon final maturity, Lender,
at its option, may, if permitted under applicable law, increase the variable
interest rate on this Note to 5.000 percentage points over the Index.

DEFAULT. Each of the following shall constitute an event of default ("Event of
Default") under this Note:

        PAYMENT DEFAULT. Borrower fails to make any payment when due under this
        Note.

        OTHER DEFAULTS. Borrower fails to comply with or to perform any other
        term, obligation, covenant or condition contained in this Note or in any
        of the related documents or to comply with or to perform any term,
        obligation, covenant or condition contained in any other agreement
        between Lender and Borrower.

        DEFAULT IN FAVOR OF THIRD PARTIES. Borrower or any Grantor defaults
        under any loan, extension of credit, security agreement, purchase or
        sales agreement, or any other agreement, in favor of any other creditor
        or person that may materially affect any of Borrower's property or
        Borrower's ability to repay this Note or perform Borrower's obligations
        under this Note or any of the related documents.

        FALSE STATEMENTS. Any warranty, representation or statement made or
        furnished to Lender by Borrower or on Borrower's behalf under this Note
        or the related documents is false or misleading in any material respect,
        either now or at the time made or furnished or becomes false or
        misleading at any time thereafter.

        INSOLVENCY. The dissolution or termination of Borrower's existence as a
        going business, the insolvency of Borrower, the appointment of a
        receiver for any part of Borrower's property, any assignment for the
        benefit of creditors, any type of creditor workout, or the commencement
        of any proceeding under any bankruptcy or insolvency laws by or against
        Borrower.

        CREDITOR OR FORFEITURE PROCEEDINGS. Commencement of foreclosure or
        forfeiture proceedings, whether by judicial proceeding, self-help,
        repossession or any other method, by any creditor of Borrower or by any
        governmental agency against any collateral securing the loan. This
        includes a garnishment of any of Borrower's accounts, including deposit
        accounts, with Lender. However, this Event of Default shall not apply if
        there is a good faith dispute by Borrower as to the validity or
        reasonableness of the claim which is the basis of the creditor or
        forfeiture proceeding and if Borrower gives Lender written notice of the
        creditor or forfeiture proceeding and deposits with Lender monies or a
        surety bond for the creditor or forfeiture proceeding, in an amount
        determined by Lender, in its sole discretion, as being an adequate
        reserve or bond for the dispute.

        EVENTS AFFECTING GUARANTOR. Any of the preceding events occurs with
        respect to any Guarantor of any of the indebtedness or any Guarantor
        dies or becomes incompetent, or revokes or disputes the validity of, or
        liability under, any guaranty of the indebtedness evidenced by this
        Note. In the event of a death, Lender, at its option, may, but shall not
        be required to, permit the Guarantor's estate to assume unconditionally
        the obligations arising under the guaranty in a manner satisfactory to
        Lender, and, in doing so, cure any Event of Default.

        CHANGE IN OWNERSHIP**

        ADVERSE CHANGE. A material adverse change occurs in Borrower's financial
        condition, or Lender believes the prospect of payment or performance of
        this Note is impaired.

        INSECURITY. Lender in good faith believes itself insecure.

        CURE PROVISIONS. If any default, other than a default in payment is
        curable and if Borrower has not been given a notice of a breach of the
        same provision of this Note within the preceding twelve (12) months, it
        may be cured (and no event of default will have occurred) if Borrower,
        after receiving written notice from Lender demanding cure of such
        default: (1) cures the default within fifteen (15) days; or (2) if the
        cure requires more than fifteen (15) days, immediately initiates steps
        which Lender deems in Lender's sole discretion to be sufficient to cure
        the default and thereafter continues and completes all reasonable and
        necessary steps sufficient to produce compliance as soon as reasonably
        practical.

LENDER'S RIGHTS. Upon default, Lender may declare the entire unpaid principal
balance on this Note and all accrued unpaid interest immediately due, and then
Borrower will pay that amount.

ATTORNEYS' FEES; EXPENSES. Lender may hire or pay someone else to help collect
this Note if Borrower does not pay. Borrower will pay Lender that amount. This
includes, subject to any limits under applicable law, Lender's attorneys' fees
and Lender's legal expenses, whether or not there is a lawsuit, including
attorneys' fees, expenses for bankruptcy proceedings (including efforts to
modify or vacate any automatic stay or injunction), and appeals. Borrower also
will pay any court costs, in addition to all other sums provided by law.

JURY WAIVER. LENDER AND BORROWER HEREBY WAIVE THE RIGHT TO ANY JURY TRIAL IN ANY
ACTION, PROCEEDING, OR COUNTERCLAIM BROUGHT BY EITHER LENDER OR BORROWER AGAINST
THE OTHER.

GOVERNING LAW. THIS NOTE WILL BE GOVERNED BY, CONSTRUED AND ENFORCED IN
ACCORDANCE WITH FEDERAL LAW AND THE LAWS OF THE STATE OF CALIFORNIA. THIS NOTE
HAS BEEN ACCEPTED BY LENDER IN THE STATE OF CALIFORNIA.

CHOICE OF VENUE. If there is a lawsuit, Borrower agrees upon Lender's request to
submit to the jurisdiction of the courts of Los Angeles County, State of
California.

COLLATERAL. Borrower acknowledges this Note is secured by the following
collateral described in the security instruments listed herein: inventory,


                                PROMISSORY NOTE
LOAN NO: 932900001-1              (CONTINUED)                            PAGE 3
===============================================================================

chattel paper, accounts, equipment and general intangibles described in
Commercial Security Agreements dated February 7, 2002.

LINE OF CREDIT. This Note evidences a revolving line of credit. Advances under
this Note may be requested orally by Borrower or as provided in this paragraph.
All oral requests shall be confirmed in writing on the day of the request. All
communications, instructions, or directions by telephone or otherwise to Lender
are to be directed to Lender's office shown above. The following persons
currently are authorized to request advances and authorize payments under the
line of credit until Lender receives from Borrower, at Lender's address shown
above, written notice of revocation of their authority: DR. JOHN A. O'MALLEY,
CEO/CHAIRMAN OF INTERNATIONAL REMOTE IMAGING SYSTEMS, INC.; JOHN CALOZ,
CFO/SECRETARY OF INTERNATIONAL REMOTE IMAGING SYSTEMS, INC.; AND DONALD
HORACEK, CONTROLLER. Borrower agrees to be liable for all sums either: (A)
advanced in accordance with the instructions of an authorized person or (B)
credited to any of Borrower's accounts with Lender. The unpaid principal
balance owing on this Note at any time may be evidenced by endorsements on this
Note or by Lender's internal records, including daily computer print-outs.
Lender will have no obligation to advance funds under this Note if: (A)
borrower or any guarantor is in default under the terms of this Note or any
agreement that Borrower or any guarantor has with Lender, including any
agreement make in connection with the signing of this Note; (B) Borrower or any
guarantor ceases doing business or is insolvent; (C) any guarantor seeks,
claims or otherwise attempts to limit, modify or revoke such guarantor's
guarantee of this Note or any other loan with Lender; (D) Borrower has applied
funds provided pursuant to this Note for purposes other than those authorized
by Lender; or (E) Lender in good faith believes itself insecure.

DEPOSIT AGREEMENT SECURITY. Borrower hereby grants a security interest to
Lender in any and all deposit accounts (checking, savings, money market or
time) of Borrower at Lender, now existing or hereinafter opened, to secure its
Indebtedness hereunder. This includes all deposit accounts Borrower holds
jointly with someone else.

FINANCIAL STATEMENT CERTIFICATIONS. The undersigned hereby certifies to
California Bank & Trust ("Bank") that all financial information ("Information")
submitted to bank now and at all times during the terms of this loan does, and
will, fairly and accurately represent the financial condition of the
undersigned, all Borrowers and Guarantors. Financial information includes, but
is not limited to all business Financial Statements (including interim and
year-end financial statements that are company prepared and/or CPA-prepared,
Business Income Tax Returns, Borrowing Base Certificates, Accounts Receivable
and Accounts Payable Agings, personal Financial Statements and Personal Income
Tax Returns. The undersigned understands that the Bank will rely on all
financial information, whenever provided, and that such information is a
material inducement to Bank to make, to continue to make, or otherwise extend
credit accommodations to the undersigned. The undersigned covenants and agrees
to notify Bank of any adverse material changes in her/his/its financial
condition in the future. The undersigned further understands and acknowledges
that there are criminal penalties for giving false financial information to
federally insured financial institutions.

ADDITIONAL PROVISION FOR "SELECTION OF RATE OPTIONS" SECTION (SEE PAGE 1). The
minimum initial LIBOR advance shall be $250,000.00 and in increments of
$100,000.00 thereafter. *

SUCCESSOR INTERESTS. The terms of this Note shall be binding upon Borrower, and
upon Borrower's heirs, personal representatives, successors and assigns, and
shall inure to the benefit of Lender and its successors and assigns.

GENERAL PROVISIONS. Lender may delay or forgo enforcing any of its rights or
remedies under this Note without losing them. Borrower and any other person who
signs, guarantees or endorses this Note, to the extent allowed by law, waive
any applicable statute of limitations, presentment, demand for payment, and
notice of dishonor. Upon any change in the terms of this Note, and unless
otherwise expressly stated in writing, no party who signs this Note, whether as
maker, guarantor, accommodation maker or endorser, shall be released from
liability. All such parties agree that Lender may renew or extend (repeatedly
and for any length of time) this loan or release any party or guarantor or
collateral; or impair, fail to realize upon or perfect lender's security
interest in the collateral; and take any other action deemed necessary by
Lender without the consent of or notice to anyone. All such parties also agree
that Lender may modify this loan without the consent of or notice to anyone
other than the party with whom the modification is made. The obligations under
this Note are joint and several.

PRIOR TO SIGNING THIS NOTE, BORROWER READ AND UNDERSTOOD ALL THE PROVISIONS OF
THIS NOTE, INCLUDING THE VARIABLE INTEREST RATE PROVISIONS. BORROWER AGREES TO
THE TERMS OF THE NOTE.

BORROWER ACKNOWLEDGES RECEIPT OF A COMPLETED COPY OF THIS PROMISSORY NOTE

BORROWER:

BY:  /s/ John A. O'Malley               BY:  /s/ John Caloz
    ---------------------------------       -----------------------------------
     Dr. John A. O'Malley,                   John Caloz, CFO/Secretary of
     CEO of International Remote             International Remote Imaging, Inc.
     Imaging Systems, Inc.

+++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++

**Any acquisition of Borrower's common stock by merger, new issuance, or
otherwise, that results in one holder owning twenty-five percent (25%) or more
of such common stock.

                                 PROMISSORY NOTE



- ----------------------------------------------------------------------------------------------------------------
 PRINCIPAL    LOAN DATE       MATURITY    LOAN NO.  CALL/COLL    ACCOUNT    OFFICER  INITIALS
                                                                
$500,00.00    02-07-2002    01-31-2007  93290001-3             932900001-3   22163   [INITIALS ILLEGIBLE]
- ----------------------------------------------------------------------------------------------------------------
References in the shaded area are for Lender's use only and do not limit the applicability of this document
to any particular loan or item. Any item above containing "***" has been omitted due to text length limitations.
- ----------------------------------------------------------------------------------------------------------------


BORROWER: INTERNATIONAL REMOTE          LENDER: CALIFORNIA BANK & TRUST
             IMAGING SYSTEMS, INC.              COMMERCIAL LOAN CENTER
          9162 ETON AVENUE                      550 SOUTH HOPE STREET, SUITE 300
          CHATSWORTH, CA 91311                  LOS ANGELES, CA 90071
================================================================================



                                                     
PRINCIPAL AMOUNT: $500,000.00     INITIAL RATE: 4.750%     DATE OF NOTE: FEBRUARY 7, 2002


PROMISE TO PAY. INTERNATIONAL REMOTE IMAGING SYSTEMS, INC. ("BORROWER") PROMISES
TO PAY TO CALIFORNIA BANK & TRUST ("LENDER"), OR ORDER, IN LAWFUL MONEY OF THE
UNITED STATES OF AMERICA, THE PRINCIPAL AMOUNT OF FIVE HUNDRED THOUSAND & 00/100
DOLLARS ($500,000.00), TOGETHER WITH INTEREST ON THE UNPAID PRINCIPAL BALANCE
FROM FEBRUARY 7, 2002, UNTIL PAID IN FULL.

PAYMENT. SUBJECT TO ANY PAYMENT CHANGES RESULTING FROM CHANGES IN THE INDEX,
BORROWER WILL PAY THIS LOAN IN 59 PRINCIPAL PAYMENTS OF $8,333.34 EACH AND ONE
FINAL PRINCIPAL AND INTEREST PAYMENT OF $8,367.02. BORROWER'S FIRST PRINCIPAL
PAYMENT IS DUE FEBRUARY 28, 2002, AND ALL SUBSEQUENT PRINCIPAL PAYMENTS ARE DUE
ON THE LAST DAY OF EACH MONTH AFTER THAT. IN ADDITION, BORROWER WILL PAY REGULAR
MONTHLY PAYMENTS OF ALL ACCRUED UNPAID INTEREST DUE AS OF EACH PAYMENT DATE,
BEGINNING FEBRUARY 28, 2002, WITH ALL SUBSEQUENT INTEREST PAYMENTS TO BE DUE ON
THE LAST DAY OF EACH MONTH AFTER THAT. BORROWER'S FINAL PAYMENT DUE JANUARY 31,
2007, WILL BE FOR ALL PRINCIPAL AND ALL ACCRUED INTEREST NOT YET PAID. UNLESS
OTHERWISE AGREED OR REQUIRED BY APPLICABLE LAW, PAYMENTS WILL BE APPLIED FIRST
TO ACCRUED UNPAID INTEREST, THEN TO PRINCIPAL, AND ANY REMAINING AMOUNT TO ANY
UNPAID COLLECTION COSTS AND LATE CHARGES. THE ANNUAL INTEREST RATE FOR THIS NOTE
IS COMPUTED ON A 365/360 BASIS; THAT IS, BY APPLYING THE RATIO OF THE ANNUAL
INTEREST RATE OVER A YEAR OF 360 DAYS, MULTIPLIED BY THE OUTSTANDING PRINCIPAL
BALANCE, MULTIPLIED BY THE ACTUAL NUMBER OF DAYS THE PRINCIPAL BALANCE IS
OUTSTANDING. BORROWER WILL PAY LENDER AT LENDER'S ADDRESS SHOWN ABOVE OR AT SUCH
OTHER PLACE AS LENDER MAY DESIGNATE IN WRITING.

VARIABLE INTEREST RATE. Subject to designation of a different interest rate
index by Borrower as provided below, the interest rate on this Note is subject
to change from time to time based on changes in an index which is the rate of
interest set from time to time by Bank as its Prime Rate. California Bank &
Trust Prime Rate is determined by Bank as a means of pricing credit extensions
to some customers and is neither tied to any external rate of interest or index
nor is it necessarily the lowest rate of interest charged by Bank at any given
time for any particular class of customers or credit extensions (the "Index").
The Index is not necessarily the lowest rate charged by Lender on its loans and
is set by Lender in its sole discretion. If the Index becomes unavailable during
the term of this loan, Lender may designate a substitute index after notifying
Borrower. Lender will tell Borrower the current Index rate upon Borrower's
request. The interest rate change will not occur more often than each day.
Borrower understands that Lender may make loans based on other rates as well.
THE INDEX CURRENTLY IS 4.750%. THE INTEREST RATE TO BE APPLIED TO THE UNPAID
PRINCIPAL BALANCE OF THIS NOTE WILL BE AT A RATE EQUAL TO THE INDEX, RESULTING
IN AN INITIAL RATE OF 4.750%. NOTICE: Under no circumstances will the interest
rate on this Note be more than the maximum rate allowed by applicable law.

INTEREST RATE OPTIONS. On the terms and subject to the conditions set forth
herein, Borrower will be able to select, from one of the following Rate Options,
an interest rate which will be applicable to a particular dollar increment of
amounts outstanding, or to be disbursed, under this Note. Principal shall be
payable as specified herein in the "Payment" section, and interest shall be
payable as specified for each Rate Option. The following Rate Options are
available to Borrower:

       (A) DEFAULT OPTION. The interest rate margin and index described in the
       "VARIABLE INTEREST RATE" paragraph herein (the "Default Option").

       (B) LONDON INTERBANK OFFERED RATE. A margin of 2.000 percentage points
       over London Interbank Offered Rate. For purposes of this Note, London
       Interbank Offered Rate shall mean the rate of interest at which deposits
       in U.S. Dollars for the relevant Interest Period is offered to first
       class banks in the London Interbank market as quoted for the mid-moving
       average LIBOR Rate as published by Telerate Systems, Inc. or such other
       publication of such rate as the holder of this Note shall reasonably
       select, two (2) Business Days prior to the commencement of the relevant
       Interest Period. An "Interest Period" is a one, two or three month period
       as selected by Borrower in a writing delivered to Lender as provided
       below. Interest based on this Rate Option is a floating rate and will
       change on and as of the date of a change in London Interbank Offered Rate
       (the "Interest Period"). Adjustments in the interest rate due to changes
       in the maximum nonusurious interest rate allowed (the "Highest Lawful
       Rate") shall be made on the effective day of any change in the Highest
       Lawful Rate. Under this Rate Option, Borrower shall make monthly interest
       payments on the same day of the month, with a final payment of all
       accrued and unpaid interest on the last day of such Interest Period and,
       in the case of an Interest Period greater than three (3) months, at three
       month (3 month) intervals after the first day of such Interest Period.

The following provisions concerning Rate Options are a part of this Note:

       SELECTION OF RATE OPTIONS. Provided Borrower is not in default under this
       Note, Borrower may request (a "Rate Request") that a $250,000.00
       increment or any amount in excess thereof (an "Increment") of the
       outstanding principal of, or amount be disbursed under, this Note bear
       interest at the selected rate. Borrower may make this Rate Request by
       telephonic notice, however no later than 10:00 AM PDT three (3) business
       days prior to the effective date of the Rate Request to permit Lender to
       quote the rate requested.*

       APPLICABLE INTEREST RATE. Borrower's Rate Request will become effective,
       and interest on the increment designated will be calculated at the rate
       (the "Effective Rate"), which Borrower requested, for the applicable
       Interest Period, subject to the following:

           (1) Notwithstanding any Rate Request, interest shall be calculated on
           the basis of the Default Option if (a) Lender, in good faith, is
           unable to ascertain the requested Rate Option by reason of
           circumstances then affecting the applicable money market or
           otherwise, (b) it becomes unlawful or impracticable for Lender to
           maintain loans based upon the requested Rate Option, or (c) Lender,
           in good faith, determines that it is impracticable to maintain loans
           based on the requested Rate Option because of increased taxes,
           regulatory costs, reserve requirements, expenses or any other costs
           or charges that affect such Rate Options. Upon the occurrence of any
           of the events described in this "Interest Rate Options" section, any
           increment to which a requested Rate Option applies shall be
           immediately (or at the option of Lender, at the end the current
           Interest Period), without further action of Lender or Borrower,
           converted to an increment to which the Default Option applies.

           (2) Borrower may have no more than a total of 3 Effective Rates
           applicable to amounts outstanding under this Note at any given time.

           (3) A Rate Request shall be effective as to amounts to be disbursed
           under this Note only if, on the effective date of the Rate Requests,
           such amounts are in fact disbursed to or for Borrower's account in
           accordance with the provisions of this Note and any related loan
           documents.

           (4) Any amounts of outstanding principal for which a Rate Request has
           not been made, or is otherwise not effective, shall bear interest
           until paid in full at the Default Option.

           (5) Any amounts of outstanding principal bearing interest based upon
           a Rate Option shall bear interest at such rate until the end of the
           Interest Period therefor, and thereafter shall bear interest based
           upon the Default Option unless a new Rate Request for a Rate Option
           complying with the terms hereof has been made and has become
           effective.




                                 PROMISSORY NOTE
LOAN NO: 932900001-3               (CONTINUED)                            PAGE 2

================================================================================

           (6) If Borrower is in default under this Note ("Default"), then
           Lender shall no longer be obligated to honor any Rate Requests.

           (7) No Interest Period shall extend beyond the maturity date of this
           Note.

       NOTICES: AUTHORITY TO ACT. Borrower acknowledges and agrees that the
       agreement of Lender herein to receive certain notices by telephone is
       solely for Borrower's convenience. Lender shall be entitled to rely on
       the authority of the person purporting to be a person authorized by
       Borrower to give such notice, and Lender shall have no liability to
       Borrower on account of any action taken by Lender in reliance upon such
       telephonic notice. Borrower's obligation to repay all sums owing under
       the Note shall not be affected in any way or to any extent by any failure
       by Lender to receive written confirmation of any telephonic notice or the
       receipt by Lender of a confirmation which is at variance with the terms
       understood by Lender to be contained in the telephonic notice.

PREPAYMENT; MINIMUM INTEREST CHARGE. In any event, even upon full prepayment of
this Note, Borrower understands that Lender is entitled to a MINIMUM INTEREST
CHARGE OF $200.00. Other than Borrower's obligation to pay any minimum interest
charge, Borrower may pay without penalty all or a portion of the amount owed
earlier than it is due. Early payments will not, unless agreed to by Lender in
writing, relieve Borrower of Borrower's obligation to continue to make payments
under the payment schedule. Rather, early payments will reduce the principal
balance due and may result in Borrower's making fewer payments. Borrower agrees
not to send Lender payments marked "paid in full", "without recourse", or
similar language. If Borrower sends such a payment, Lender may accept it without
losing any of Lender's rights under this Note, and Borrower will remain
obligated to pay any further amount owed to Lender. All written communications
concerning disputed amounts, including any check or other payment instrument
that indicates that the payment constitutes "payment in full" of the amount owed
or that is tendered with other conditions or limitations or as full satisfaction
of a disputed amount must be mailed or delivered to: California Bank & Trust,
Commercial Loan Center, 550 South Hope Street, Suite 300, Los Angeles, CA 90071.

LATE CHARGE. If a payment is 15 days or more late, Borrower will be charged
6.000% OF THE REGULARLY SCHEDULED PAYMENT OR $500.00, WHICHEVER IS LESS.

INTEREST AFTER DEFAULT. Upon Borrower's failure to pay all amounts declared due
pursuant to this section, including failure to pay upon final maturity, Lender,
at its option, may, if permitted under applicable law, increase the variable
interest rate on this Note to 5.000 percentage points over the Index.

DEFAULT. Each of the following shall constitute an event of default ("Event of
Default") under this Note:

       PAYMENT DEFAULT. Borrower fails to make any payment when due under this
       Note.

       OTHER DEFAULTS. Borrower fails to comply with or to perform any other
       term, obligation, covenant or condition contained in this Note or in any
       of the related documents or to comply with or to perform any term,
       obligation, covenant or condition contained in any other agreement
       between Lender and Borrower.

       DEFAULT IN FAVOR OF THIRD PARTIES. Borrower or any Grantor defaults under
       any loan, extension of credit, security agreement, purchase or sales
       agreement, or any other agreement, in favor of any other creditor or
       person that may materially affect any of Borrower's property or
       Borrower's ability to repay this Note or perform Borrower's obligations
       under this Note or any of the related documents.

       FALSE STATEMENTS. Any warranty, representation or statement made or
       furnished to Lender by Borrower or on Borrower's behalf under this Note
       or the related documents is false or misleading in any material respect,
       either now or at the time made or furnished or becomes false or
       misleading at any time thereafter.

       INSOLVENCY. The dissolution or termination of Borrower's existence as a
       going business, the insolvency of Borrower, the appointment of a receiver
       for any part of Borrower's property, any assignment for the benefit of
       creditors, any type of creditor workout, or the commencement of any
       proceeding under any bankruptcy or insolvency laws by or against
       Borrower.

       CREDITOR OR FORFEITURE PROCEEDINGS. Commencement of foreclosure or
       forfeiture proceedings, whether by judicial proceeding, self-help,
       repossession or any other method, by any creditor of Borrower or by any
       governmental agency against any collateral securing the loan. This
       includes a garnishment of any of Borrower's accounts, including deposit
       accounts, with Lender. However, this Event of Default shall not apply if
       there is a good faith dispute by Borrower as to the validity or
       reasonableness of the claim which is the basis of the creditor or
       forfeiture proceeding and if Borrower gives Lender written notice of the
       creditor or forfeiture proceeding and deposits with Lender monies or a
       surety bond for the creditor or forfeiture proceeding, in an amount
       determined by Lender, in its sole discretion, as being an adequate
       reserve or bond for the dispute.

       EVENTS AFFECTING GUARANTOR. Any of the preceding events occurs with
       respect to any Guarantor of any of the indebtedness or any Guarantor dies
       or becomes incompetent, or revokes or disputes the validity of, or
       liability under, any guaranty of the indebtedness evidenced by this Note.
       In the event of a death, Lender, at its option, may, but shall not be
       required to, permit the Guarantor's estate to assume unconditionally the
       obligations arising under the guaranty in a manner satisfactory to
       Lender, and, in doing so, cure any Event of Default.

       CHANGE IN OWNERSHIP.**

       ADVERSE CHANGE. A material adverse change occurs in Borrower's financial
       condition, or Lender believes the prospect of payment or performance of
       this Note is impaired.

       INSECURITY. Lender in good faith believes itself insecure.

       CURE PROVISIONS. If any default, other than a default in payment is
       curable and if Borrower has not been given a notice of a breach of the
       same provision of this Note within the preceding twelve (12) months, it
       may be cured (and no event of default will have occurred) if Borrower,
       after receiving written notice from Lender demanding cure of such
       default: (1) cures the default within fifteen (15) days; or (2) if the
       cure requires more than fifteen (15) days, immediately initiates steps
       which Lender deems in Lender's sole discretion to be sufficient to cure
       the default and thereafter continues and completes all reasonable and
       necessary steps sufficient to produce compliance as soon as reasonably
       practical.

LENDER'S RIGHTS. Upon default, Lender may declare the entire unpaid principal
balance on this Note and all accrued unpaid interest immediately due, and then
Borrower will pay that amount.

ATTORNEYS' FEES; EXPENSES. Lender may hire or pay someone else to help collect
this Note if Borrower does not pay. Borrower will pay Lender that amount. This
includes, subject to any limits under applicable law, Lender's attorneys' fees
and Lender's legal expenses, whether or not there is a lawsuit, including
attorneys' fees, expenses for bankruptcy proceedings (including efforts to
modify or vacate any automatic stay or injunction), and appeals. Borrower also
will pay any court costs, in addition to all other sums provided by law.

JURY WAIVER. LENDER AND BORROWER HEREBY WAIVE THE RIGHT TO ANY JURY TRIAL IN ANY
ACTION, PROCEEDING, OR COUNTERCLAIM BROUGHT BY EITHER LENDER OR BORROWER AGAINST
THE OTHER.

GOVERNING LAW. THIS NOTE WILL BE GOVERNED BY, CONSTRUED AND ENFORCED IN
ACCORDANCE WITH FEDERAL LAW AND THE LAWS OF THE STATE OF CALIFORNIA. THIS NOTE
HAS BEEN ACCEPTED BY LENDER IN THE STATE OF CALIFORNIA.

CHOICE OF VENUE. If there is a lawsuit, Borrower agrees upon Lender's request to
submit to the jurisdiction of the courts of Los Angeles County,




                                PROMISSORY NOTE
LOAN NO. 93290001-3               (CONTINUED)                             PAGE 3
================================================================================

State of California.

COLLATERAL. Borrower acknowledges this Note is secured by the following
collateral described in the security instrument listed herein: inventory,
chattel paper, accounts, equipment and general intangibles described in a
Commercial Security Agreement dated February 7, 2002.

DEPOSIT AGREEMENT SECURITY. Borrower hereby grants a security interest to
Lender in any and all deposit accounts (checking, savings, money market or time)
of Borrower at Lender, now existing or hereinafter opened, to secure its
indebtedness hereunder. This includes all deposit accounts Borrower holds
jointly with someone else.

FINANCIAL STATEMENT CERTIFICATIONS. The undersigned hereby certifies to
California Bank & Trust ("Bank") that all financial information ("Information")
submitted to Bank now and at all times during the terms of this loan does, and
will, fairly and accurately represent the financial condition of the
undersigned, all Borrowers and Guarantors. Financial Information includes, but
it is not limited to all Business Financial Statements (including Interim and
Year-End financial statements that are company prepared and/or CPA-prepared),
Business Income Tax Returns, Borrowing Base Certificates, Accounts Receivable
and Accounts Payable Agings, Personal Financial Statements and Personal Income
Tax Returns. The undersigned understands that the Bank will rely on all
financial information, whenever provided, and that such information is a
material inducement to Bank to make, to continue to make, or otherwise extend
credit accommodations to the undersigned. The undersigned covenants and agrees
to notify Bank of any adverse material changes in her/his/its financial
condition in the future. The undersigned further understands and acknowledges
that there are criminal penalties for giving false financial information to
federally insured financial institutions.

ADDITIONAL PROVISION FOR "SELECTION OF RATE OPTION" SECTION (SEE PAGE 1). The
minimum initial LIBOR advance shall be $250,000.00 and in increments of
$100,000.00 thereafter.*

SUCCESSOR INTERESTS. The terms of this Note shall be binding upon Borrower, and
upon Borrower's heirs, personal representatives, successors and assigns, and
shall insure to the benefit of Lender and its successor and assigns.

GENERAL PROVISIONS. Lender may delay or forgo enforcing any of its rights or
remedies under this Note without losing them. Borrower and any other person who
signs, guarantees or endorses this Note, to the extent allowed by law, waive
any applicable statute of limitations, presentment, demand for payment, and
notice of dishonor. Upon any change in the terms of this Note, and unless
otherwise expressly stated in writing, no party who signs this Note, whether as
a maker, guarantor, accommodation maker or endorser, shall be released from
liability. All such parties agree that Lender may renew or extend (repeatedly
and for any length of time) this loan or release any party or guarantor or
collateral; or impair, fail to realize upon or perfect Lender's security
interest in the collateral; and take any other action deemed necessary by
Lender without the consent of or notice to anyone. All such parties also agree
that Lender may modify this loan without the consent of or notice to anyone
other than the party with whom the modification is made. The obligations under
this Note are joint and several.

PRIOR TO SIGNING THIS NOTE, BORROWER READ AND UNDERSTOOD ALL THE PROVISIONS OF
THIS NOTE, INCLUDING THE VARIABLE INTEREST RATE PROVISIONS. BORROWER AGREES TO
THE TERMS OF THE NOTE.

BORROWER ACKNOWLEDGES RECEIPT OF A COMPLETED COPY OF THIS PROMISSORY NOTE.

BORROWER:


INTERNATIONAL REMOTE IMAGING SYSTEMS, INC.

By:/s/ Dr. John A. O'Malley                   By:/s/ John Caloz
   ----------------------------                  ----------------------------
   Dr. John A. O'Malley, CEO of                  John Caloz, CFO/Secretary of
   International Remote Imaging                  International Remote Imaging
   Systems, Inc.                                 Systems, Inc.

** Any acquisition of Borrower's common stock by merger, new issuance, or
   otherwise, that results in one holder owning twenty-five percent (25%) or
   more of such common stock.


                                PROMISSORY NOTE



- ----------------------------------------------------------------------------------------------------------------------------------
  PRINCIPAL       LOAN DATE       MATURITY        LOAN NO          CALL/COLL     ACCOUNT          OFFICER    INITIALS
                                                                                        
$1,000,000.00     02-07-2002      02-28-2007      932900001-4                    932900001-4      22163      [INITIALS ILLEGIBLE]
- ----------------------------------------------------------------------------------------------------------------------------------
References in the shaded area are for Lender's use only and do not limit the applicability of this document
to any particular loan or item. Any item above containing "***" has been omitted due to text length limitations.
- ----------------------------------------------------------------------------------------------------------------------------------


BORROWER:  INTERNATIONAL REMOTE        LENDER:  CALIFORNIA BANK & TRUST
              IMAGING SYSTEMS, INC.             COMMERCIAL LOAN CENTER
           9162 ETON AVENUE                     550 SOUTH HOPE STREET, SUITE 300
           CHATSWORTH, CA 91311                 LOS ANGELES, CA 90071
================================================================================

                                                              
PRINCIPAL AMOUNT: $1,000,000.00         INITIAL RATE: 4.750%        DATE OF NOTE: FEBRUARY 7, 2002



PROMISE TO PAY. INTERNATIONAL REMOTE IMAGING SYSTEMS, INC. ("BORROWER") PROMISES
TO PAY TO CALIFORNIA BANK & TRUST ("LENDER"), OR ORDER, IN LAWFUL MONEY OF THE
UNITED STATES OF AMERICA, THE PRINCIPAL AMOUNT OF ONE MILLION & 00/100 DOLLARS
($1,000,000.00) OR SO MUCH AS MAY BE OUTSTANDING, TOGETHER WITH INTEREST ON THE
UNPAID OUTSTANDING PRINCIPAL BALANCE OF EACH ADVANCE. INTEREST SHALL BE
CALCULATED FROM THE DATE OF EACH ADVANCE UNTIL REPAYMENT OF EACH ADVANCE.

PAYMENT. BORROWER WILL PAY THIS LOAN IN ACCORDANCE WITH THE FOLLOWING PAYMENT
SCHEDULE:

      SUBJECT TO ANY PAYMENT CHANGES RESULTING FROM CHANGES IN THE INDEX,
      BORROWER WILL PAY 12 CONSECUTIVE MONTHLY PAYMENTS OF ACCRUED UNPAID
      INTEREST, BEGINNING FEBRUARY 28, 2002 FOLLOWED BY 48 PRINCIPAL PLUS
      INTEREST PAYMENTS. BORROWER'S FIRST PRINCIPAL PLUS INTEREST IS DUE
      FEBRUARY 28, 2003, AND ALL SUBSEQUENT PRINCIPAL PLUS ACCRUED INTEREST
      PAYMENTS ARE DUE ON THE SAME DAY OF EACH MONTH AFTER THAT. BORROWER'S
      FINAL PAYMENT DUE FEBRUARY 28, 2007, WILL BE FOR ALL PRINCIPAL AND ACCRUED
      INTEREST NOT YET PAID.

UNLESS OTHERWISE AGREED OR REQUIRED BY APPLICABLE LAW, PAYMENTS WILL BE APPLIED
FIRST TO ACCRUED UNPAID INTEREST, THEN TO PRINCIPAL, AND ANY REMAINING AMOUNT TO
ANY UNPAID COLLECTION COSTS AND LATE CHARGES. THE ANNUAL INTEREST RATE FOR THIS
NOTE IS COMPUTED ON A 365/360 BASIS; THAT IS, BY APPLYING THE RATIO OF THE
ANNUAL INTEREST RATE OVER A YEAR OF 360 DAYS, MULTIPLIED BY THE OUTSTANDING
PRINCIPAL BALANCE, MULTIPLIED BY THE ACTUAL NUMBER OF DAYS THE PRINCIPAL BALANCE
IS OUTSTANDING. BORROWER WILL PAY LENDER AT LENDER'S ADDRESS SHOWN ABOVE OR AT
SUCH OTHER PLACE AS LENDER MAY DESIGNATE IN WRITING.

VARIABLE INTEREST RATE. Subject to designation of a different interest rate
index by Borrower as provided below, the interest rate on this Note is subject
to change from time to time based on changes in an index which is the rate of
interest set from time to time by Bank as its Prime Rate. California Bank &
Trust Prime Rate is determined by Bank as a means of pricing credit extensions
to some customers and is neither tied to any external rate of interest or index
nor is it necessarily the lowest rate of interest charged by Bank at any given
time for any particular class of customers or credit extensions (the "Index").
The Index is not necessarily the lowest rate charged by Lender on its loans and
is set by Lender in its sole discretion. If the Index becomes unavailable during
the term of this loan, Lender may designate a substitute index after notifying
Borrower. Lender will tell Borrower the current Index rate upon Borrower's
request. The interest rate change will not occur more often than each day.
Borrower understands that Lender may make loans based on other rates as well.
THE INDEX CURRENTLY IS 4.750%. THE INTEREST RATE TO BE APPLIED TO THE UNPAID
PRINCIPAL BALANCE OF THIS A NOTE WILL BE AT A RATE EQUAL TO THE INDEX, RESULTING
IN AN INITIAL RATE OF 4.750%. NOTICE: Under no circumstances will the interest
rate on this Note be more than the maximum rate allowed by applicable law.

INTEREST RATE OPTIONS. On the terms and subject to the conditions set forth
herein, Borrower will be able to select, from one of the following Rate Options,
an interest rate which will be applicable to a particular dollar increment of
amounts outstanding, or to be disbursed, under this Note. Principal shall be
payable as specified herein in the "Payment" section, and interest shall be
payable as specified for each Rate Option. The following Rate Options are
available to Borrower:

      (A) DEFAULT OPTION. The interest rate margin and index described in the
      "VARIABLE INTEREST RATE" paragraph herein (the "Default Option").

      (B) LONDON INTERBANK OFFERED RATE. A margin of 2.000 percentage points
      over London Interbank Offered Rate. For purposes of this Note, low London
      Interbank Offered Rate shall mean the rate of interest at which deposits
      in U.S. Dollars for the relevant Interest Period is offered to first class
      banks in the London Interbank market as quoted for the mid-moving average
      LIBOR Rate as published by Telerate Systems, Inc. or such other
      publication of such rate as the holder of this Note shall reasonably
      select, two (2) Business Days prior to the commencement of the relevant
      Interest Period. An "Interest Period" is a one, two or three month period
      as selected by Borrower in a writing delivered to Lender as provided
      below. Interest based on this Rate Option is a floating rate and will
      change on and as of the date of a change in London Interbank Offered Rate
      (the "Interest Period"). Adjustments in the interest rate due to changes
      in the maximum nonusurious interest rate allowed (the "Highest Lawful
      Rate") shall be made on the effective day of any change in the Highest
      Lawful Rate. Under this Rate Option, Borrower shall make monthly interest
      payments on the same day of the month, with a final payment of all accrued
      and unpaid interest on the last day of such Interest Period and, in the
      case of an Interest Period greater than three (3) months, at three month
      (3 month) intervals after the first day of such Interest Period.

The following provisions concerning Rate Options are a part of this Note:

      SELECTION OF RATE OPTIONS. Provided Borrower is not in default under this
      Note, Borrower may request (a "Rate Request") that a $250,000.00 increment
      or any amount in excess thereof (an "Increment") of the outstanding
      principal of, or amounts to be disbursed under, this Note bear interest at
      the selected rate. Borrower may make this Rate Request by telephonic
      notice, however no later than 10:00 AM PDT three (3) business days prior
      to the effective date of the Rate Request to permit Lender to quote the
      rate requested.*

      APPLICABLE INTEREST RATE. Borrower's Rate Request will become effective,
      and interest on the increment designated will be calculated at the rate
      (the "Effective Rate"), which Borrower requested, for the applicable
      Interest Period, subject to the following:

            (1) Notwithstanding any Rate Request, interest shall be calculated
            on the basis of the Default Option if (a) Lender, in good faith, is
            unable to ascertain the requested Rate Option by reason of
            circumstances then affecting the applicable money market or
            otherwise, (b) it becomes unlawful or impracticable for Lender to
            maintain loans based upon the requested Rate Option, or (c) Lender,
            in good faith, determines that it is impracticable to maintain loans
            based on the requested Rate Option because of increased taxes,
            regulatory costs, reserve requirements, expenses or any other costs
            or charges that affect such Rate Options. Upon the occurrence of any
            of the events described in this "Interest Rate Options" section, any
            increment to which a requested Rate Option applies shall be
            immediately (or at the option of Lender, at the end the current
            Interest Period), without further action of Lender or Borrower,
            converted to an increment to which the Default Option applies.

            (2) Borrower may have no more than a total of 3 Effective Rates
            applicable to amounts outstanding under this Note at any given time.

            (3) A Rate Request shall be effective as to amounts to be disbursed
            under this Note only if, on the effective date of the Rate Requests,
            such amounts are in fact disbursed to or for Borrower's account in
            accordance with the provisions of this Note and any related loan
            documents.

            (4) Any amounts of outstanding principal for which a Rate Request
            has not been made, or is otherwise not effective, shall bear
            interest until paid in full at the Default Option.

            (5) Any amounts of outstanding principal bearing interest based upon
            a Rate Option shall bear interest at such rate until the end of the




                                 PROMISSORY NOTE
LOAN NO: 932900001-4               (CONTINUED)                            PAGE 2

================================================================================

            Interest Period therefor, and thereafter shall bear interest based
            upon the Default Option unless a new Rate Request for a Rate Option
            complying with the terms hereof has been made and has become
            effective.

            (6) If Borrower is in default under this Note ("Default"), then
            Lender shall no longer be obligated to honor any Rate Requests.

            (7) No Interest Period shall extend beyond the maturity date of this
            Note.

      NOTICES: AUTHORITY TO ACT. Borrower acknowledges and agrees that the
      agreement of Lender herein to receive certain notices by telephone is
      solely for Borrower's convenience. Lender shall be entitled to rely on the
      authority of the person purporting to be a person authorized by Borrower
      to give such notice, and Lender shall have no liability to Borrower on
      account of any action taken by Lender in reliance upon such telephonic
      notice. Borrower's obligation to repay all sums owing under the Note shall
      not be affected in any way or to any extent by any failure by Lender to
      receive written confirmation of any telephonic notice or the receipt by
      Lender of a confirmation which is at variance with the terms understood by
      Lender to be contained in the telephonic notice.

PREPAYMENT; MINIMUM INTEREST CHARGE. In any event, even upon full prepayment of
this Note, Borrower understands that Lender is entitled to a MINIMUM INTEREST
CHARGE OF $200.00. Other than Borrower's obligation to pay any minimum interest
charge, Borrower may pay without penalty all or a portion of the amount owed
earlier than it is due. Early payments will not, unless agreed to by Lender in
writing, relieve Borrower of Borrower's obligation to continue to make payments
of accrued unpaid interest. Rather, early payments will reduce the principal
balance due. Borrower agrees not to send Lender payments marked "paid in full",
"without recourse", or similar language. If Borrower sends such a payment,
Lender may accept it without losing any of Lender's rights under this Note, and
Borrower will remain obligated to pay any further amount owed to Lender. All
written communications concerning disputed amounts, including any check or other
payment instrument that indicates that the payment constitutes "payment in full"
of the amount owed or that is tendered with other conditions or limitations or
as full satisfaction of a disputed amount must be mailed or delivered to:
California Bank & Trust, Commercial Loan Center, 550 South Hope Street, Suite
300, Los Angeles, CA 90071.

LATE CHARGE. If a payment is 15 days or more late, Borrower will be charged
6.000% OF THE REGULARLY SCHEDULED PAYMENT OR $500.00, WHICHEVER IS LESS.

INTEREST AFTER DEFAULT. Upon Borrower's failure to pay all amounts declared due
pursuant to this section, including failure to pay upon final maturity, Lender,
at its option, may, if permitted under applicable law, increase the variable
interest rate on this Note to 5.000 percentage points over the Index.

DEFAULT. Each of the following shall constitute an event of default ("Event of
Default") under this Note:

      PAYMENT DEFAULT. Borrower fails to make any payment when due under this
      Note.

      OTHER DEFAULTS. Borrower fails to comply with or to perform any other
      term, obligation, covenant or condition contained in this Note or in any
      of the related documents or to comply with or to perform any term,
      obligation, covenant or condition contained in any other agreement between
      Lender and Borrower.

      DEFAULT IN FAVOR OF THIRD PARTIES. Borrower or any Grantor defaults under
      any loan, extension of credit, security agreement, purchase or sales
      agreement, or any other agreement, in favor of any other creditor or
      person that may materially affect any of Borrower's property or Borrower's
      ability to repay this Note or perform Borrower's obligations under this
      Note or any of the related documents.

      FALSE STATEMENTS. Any warranty, representation or statement made or
      furnished to Lender by Borrower or on Borrower's behalf under this Note or
      the related documents is false or misleading in any material respect,
      either now or at the time made or furnished or becomes false or misleading
      at any time thereafter.

      INSOLVENCY. The dissolution or termination of Borrower's existence as a
      going business, the insolvency of Borrower, the appointment of a receiver
      for any part of Borrower's property, any assignment for the benefit of
      creditors, any type of creditor workout, or the commencement of any
      proceeding under any bankruptcy or insolvency laws by or against Borrower.

      CREDITOR OR FORFEITURE PROCEEDINGS. Commencement of foreclosure or
      forfeiture proceedings, whether by judicial proceeding, self-help,
      repossession or any other method, by any creditor of Borrower or by any
      governmental agency against any collateral securing the loan. This
      includes a garnishment of any of Borrower's accounts, including deposit
      accounts, with Lender. However, this Event of Default shall not apply if
      there is a good faith dispute by Borrower as to the validity or
      reasonableness of the claim which is the basis of the creditor or
      forfeiture proceeding and if Borrower gives Lender written notice of the
      creditor or forfeiture proceeding and deposits with Lender monies or a
      surety bond for the creditor or forfeiture proceeding, in an amount
      determined by Lender, in its sole discretion, as being an adequate reserve
      or bond for the dispute.

      EVENTS AFFECTING GUARANTOR. Any of the preceding events occurs with
      respect to any Guarantor of any of the indebtedness or any Guarantor dies
      or becomes incompetent, or revokes or disputes the validity of, or
      liability under, any guaranty of the indebtedness evidenced by this Note.
      In the event of a death, Lender, at its option, may, but shall not be
      required to, permit the Guarantor's estate to assume unconditionally the
      obligations arising under the guaranty in a manner satisfactory to Lender,
      and, in doing so, cure any Event of Default.

      CHANGE IN OWNERSHIP.**

      ADVERSE CHANGE. A material adverse change occurs in Borrower's financial
      condition, or Lender believes the prospect of payment or performance of
      this Note is impaired.

      INSECURITY. Lender in good faith believes itself insecure.

      CURE PROVISIONS. If any default, other than a default in payment is
      curable and if Borrower has not been given a notice of a breach of the
      same provision of this Note within the preceding twelve (12) months, it
      may be cured (and no event of default will have occurred) if Borrower,
      after receiving written notice from Lender demanding cure of such default:
      (1) cures the default within fifteen (15) days; or (2) if the cure
      requires more than fifteen (15) days, immediately initiates steps which
      Lender deems in Lender's sole discretion to be sufficient to cure the
      default and thereafter continues and completes all reasonable and
      necessary steps sufficient to produce compliance as soon as reasonably
      practical.

LENDER'S RIGHTS. Upon default, Lender may declare the entire unpaid principal
balance on this Note and all accrued unpaid interest immediately due, and then
Borrower will pay that amount.

ATTORNEYS' FEES; EXPENSES. Lender may hire or pay someone else to help collect
this Note if Borrower does not pay. Borrower will pay Lender that amount. This
includes, subject to any limits under applicable law, Lender's attorneys' fees
and Lender's legal expenses, whether or not there is a lawsuit, including
attorneys' fees, expenses for bankruptcy proceedings (including efforts to
modify or vacate any automatic stay or injunction), and appeals. Borrower also
will pay any court costs, in addition to all other sums provided by law.

JURY WAIVER. LENDER AND BORROWER HEREBY WAIVE THE RIGHT TO ANY JURY TRIAL IN ANY
ACTION, PROCEEDING, OR COUNTERCLAIM BROUGHT BY EITHER LENDER OR BORROWER AGAINST
THE OTHER.

GOVERNING LAW. THIS NOTE WILL BE GOVERNED BY, CONSTRUED AND ENFORCED IN
ACCORDANCE WITH FEDERAL LAW AND THE LAWS OF THE STATE OF CALIFORNIA. THIS NOTE
HAS BEEN ACCEPTED BY LENDER IN THE STATE OF CALIFORNIA.

                                PROMISSORY NOTE
LOAN NO: 932900001-4                   (CONTINUED)                        PAGE 3
- --------------------------------------------------------------------------------

CHOICE OF VENUE. If there is a lawsuit, Borrower agrees upon Lender's request
to submit to the jurisdiction of the courts of Los Angeles County, State of
California.

COLLATERAL. Borrower acknowledges this Note is secured by the following
collateral described in the security instrument listed herein: inventory,
chattel paper, accounts, equipment and general intangibles described in a
Commercial Security Agreement dated February 7, 2002.

LINE OF CREDIT. This Note evidences a straight line of credit. Once the total
amount of principal has been advanced, Borrower is not entitled to further loan
advances. Advances under this Note may be requested either orally or in writing
by Borrower or as provided in this paragraph. Lender may, but need not, require
that all oral requests be confirmed in writing. All communications,
instructions, or directions by telephone or otherwise to Lender are to be
directed to Lender's office shown above. The following persons currently are
authorized to request advances and authorize payments under the line of credit
until Lender receives from Borrower, at Lender's address shown above, written
notice of revocation of their authority: DR. JOHN A. O'MALLEY, CEO/CHAIRMAN OF
INTERNATIONAL REMOTE IMAGING SYSTEMS, INC.; JOHN CALOZ, CFO/SECRETARY OF
INTERNATIONAL REMOTE IMAGING SYSTEMS, INC.; AND DONALD HORACEK, CONTROLLER OF
ADVANCED DIGITAL IMAGING RESEARCH, LLC. Borrower agrees to be liable for all
sums either: (A) advanced in accordance with the instructions of an authorized
person or (B) credited to any of Borrower's accounts with Lender. The unpaid
principal balance owing on this Note at any time may be evidenced by
endorsements on this Note or by Lender's internal records, including daily
computer print-outs. Lender will have no obligation to advance funds under this
Note if: (A) Borrower or any guarantor is in default under the terms of this
Note or any agreement that Borrower or any guarantor has with Lender, including
any agreement made in connection with the signing of this Note; (B) Borrower or
any guarantor ceases doing business or is insolvent; (C) any guarantor seeks,
claims or otherwise attempts to limit, modify or revoke such guarantor's
guarantee of this Note or any other loan with Lender; (D) Borrower has applied
funds provided pursuant to this Note for purposes other than those authorized
by Lender; or (E) Lender in good faith believes itself insecure.

DEPOSIT AGREEMENT SECURITY. Borrower hereby grants a security interest  to
Lender in any and all deposit accounts (checking, savings, money market or
time) of Borrower at Lender, now existing or hereinafter opened, to secure its
indebtedness hereunder. This includes all deposit accounts Borrower holds
jointly with someone else.

FINANCIAL STATEMENT CERTIFICATIONS. The undersigned hereby certifies to
California Bank & Trust ("Bank") that all financial information ("Information")
submitted to Bank now and at all times during the terms of this loan does, and
will, fairly and accurately represent the financial condition of the
undersigned, all Borrowers and Guarantors. Financial Information includes, but
is not limited to all Business Financial Statements (including Interim and
Year-End financial statements that are company prepared and/or CPA-prepared),
Business Income Tax Returns, Borrowing Base Certificates, Accounts Receivable
and Accounts Payable Agings, Personal Financial Statements and Personal Income
Tax Returns. The undersigned understand that the Bank will rely on all financial
information, whenever provided, and that such information is a material
inducement to Bank to make, to continue to make, or otherwise extend credit
accommodations to the undersigned. The undersigned covenants and agrees to
notify Bank of any adverse material changes in her/his/its financial condition
in the future. The undersigned further understands and acknowledges that there
are criminal penalties for giving false financial information to federally
insured financial institutions.

TERM OUT OF NON-REVOLVING LINE OF CREDIT. Borrower covenants and agrees with
Lender, that upon the end of the twelve (12) month interest only payment
period, the non-revolving feature of this loan will be discontinued and the
loan balance will be converted to a forty-eight (48) month installment loan,
with payments of Principal plus accrued interest at an interest rate based on
selected interest rate as per the options described in the "Interest Rate
Options" Section of this Note.

LOAN AGREEMENT. This Note is subject to the terms and conditions of that Loan
Agreement executed by Borrower in favor of Lender on February 7, 2002.

ADDITIONAL PROVISION FOR "SELECTION OF RATE OPTIONS" SECTION (SEE PAGE 1). The
minimum initial LIBOR advance shall be $250,000.00 and in increments of
$100,000.00 thereafter.*

SUCCESSOR INTERESTS. The terms of this Note shall be binding upon Borrower, and
upon Borrower's heirs, personal representatives, successors and assigns, and
shall inure to the benefit of Lender and its successors and assigns.

GENERAL PROVISIONS. Lender may delay or forgo enforcing any of its rights or
remedies under this Note without losing them. Borrower and any other person who
signs, guarantees or endorses this Note, to the extent allowed by law, waive
any applicable statute of limitations, presentment, demand for payment, and
notice of dishonor. Upon any change in the terms of this Note, and unless
otherwise expressly stated in writing, no party who signs this Note, whether as
maker, guarantor, accommodation maker or endorser, shall be released from
liability. All such parties agree that Lender may renew or extend (repeatedly
and for any length of time) this loan or release any party or guarantor or
collateral; or impair, fail to realize upon or perfect Lender's security
interest in the collateral; and take any other action deemed necessary by
Lender without the consent of or notice to anyone. All such parties also agree
that Lender may modify this loan without the consent of or notice to anyone
other than the party with whom the modification is made. The obligations under
this Note are joint and several.

PRIOR TO SIGNING THIS NOTE, BORROWER READ AND UNDERSTOOD ALL THE PROVISIONS OF
THIS NOTE, INCLUDING THE VARIABLE INTEREST RATE PROVISIONS. BORROWER AGREES TO
THE TERMS OF THE NOTE.

BORROWER ACKNOWLEDGES RECEIPT OF A COMPLETED COPY OF THIS PROMISSORY NOTE.

BORROWER:


INTERNATIONAL REMOTE IMAGING SYSTEMS INC.

By: /s/ John A. O'Malley                   By:  /s/ John Caloz
   ------------------------------------       ----------------------------------
    DR. JOHN A. O'MALLEY, CEO/CHAIRMAN          JOHN CALOZ, CFO/SECRETARY OF
    OF INTERNATIONAL REMOTE IMAGING             INTERNATIONAL REMOTE IMAGING
    SYSTEMS, INC.                               SYSTEMS, INC.


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

**   Any acquisition of Borrower's common stock by merger, new issuance, or
     otherwise, that results in one holder owning twenty-five percent (25%) or
     more of such common stock.

EX-11.1(C)

                                                                 EXHIBIT 11.1(c)


                         COMMERCIAL SECURITY AGREEMENT



- ------------------------------------------------------------------------------------------------------------------
  PRINCIPAL     LOAN DATE    MATURITY      LOAN NO     CALL/COLL     ACCOUNT    OFFICER    INITIALS
                                                                      
$6,500,000.0   02-07-2002   06-30-2004   932900001-1              932900001-1     22163    [INITIALS ILLEGIBLE]
- -------------------------------------------------------------------------------------------------------------------
References in the shaded area are for Lender's use only and do not limit the applicability of this document
to any particular loan or item. Any item above containing "***" has been omitted due to text length limitations.
- -------------------------------------------------------------------------------------------------------------------


GRANTOR:  INTERNATIONAL REMOTE          LENDER: CALIFORNIA BANK & TRUST
             IMAGING SYSTEMS, INC.              COMMERCIAL LOAN CENTER
          9162 ETON AVENUE                      550 SOUTH HOPE STREET, SUITE 300
          CHATSWORTH, CA 91311                  LOS ANGELES, CA 90071
================================================================================

THIS COMMERCIAL SECURITY AGREEMENT dated February 7, 2002, is made and executed
between International Remote Imaging Systems, Inc. ("Grantor") and California
Bank & Trust ("Lender").

GRANT OF SECURITY INTEREST. For valuable consideration, Grantor grants to Lender
a security interest in the Collateral to secure the Indebtedness and agrees that
Lender shall have the rights stated in this Agreement with respect to the
Collateral, in addition to all other rights which Lender may have by law.

COLLATERAL DESCRIPTION. The word "Collateral" as used in this Agreement means
the following described property, whether now owned or hereafter acquired,
whether now existing or hereafter arising, and wherever located, in which
Grantor is giving to Lender a security interest for the payment of the
Indebtedness and performance of all other obligations under the Note and this
Agreement:

        ALL INVENTORY, EQUIPMENT, ACCOUNTS (INCLUDING BUT NOT LIMITED TO ALL
        HEALTH-CARE-INSURANCE RECEIVABLES), CHATTEL PAPER, INSTRUMENTS
        (INCLUDING BUT NOT LIMITED TO ALL PROMISSORY NOTES), LETTER-OF-CREDIT
        RIGHTS, LETTERS OF CREDIT, DOCUMENTS, DEPOSIT ACCOUNTS, INVESTMENT
        PROPERTY, MONEY, OTHER RIGHTS TO PAYMENT AND PERFORMANCE, AND GENERAL
        INTANGIBLES (INCLUDING BUT NOT LIMITED TO ALL SOFTWARE AND ALL PAYMENT
        INTANGIBLES); ALL FIXTURES; ALL ATTACHMENTS, ACCESSIONS, ACCESSORIES,
        FITTINGS, INCREASES, TOOLS, PARTS, REPAIRS, SUPPLIES, AND COMMINGLED
        GOODS RELATING TO THE FOREGOING PROPERTY, AND ALL ADDITIONS,
        REPLACEMENTS OF AND SUBSTITUTIONS FOR ALL OR ANY PART OF THE FOREGOING
        PROPERTY; ALL INSURANCE REFUNDS RELATING TO THE FOREGOING PROPERTY; ALL
        GOOD WILL RELATING TO THE FOREGOING PROPERTY; ALL RECORDS AND DATA AND
        EMBEDDED SOFTWARE RELATING TO THE FOREGOING PROPERTY, AND ALL EQUIPMENT,
        INVENTORY AND SOFTWARE TO UTILIZE, CREATE, MAINTAIN AND PROCESS ANY SUCH
        RECORDS AND DATA ON ELECTRONIC MEDIA; AND ALL SUPPORTING OBLIGATIONS
        RELATING TO THE FOREGOING PROPERTY; ALL WHETHER NOW EXISTING OR
        HEREAFTER ARISING, WHETHER NOW OWNED OR HEREAFTER ACQUIRED OR WHETHER
        NOW OR HEREAFTER SUBJECT TO ANY RIGHTS IN THE FOREGOING PROPERTY; AND
        ALL PRODUCTS AND PROCEEDS (INCLUDING BUT NOT LIMITED TO ALL INSURANCE
        PAYMENTS) OF OR RELATING TO THE FOREGOING PROPERTY.

In addition, the word "Collateral" also includes all the following, whether now
owned or hereafter acquired, whether now existing or hereafter arising, and
wherever located:

      (A) All accessions, attachments, accessories, tools, parts, supplies,
      replacements of and additions to any of the collateral described herein,
      whether added now or later. (B) All products and produce of any of the
      property described in this Collateral section.

      (B) All products and produce of any of the property described in this
      Collateral Section.

      (C) All accounts, general intangibles, instruments, rents, monies,
      payments, and all other rights, arising out of a sale, lease, or other
      disposition of any of the property described in this Collateral section.

      (D) All proceeds (including insurance proceeds) from the sale,
      destruction, loss, or other disposition of any of the property described
      in this Collateral section, and sums due from a third party who has
      damaged or destroyed the Collateral or from that party's insurer, whether
      due to judgment, settlement or other process. (E) All records and data
      relating to any of the property described in this Collateral section,
      whether in the form of a writing, photograph, microfilm, microfiche, or
      electronic media, together with all of Grantor's right, title, and
      interest in and to all computer software required to utilize, create,
      maintain, and process any such records or data on electronic media.

      (E) All records and data relating to any of the property described in this
      Collateral Section, whether in the form of a writing, photograph,
      microfilm, microfiche, or electronic media, together with all of Grantors
      right, title, and interest in and to all computer software required to
      utilize, create, maintain, and process any such records or data on
      electronic media.


Despite any other provision of this Agreement, Lender is not granted, and will
not have, a nonpurchase money security interest in household goods, to the
extent such a security interest would be prohibited by applicable law. In
addition, if because of the type of any Property, Lender is required to give a
notice of the right to cancel under Truth in Lending for the Indebtedness, then
Lender will not have a security interest in such Collateral unless and until
such a notice is given.

CROSS-COLLATERALIZATION. In addition to the Note, this Agreement secures all
obligations, debts and liabilities, plus interest thereon, of Grantor to Lender,
or any one or more of them, as well as all claims by Lender against Grantor or
any one or more of them, whether now existing or hereafter arising, whether
related or unrelated to the purpose of the Note, whether voluntary or otherwise,
whether due or not due, direct or indirect, determined or undetermined, absolute
or contingent, liquidated or unliquidated whether Grantor may be liable
individually or jointly with others, whether obligated as guarantor, surety,
accommodation party or otherwise, and whether recovery upon such amounts may be
or hereafter may become barred by any statute of limitations, and whether the
obligation to repay such amounts may be or hereafter may become otherwise
unenforceable.

GRANTOR'S REPRESENTATIONS AND WARRANTIES WITH RESPECT TO THE COLLATERAL. With
respect to the Collateral, Grantor represents and promises to Lender that:

        PERFECTION OF SECURITY INTEREST. Grantor agrees to execute financing
        statements and to take whatever other actions are requested by Lender to
        perfect and continue Lender's security interest in the Collateral. Upon
        request of Lender, Grantor will deliver to Lender any and all of the
        documents evidencing or constituting the Collateral, and Grantor will
        note Lender's interest upon any and all chattel paper if not delivered
        to Lender for possession by Lender. THIS IS A CONTINUING SECURITY
        AGREEMENT AND WILL CONTINUE IN EFFECT EVEN THOUGH ALL OR ANY PART OF THE
        INDEBTEDNESS IS PAID IN FULL AND EVEN THOUGH FOR A PERIOD OF TIME
        GRANTOR MAY NOT BE INDEBTED TO LENDER.

        NOTICES TO LENDER. Grantor will promptly notify Lender in writing at
        Lender's address shown above (or such other addresses as Lender may
        designate from time to time) prior to any (1) change in Grantor's name;
        (2) change in Grantor's assumed business name(s); (3) change in the
        management of the Corporation Grantor; (4) change in the authorized
        signer(s); (5) change in Grantor's principal office address; (6) change
        in Grantor's state of organization; (7) conversion of Grantor to a new
        or different type of business entity; or (8) change in any other aspect
        of Grantor that directly or indirectly relates to any agreements between
        Grantor and Lender. No change in Grantor's name or state of organization
        will take effect until after Lender has received notice

        NO VIOLATION. The execution and delivery of this Agreement will not
        violate any law or agreement governing Grantor or to which Grantor is a
        party, and its certificate or articles of incorporation and bylaws do
        not prohibit any term or condition of this Agreement.

        ENFORCEABILITY OF COLLATERAL. To the extent the Collateral consists of
        accounts, chattel paper, or general intangibles, as defined by the
        Uniform Commercial Code, the Collateral is enforceable in accordance
        with its terms, is genuine, and fully complies with all applicable laws
        and regulations



                          COMMERCIAL SECURITY AGREEMENT
LOAN NO: 932900001-1                (CONTINUED)                           PAGE 2
================================================================================


        concerning form, content and manner of preparation and execution, and
        all persons appearing to be obligated on the Collateral have authority
        and capacity to contract and are in fact obligated as they appear to be
        on the Collateral. At the time any Account becomes subject to a security
        interest in favor of Lender, the Account shall be a good and valid
        account representing an undisputed, bona fide indebtedness incurred by
        the account debtor, for merchandise held subject to delivery
        instructions or previously shipped or delivered pursuant to a contract
        of sale, or for services previously performed by Grantor with or for the
        account debtor. So long as this Agreement remains in effect, Grantor
        shall not, without Lender's prior written consent, compromise, settle,
        adjust, or extend payment under or with regard to any such Accounts.
        There shall be no setoffs or counterclaims against any of the
        Collateral, and no agreement shall have been made under which any
        deductions or discounts may be claimed concerning the Collateral except
        those disclosed to Lender in writing.

        LOCATION OF THE COLLATERAL. Except in the ordinary course of Grantor's
        business, Grantor agrees to keep the Collateral (or to the extent the
        Collateral consists of intangible property such as accounts or general
        intangibles, the records concerning the Collateral) at Grantor's address
        shown above or at such other locations as are acceptable to Lender. Upon
        Lender's request. Grantor will deliver to Lender in form satisfactory to
        Lender a schedule of real properties and Collateral locations relating
        to Grantor's operations, including without limitation the following: (1)
        all real property Grantor owns or is purchasing; (2) all real property
        Grantor is renting or leasing; (3) all storage facilities Grantor owns,
        rents, leases, or uses; and (4) all other properties where Collateral is
        or may be located.

        REMOVAL OF THE COLLATERAL. Except in the ordinary course of Grantor's
        business, including the sales of inventory, Grantor shall not remove the
        Collateral from its existing location without Lender's prior written
        consent. To the extent that the Collateral consists of vehicles, or
        other titled property, Grantor shall not take or permit any action which
        would require application for certificates of title for the vehicles
        outside the State of Delaware, without Lender's prior written consent.
        Grantor shall, whenever requested, advise Lender of the exact location
        of the Collateral.

        TRANSACTIONS INVOLVING COLLATERAL. Except for inventory sold or accounts
        collected in the ordinary course of Grantor's business, or as otherwise
        provided for in this Agreement, Grantor shall not sell, offer to sell,
        or otherwise transfer or dispose of the Collateral. While Grantor is not
        in default under this Agreement, Grantor may sell inventory, but only in
        the ordinary course of its business and only to buyers who qualify as a
        buyer in the ordinary course of business. A sale in the ordinary course
        of Grantor's business does not include a transfer in partial or total
        satisfaction of a debt or any bulk sale. Grantor shall not pledge,
        mortgage, encumber or otherwise permit the Collateral to be subject to
        any lien, security interest, encumbrance, or charge, other than the
        security interest provided for in this Agreement, without the prior
        written consent of Lender. This includes security interests even if
        junior in right to the security interests granted under this Agreement.
        Unless waived by Lender, all proceeds from any disposition of the
        Collateral (for whatever reason) shall be held in trust for Lender and
        shall not be commingled with any other funds; provided however, this
        requirement shall not constitute consent by Lender to any sale or other
        disposition. Upon receipt, Grantor shall immediately deliver any such
        proceeds to Lender.

        TITLE. Grantor represents and warrants to Lender that Grantor holds good
        and marketable title to the Collateral, free and clear of all liens and
        encumbrances except for the lien of this Agreement. No financing
        statement covering any of the Collateral is on file in any public office
        other than those which reflect the security interest created by this
        Agreement or to which Lender has specifically consented. Grantor shall
        defend Lender's rights in the Collateral against the claims and demands
        of all other persons.

        REPAIRS AND MAINTENANCE. Grantor agrees to keep and maintain, and to
        cause others to keep and maintain, the Collateral in good order, repair
        and condition at all times while this Agreement remains in effect.
        Grantor further agrees to pay when due all claims for work done on, or
        services rendered or material furnished in connection with the
        Collateral so that no lien or encumbrance may ever attach to or be filed
        against the Collateral.

        INSPECTION OF COLLATERAL. Lender and Lender's designated representatives
        and agents shall have the right at all reasonable times to examine and
        inspect the Collateral wherever located.

        TAXES, ASSESSMENTS AND LIENS. Grantor will pay when due all taxes,
        assessments and liens upon the Collateral, its use or operation, upon
        this Agreement, upon any promissory note or notes evidencing the
        Indebtedness, or upon any of the other Related Documents. Grantor may
        withhold any such payment or may elect to contest any lien if Grantor is
        in good faith conducting an appropriate proceeding to contest the
        obligation to pay and so long as Lender's interest in the Collateral is
        not jeopardized in Lender's sole opinion. If the Collateral is subjected
        to a lien which is not discharged within fifteen (15) days, Grantor
        shall deposit with Lender cash, a sufficient corporate surety bond or
        other security satisfactory to Lender in an amount adequate to provide
        for the discharge of the lien plus any interest, costs, reasonable
        attorneys' fees or other charges that could accrue as a result of
        foreclosure or sale of the Collateral. In any contest Grantor shall
        defend itself and Lender and shall satisfy any final adverse judgment
        before enforcement against the Collateral. Grantor shall name Lender as
        an additional obligee under any surety bond furnished in the contest
        proceedings. Grantor further agrees to furnish Lender with evidence that
        such taxes, assessments, and governmental and other charges have been
        paid in full and in a timely manner. Grantor may withhold any such
        payment or may elect to contest any lien if Grantor is in good faith
        conducting an appropriate proceeding to contest the obligation to pay
        and so long as Lender's interest in the Collateral is not jeopardized.

        COMPLIANCE WITH GOVERNMENTAL REQUIREMENTS. Grantor shall comply promptly
        with all laws, ordinances, rules and regulations of all governmental
        authorities, now or hereafter in effect, applicable to the ownership,
        production, disposition, or use of the Collateral, including all laws or
        regulations relating to the undue erosion of highly-erodible land or
        relating to the conversion of wetlands for the production of an
        agricultural product or commodity. Grantor may contest in good faith any
        such law, ordinance or regulation and withhold compliance during any
        proceeding, including appropriate appeals, so long as Lender's interest
        in the Collateral, in Lender's opinion, is not jeopardized.

        HAZARDOUS SUBSTANCES. Grantor represents and warrants that the
        Collateral never has been, and never will be so long as this Agreement
        remains a lien on the Collateral, used in violation of any Environmental
        Laws or for the generation, manufacture, storage, transportation,
        treatment, disposal, release or threatened release of any Hazardous
        Substance. The representations and warranties contained herein are based
        on Grantor's due diligence in investigating the Collateral for Hazardous
        Substances. Grantor hereby (1) releases and waives any future claims
        against Lender for indemnity or contribution in the event Grantor
        becomes liable for cleanup or other costs under any Environmental Laws,
        and (2) agrees to indemnify and hold harmless Lender against any and all
        claims and losses resulting from a breach of this provision of this
        Agreement. This obligation to indemnify shall survive the payment of the
        Indebtedness and the satisfaction of this Agreement.

        MAINTENANCE OF CASUALTY INSURANCE. Grantor shall procure and maintain
        all risks insurance, including without limitation fire, theft and
        liability coverage together with such other insurance as Lender may
        require with respect to the Collateral, in form, amounts, coverages and
        basis reasonably acceptable to Lender and issued by a company or
        companies reasonably acceptable to Lender. Grantor, upon request of
        Lender, will deliver to Lender from time to time the policies or
        certificates of insurance in form satisfactory to Lender, including
        stipulations that coverages will not be cancelled or diminished without
        at least ten (10) days' prior written notice to Lender and not including
        any disclaimer of the insurer's liability for failure to give such a
        notice. Each insurance policy also shall include an endorsement
        providing that coverage in favor of Lender will not be impaired in any
        way by any act, omission or default of Grantor or any other person. In
        connection with all policies covering assets in which Lender holds or is
        offered a security interest, Grantor will provide Lender with such loss
        payable or other endorsements as Lender may require. If Grantor at any
        time fails to obtain or maintain any insurance as required under this
        Agreement, Lender may (but shall not be obligated to) obtain such
        insurance as Lender deems appropriate, including if Lender so chooses
        "single interest insurance;" which will cover only Lender's interest in
        the Collateral.



                          COMMERCIAL SECURITY AGREEMENT
LOAN NO: 932900001-1                (CONTINUED)                           PAGE 3
================================================================================

        APPLICATION OF INSURANCE PROCEEDS. Grantor shall promptly notify Lender
        of any loss or damage to the Collateral. Lender may make proof of loss
        if Grantor fails to do so within fifteen (15) days of the casualty. All
        proceeds of any insurance on the Collateral, including accrued proceeds
        thereon, shall be held by Lender as part of the Collateral. If Lender
        consents to repair or replacement of the damaged or destroyed
        Collateral, Lender shall, upon satisfactory proof of expenditure, pay or
        reimburse Grantor from the proceeds for the reasonable cost of repair or
        restoration. If Lender does not consent to repair or replacement of the
        Collateral, Lender shall retain a sufficient amount of the proceeds to
        pay all of the Indebtedness, and shall pay the balance to Grantor. Any
        proceeds which have not been disbursed within six (6) months after their
        receipt and which Grantor has not committed to the repair or restoration
        of the Collateral shall be used to prepay the Indebtedness.

        INSURANCE RESERVES. Lender may require Grantor to maintain with Lender
        reserves for payment of insurance premiums, which reserves shall be
        created by monthly payments from Grantor of a sum estimated by Lender to
        be sufficient to produce, at least fifteen (15) days before the premium
        due date, amounts at least equal to the insurance premiums to be paid.
        If fifteen (15) days before payment is due, the reserve funds are
        insufficient, Grantor shall upon demand pay any deficiency to Lender.
        The reserve funds shall be held by Lender as a general deposit and shall
        constitute a non-interest-bearing account which Lender may satisfy by
        payment of the insurance premiums required to be paid by Grantor as they
        become due. Lender does not hold the reserve funds in trust for Grantor,
        and Lender is not the agent of Grantor for payment of the insurance
        premiums required to be paid by Grantor. The responsibility for the
        payment of premiums shall remain Grantor's sole responsibility.

        INSURANCE REPORTS. Grantor, upon request of Lender, shall furnish to
        Lender reports on each existing policy of insurance showing such
        information as Lender may reasonably request including the following:
        (1) the name of the insurer; (2) the risks insured; (3) the amount of
        the policy; (4) the property insured; (5) the then current value on the
        basis of which insurance has been obtained and the manner of determining
        that value; and (6) the expiration date of the policy. In addition,
        Grantor shall upon request by Lender (however not more often than
        annually) have an independent appraiser satisfactory to Lender
        determine, as applicable, the cash value or replacement cost of the
        Collateral.

        FINANCING STATEMENTS. Grantor authorizes Lender to file a UCC-1
        financing statement, or alternatively, a copy of this Agreement to
        perfect Lender's security interest. At Lender's request, Grantor
        additionally agrees to sign all other documents that are necessary to
        perfect, protect, and continue Lender's security interest in the
        Property. Grantor will pay all filing fees, title transfer fees, and
        other fees and costs involved unless prohibited by law or unless Lender
        is required by law to pay such fees and costs. Grantor irrevocably
        appoints Lender to execute financing statements and documents of title
        in Grantor's name and to execute all documents necessary to transfer
        title if there is a default. Lender may file a copy of this Agreement as
        a financing statement. If Grantor changes Grantor's name or address, or
        the name or address of any person granting a security interest under
        this Agreement changes, Grantor will promptly notify the Lender of such
        change.

GRANTOR'S RIGHT TO POSSESSION AND TO COLLECT ACCOUNTS. Until default and except
as otherwise provided below with respect to accounts, Grantor may have
possession of the tangible personal property and beneficial use of all the
Collateral and may use it in any lawful manner not inconsistent with this
Agreement or the Related Documents, provided that Grantor's right to possession
and beneficial use shall not apply to any Collateral where possession of the
Collateral by Lender is required by law to perfect Lender's security interest in
such Collateral. Until otherwise notified by Lender, Grantor may collect any of
the Collateral consisting of accounts. At any time and even though no Event of
Default exists, Lender may exercise its rights to collect the accounts and to
notify account debtors to make payments directly to Lender for application to
the Indebtedness. If Lender at any time has possession of any Collateral,
whether before or after an Event of Default, Lender shall be deemed to have
exercised reasonable care in the custody and preservation of the Collateral if
Lender takes such action for that purpose as Grantor shall request or as Lender,
in Lender's sole discretion, shall deem appropriate under the circumstances, but
failure to honor any request by Grantor shall not of itself be deemed to be a
failure to exercise reasonable care. Lender shall not be required to take any
steps necessary to preserve any rights in the Collateral against prior parties,
nor to protect, preserve or maintain any security interest given to secure the
Indebtedness.

LENDER'S EXPENDITURES. If any action or proceeding is commenced that would
materially affect Lender's interest in the Collateral or if Grantor fails to
comply with any provision of this Agreement or any Related Documents, including
but not limited to Grantor's failure to discharge or pay when due any amounts
Grantor is required to discharge or pay under this Agreement or any Related
Documents, Lender on Grantor's behalf may (but shall not be obligated to) take
any action that Lender deems appropriate, including but not limited to
discharging or paying all taxes, liens, security interests, encumbrances and
other claims, at any time levied or placed on the Collateral and paying all
costs for insuring, maintaining and preserving the Collateral. All such
expenditures incurred or paid by Lender for such purposes will then bear
interest at the rate charged under the Note from the date incurred or paid by
Lender to the date of repayment by Grantor. All such expenses will become a part
of the Indebtedness and, at Lender's option, will (A) be payable on demand; (B)
be added to the balance of the Note and be apportioned among and be payable with
any installment payments to become due during either (1) the term of any
applicable insurance policy; or (2) the remaining term of the Note; or (C) be
treated as a balloon payment which will be due and payable at the Note's
maturity. The Agreement also will secure payment of these amounts. Such right
shall be in addition to all other rights and remedies to which Lender may be
entitled upon Default.

DEFAULT. Each of the following shall constitute an Event of Default under this
Agreement:

        PAYMENT DEFAULT. Grantor fails to make any payment when due under the
        Indebtedness.

        OTHER DEFAULTS. Grantor fails to comply with or to perform any other
        term, obligation, covenant or condition contained in this Agreement or
        in any of the Related Documents or to comply with or to perform any
        term, obligation, covenant or condition contained in any other agreement
        between Lender and Grantor.

        DEFAULT IN FAVOR OF THIRD PARTIES. Should Borrower or any Grantor
        default under any loan, extension of credit, security agreement,
        purchase or sales agreement, or any other agreement, in favor of any
        other creditor or person that may materially affect any of Grantor's
        property or Grantor's or any Grantor's ability to repay the Indebtedness
        or perform their respective obligations under this Agreement or any of
        the Related Documents.

        FALSE STATEMENTS. Any warranty, representation or statement made or
        furnished to Lender by Grantor or on Grantor's behalf under this
        Agreement or the Related Documents is false or misleading in any
        material respect, either now or at the time made or furnished or becomes
        false or misleading at any time thereafter.

        DEFECTIVE COLLATERALIZATION. This Agreement or any of the Related
        Documents ceases to be in full force and effect (including failure of
        any collateral document to create a valid and perfected security
        interest or lien) at any time and for any reason.

        INSOLVENCY. The dissolution or termination of Grantor's existence as a
        going business, the insolvency of Grantor, the appointment of a receiver
        for any part of Grantor's property, any assignment for the benefit of
        creditors, any type of creditor workout, or the commencement of any
        proceeding under any bankruptcy or insolvency laws by or against
        Grantor.

        CREDITOR OR FORFEITURE PROCEEDINGS. Commencement of foreclosure or
        forfeiture proceedings, whether by judicial proceeding, self-help,
        repossession or any other method, by any creditor of Grantor or by any
        governmental agency against any collateral securing the Indebtedness.
        This includes a garnishment of any of Grantor's accounts, including
        deposit accounts, with Lender. However, this Event of Default shall not
        apply if there is a good faith dispute by Grantor as to the validity or
        reasonableness of the claim which is the basis of the creditor or
        forfeiture proceeding and if Grantor gives Lender written notice of the
        creditor or forfeiture proceeding and deposits with Lender monies or a
        surety bond for the creditor or forfeiture proceeding, in an amount
        determined by Lender, in its sole discretion, as being an adequate
        reserve or bond for the dispute.

        EVENTS AFFECTING GUARANTOR. Any of the preceding events occurs with
        respect to Guarantor of any of the Indebtedness or Guarantor dies or




                          COMMERCIAL SECURITY AGREEMENT
LOAN NO: 932900001-1                (CONTINUED)                           PAGE 4
================================================================================


        becomes incompetent or revokes or disputes the validity of, or liability
        under, any Guaranty of the Indebtedness.

        ADVERSE CHANGE. A material adverse change occurs in Grantor's financial
        condition, or Lender believes the prospect of payment or performance of
        the Indebtedness is impaired.

        INSECURITY. Lender in good faith believes itself insecure.

        CURE PROVISIONS. If any default, other than a default in payment is
        curable and if Grantor has not been given a notice of a breach of the
        same provision of this Agreement within the preceding twelve (12)
        months, it may be cured (and no event of default will have occurred) if
        Grantor, after receiving written notice from Lender demanding cure of
        such default: (1) cures the default within fifteen (15) days; or (2) if
        the cure requires more than fifteen (15) days, immediately initiates
        steps which Lender deems in Lender's sole discretion to be sufficient to
        cure the default and thereafter continues and completes all reasonable
        and necessary steps sufficient to produce compliance as soon as
        reasonably practical.

RIGHTS AND REMEDIES ON DEFAULT. If an Event of Default occurs under this
Agreement, at any time thereafter, Lender shall have all the rights of a secured
party under the Delaware Uniform Commercial Code. In addition and without
limitation, Lender may exercise any one or more of the following rights and
remedies:

        ACCELERATE INDEBTEDNESS. Lender may declare the entire Indebtedness,
        including any prepayment penalty which Grantor would be required to pay,
        immediately due and payable, without notice of any kind to Grantor.

        ASSEMBLE COLLATERAL. Lender may require Grantor to deliver to Lender all
        or any portion of the Collateral and any and all certificates of title
        and other documents relating to the Collateral. Lender may require
        Grantor to assemble the Collateral and make it available to Lender at a
        place to be designated by Lender. Lender also shall have full power to
        enter upon the property of Grantor to take possession of and remove the
        Collateral. If the Collateral contains other goods not covered by this
        Agreement at the time of repossession, Grantor agrees Lender may take
        such other goods, provided that Lender makes reasonable efforts to
        return them to Grantor after repossession.

        SELL THE COLLATERAL. Lender shall have full power to sell, lease,
        transfer, or otherwise deal with the Collateral or proceeds thereof in
        Lender's own name or that of Grantor. Lender may sell the Collateral at
        public auction or private sale. Unless the Collateral threatens to
        decline speedily in value or is of a type customarily sold on a
        recognized market, Lender will give Grantor, and other persons as
        required by law, reasonable notice of the time and place of any public
        sale, or the time after which any private sale or any other disposition
        of the Collateral is to be made. However, no notice need be provided to
        any person who, after Event of Default occurs, enters into and
        authenticates an agreement waiving that person's right to notification
        of sale. The requirements of reasonable notice shall be met if such
        notice is given at least ten (10) days before the time of the sale or
        disposition. All expenses relating to the disposition of the Collateral,
        including without limitation the expenses of retaking, holding,
        insuring, preparing for sale and selling the Collateral, shall become a
        part of the Indebtedness secured by this Agreement and shall be payable
        on demand, with interest at the Note rate from date of expenditure until
        repaid.

        APPOINT RECEIVER. Lender shall have the right to have a receiver
        appointed to take possession of all or any part of the Collateral, with
        the power to protect and preserve the Collateral, to operate the
        Collateral preceding foreclosure or sale, and to collect the Rents from
        the Collateral and apply the proceeds, over and above the cost of the
        receivership, against the Indebtedness. The receiver may serve without
        bond if permitted by law. Lender's right to the appointment of a
        receiver shall exist whether or not the apparent value of the Collateral
        exceeds the Indebtedness by a substantial amount. Employment by Lender
        shall not disqualify a person from serving as a receiver.

        COLLECT REVENUES, APPLY ACCOUNTS. Lender, either itself or through a
        receiver, may collect the payments, rents, income, and revenues from the
        Collateral. Lender may at any time in Lender's discretion transfer any
        Collateral into Lender's own name or that of Lender's nominee and
        receive the payments, rents, income, and revenues therefrom and hold the
        same as security for the Indebtedness or apply it to payment of the
        Indebtedness in such order of preference as Lender may determine.
        Insofar as the Collateral consists of accounts, general intangibles,
        insurance policies, instruments, chattel paper, choses in action, or
        similar property, Lender may demand, collect, receipt for, settle,
        compromise, adjust, sue for, foreclose, or realize on the Collateral as
        Lender may determine, whether or not Indebtedness or Collateral is then
        due. For these purposes, Lender may, on behalf of and in the name of
        Grantor, receive, open and dispose of mail addressed to Grantor; change
        any address to which mail and payments are to be sent; and endorse
        notes, checks, drafts, money orders, documents of title, instruments and
        items pertaining to payment, shipment, or storage of any Collateral. To
        facilitate collection, Lender may notify account debtors and obligors on
        any Collateral to make payments directly to Lender.

        OBTAIN DEFICIENCY. If Lender chooses to sell any or all of the
        Collateral, Lender may obtain a judgment against Grantor for any
        deficiency remaining on the Indebtedness due to Lender after application
        of all amounts received from the exercise of the rights provided in this
        Agreement. Grantor shall be liable for a deficiency even if the
        transaction described in this subsection is a sale of accounts or
        chattel paper.

        OTHER RIGHTS AND REMEDIES. Lender shall have all the rights and remedies
        of a secured creditor under the provisions of the Uniform Commercial
        Code, as may be amended from time to time. In addition, Lender shall
        have and may exercise any or all other rights and remedies it may have
        available at law, in equity, or otherwise.

        ELECTION OF REMEDIES. Except as may be prohibited by applicable law, all
        of Lender's rights and remedies, whether evidenced by this Agreement,
        the Related Documents, or by any other writing, shall be cumulative and
        may be exercised singularly or concurrently. Election by Lender to
        pursue any remedy shall not exclude pursuit of any other remedy, and an
        election to make expenditures or to take action to perform an obligation
        of Grantor under this Agreement, after Grantor's failure to perform,
        shall not affect Lender's right to declare a default and exercise its
        remedies.

DEPOSIT AGREEMENT SECURITY. Grantor hereby grants a security interest to Lender
in any and all deposit accounts (checking, savings, money market or time) of
Grantor at Lender, now existing or hereinafter opened, to secure the
Indebtedness. This includes all deposit accounts Grantor holds jointly with
someone else.

MISCELLANEOUS PROVISIONS. The following miscellaneous provisions are a part of
this Agreement:

        AMENDMENTS. This Agreement, together with any Related Documents,
        constitutes the entire understanding and agreement of the parties as to
        the matters set forth in this Agreement. No alteration of or amendment
        to this Agreement shall be effective unless given in writing and signed
        by the party or parties sought to be charged or bound by the alteration
        or amendment.

        ATTORNEYS' FEES; EXPENSES. Grantor agrees to pay upon demand all of
        Lender's costs and expenses, including Lender's reasonable attorneys'
        fees and Lender's legal expenses, incurred in connection with the
        enforcement of this Agreement. Lender may hire or pay someone else to
        help enforce this Agreement, and Grantor shall pay the costs and
        expenses of such enforcement. Costs and expenses include Lender's
        reasonable attorneys' fees and legal expenses whether or not there is a
        lawsuit, including reasonable attorneys' fees and legal expenses for
        bankruptcy proceedings (including efforts to modify or vacate any
        automatic stay or injunction), appeals, and any anticipated
        post-judgment collection services. Lender may also recover from Grantor
        all court, alternative dispute resolution or other collection costs
        (including, without limitation, fees and charges of collection agencies)
        actually incurred by Lender.

        CAPTION HEADINGS. Caption headings in this Agreement are for convenience
        purposes only and are not to be used to interpret or define the
        provisions of this Agreement.




                          COMMERCIAL SECURITY AGREEMENT
LOAN NO: 932900001-1                (CONTINUED)                           PAGE 5
================================================================================


        GOVERNING LAW. THIS AGREEMENT WILL BE GOVERNED BY, CONSTRUED AND
        ENFORCED IN ACCORDANCE WITH FEDERAL LAW AND THE LAWS OF THE STATE OF
        CALIFORNIA, EXCEPT AND ONLY TO THE EXTENT OF PROCEDURAL MATTERS RELATED
        TO THE PERFECTION AND ENFORCEMENT OF LENDER'S RIGHTS AND REMEDIES
        AGAINST THE COLLATERAL, WHICH MATTERS SHALL BE GOVERNED BY THE LAWS OF
        THE STATE OF DELAWARE. HOWEVER, IN THE EVENT THAT THE ENFORCEABILITY OR
        VALIDITY OF ANY PROVISION OF THIS AGREEMENT IS CHALLENGED OR QUESTIONED,
        SUCH PROVISION SHALL BE GOVERNED BY WHICHEVER APPLICABLE STATE OR
        FEDERAL LAW WOULD UPHOLD OR WOULD ENFORCE SUCH CHALLENGED OR QUESTIONED
        PROVISION. THE LOAN TRANSACTION WHICH IS EVIDENCED BY THE NOTE AND THIS
        AGREEMENT HAS BEEN APPLIED FOR, CONSIDERED, APPROVED AND MADE, AND ALL
        NECESSARY LOAN DOCUMENTS HAVE BEEN ACCEPTED BY LENDER IN THE STATE OF
        CALIFORNIA.


        CHOICE OF VENUE. If there is a lawsuit, Grantor agrees upon Lender's
        request to submit to the jurisdiction of the courts of Los Angeles
        County, State of California.

        NO WAIVER BY LENDER. Lender shall not be deemed to have waived any
        rights under this Agreement unless such waiver is given in writing and
        signed by Lender. No delay or omission on the part of Lender in
        exercising any right shall operate as a waiver of such right or any
        other right. A waiver by Lender of a provision of this Agreement shall
        not prejudice or constitute a waiver of Lender's right otherwise to
        demand strict compliance with that provision or any other provision of
        this Agreement. No prior waiver by Lender, nor any course of dealing
        between Lender and Grantor, shall constitute a waiver of any of Lender's
        rights or of any of Grantor's obligations as to any future transactions.
        Whenever the consent of Lender is required under this Agreement, the
        granting of such consent by Lender in any instance shall not constitute
        continuing consent to subsequent instances where such consent is
        required and in all cases such consent may be granted or withheld in the
        sole discretion of Lender.

        NOTICES. Any notice required to be given under this Agreement shall be
        given in writing, and shall be effective when actually delivered, when
        actually received by telefacsimile (unless otherwise required by law),
        when deposited with a nationally recognized overnight courier, or, if
        mailed, when deposited in the United States mail, as first class,
        certified or registered mail postage prepaid, directed to the addresses
        shown near the beginning of this Agreement. Any party may change its
        address for notices under this Agreement by giving formal written notice
        to the other parties, specifying that the purpose of the notice is to
        change the party's address. For notice purposes, Grantor agrees to keep
        Lender informed at all times of Grantor's current address. Unless
        otherwise provided or required by law, if there is more than one
        Grantor, any notice given by Lender to any Grantor is deemed to be
        notice given to all Grantors.

        POWER OF ATTORNEY. Grantor hereby appoints Lender as Grantor's
        irrevocable attorney-in-fact for the purpose of executing any documents
        necessary to perfect, amend, or to continue the security interest
        granted in this Agreement or to demand termination of filings of other
        secured parties. Lender may at any time, and without further
        authorization from Grantor, file a carbon, photographic or other
        reproduction of any financing statement or of this Agreement for use as
        a financing statement. Grantor will reimburse Lender for all expenses
        for the perfection and the continuation of the perfection of Lender's
        security interest in the Collateral.

        SEVERABILITY. If a court of competent jurisdiction finds any provision
        of this Agreement to be illegal, invalid, or unenforceable as to any
        circumstance, that finding shall not make the offending provision
        illegal, invalid, or unenforceable as to any other circumstance. If
        feasible, the offending provision shall be considered modified so that
        it becomes legal, valid and enforceable. If the offending provision
        cannot be so modified, it shall be considered deleted from this
        Agreement. Unless otherwise required by law, the illegality, invalidity,
        or unenforceability of any provision of this Agreement shall not affect
        the legality, validity or enforceability of any other provision of this
        Agreement.

        SUCCESSORS AND ASSIGNS. Subject to any limitations stated in this
        Agreement on transfer of Grantor's interest, this Agreement shall be
        binding upon and inure to the benefit of the parties, their successors
        and assigns. If ownership of the Collateral becomes vested in a person
        other than Grantor, Lender, without notice to Grantor, may deal with
        Grantor's successors with reference to this Agreement and the
        Indebtedness by way of forbearance or extension without releasing
        Grantor from the obligations of this Agreement or liability under the
        Indebtedness.

        SURVIVAL OF REPRESENTATIONS AND WARRANTIES. All representations,
        warranties, and agreements made by Grantor in this Agreement shall
        survive the execution and delivery of this Agreement, shall be
        continuing in nature, and shall remain in full force and effect until
        such time as Grantor's Indebtedness shall be paid in full.

        TIME IS OF THE ESSENCE. Time is of the essence in the performance of
        this Agreement.

        WAIVE JURY. ALL PARTIES TO THIS AGREEMENT HEREBY WAIVE THE RIGHT TO ANY
        JURY TRIAL IN ANY ACTION, PROCEEDING, OR COUNTERCLAIM BROUGHT BY ANY
        PARTY AGAINST ANY OTHER PARTY.

DEFINITIONS. The following capitalized words and terms shall have the following
meanings when used in this Agreement. Unless specifically stated to the
contrary, all references to dollar amounts shall mean amounts in lawful money of
the United States of America. Words and terms used in the singular shall include
the plural, and the plural shall include the singular, as the context may
require. Words and terms not otherwise defined in this Agreement shall have the
meanings attributed to such terms in the Uniform Commercial Code:

        ACCOUNT. The word "Account" means a trade account, account receivable,
        other receivable, or other right to payment for goods sold or services
        rendered owing to Grantor (or to a third party grantor acceptable to
        Lender).

        AGREEMENT. The word "Agreement" means this Commercial Security
        Agreement, as this Commercial Security Agreement may be amended or
        modified from time to time, together with all exhibits and schedules
        attached to this Commercial Security Agreement from time to time.

        BORROWER. The word "Borrower" means International Remote Imaging
        Systems, Inc., and all other persons and entities signing the Note in
        whatever capacity.

        COLLATERAL. The word "Collateral" means all of Grantor's right, title
        and interest in and to all the Collateral as described in the Collateral
        Description section of this Agreement.

        DEFAULT. The word "Default" means the Default set forth in this
        Agreement in the section titled "Default".

        ENVIRONMENTAL LAWS. The words "Environmental Laws" mean any and all
        state, federal and local statutes, regulations and ordinances relating
        to the protection of human health or the environment, including without
        limitation the Comprehensive Environmental Response, Compensation, and
        Liability Act of 1980, as amended, 42 U.S.C. Section 9601, et seq.
        ("CERCLA"), the Superfund Amendments and Reauthorization Act of 1986,
        Pub. L. No. 99-499 ("SARA"), the Hazardous Materials Transportation Act,
        49 U.S.C. Section 1801, et seq., the Resource Conservation and Recovery
        Act, 42 U.S.C. Section 6901, et seq., Chapters 6.5 through 7.7 of
        Division 20 of the California Health and Safety Code, Section 25100, et
        seq., or other applicable state or federal laws, rules, or regulations
        adopted pursuant thereto.

        EVENT OF DEFAULT. The words "Event of Default" mean any of the events of
        default set forth in this Agreement in the default section of this
        Agreement.

        GRANTOR. The word "Grantor" means International Remote Imaging Systems,
        Inc.

        GUARANTOR. The word "Guarantor" means any guarantor, surety, or
        accommodation party of any or all of the Indebtedness.

        GUARANTY. The word "Guaranty" means the guaranty from Guarantor to
        Lender, including without limitation a guaranty of all or part of the
        Note.




                          COMMERCIAL SECURITY AGREEMENT
LOAN NO: 932900001-1                (CONTINUED)                           PAGE 6
================================================================================


        HAZARDOUS SUBSTANCES. The words "Hazardous Substances" mean materials
        that, because of their quantity, concentration or physical, chemical or
        infectious characteristics, may cause or pose a present or potential
        hazard to human health or the environment when improperly used, treated,
        stored, disposed of, generated, manufactured, transported or otherwise
        handled. The words "Hazardous Substances" are used in their very
        broadest sense and include without limitation any and all hazardous or
        toxic substances, materials or waste as defined by or listed under the
        Environmental Laws. The term "Hazardous Substances" also includes,
        without limitation, petroleum and petroleum by-products or any fraction
        thereof and asbestos.

        INDEBTEDNESS. The word "Indebtedness" means the indebtedness evidenced
        by the Note or Related Documents, including all principal and interest
        together with all other indebtedness and costs and expenses for which
        Grantor is responsible under this Agreement or under any of the Related
        Documents.

        LENDER. The word "Lender" means California Bank & Trust, its successors
        and assigns.

        NOTE. The word "Note" means the Note executed by International Remote
        Imaging Systems, Inc. in the principal amount of $6,500,000.00 dated
        February 7, 2002, together with all renewals of, extensions of,
        modifications of, refinancings of, consolidations of, and substitutions
        for the note or credit agreement.

        PROPERTY. The word "Property" means all of Grantor's right, title and
        interest in and to all the Property as described in the "Collateral
        Description" section of this Agreement.

        RELATED DOCUMENTS. The words "Related Documents" mean all promissory
        notes, credit agreements, loan agreements, environmental agreements,
        guaranties, security agreements, mortgages, deeds of trust, security
        deeds, collateral mortgages, and all other instruments, agreements and
        documents, whether now or hereafter existing, executed in connection
        with the Indebtedness.

GRANTOR HAS READ AND UNDERSTOOD ALL THE PROVISIONS OF THIS COMMERCIAL SECURITY
AGREEMENT AND AGREES TO ITS TERMS. THIS AGREEMENT IS DATED FEBRUARY 7, 2002.

THIS AGREEMENT IS GIVEN UNDER SEAL AND IT IS INTENDED THAT THIS AGREEMENT IS AND
SHALL CONSTITUTE AND HAVE THE EFFECT OF A SEALED INSTRUMENT ACCORDING TO LAW.

GRANTOR:


INTERNATIONAL REMOTE IMAGING SYSTEMS, INC.


BY: /s/ JOHN A. O'MALLEY         (SEAL)   BY: /s/ JOHN CALOZ              (SEAL)
    -----------------------------            -----------------------------
    DR. JOHN A. O'MALLEY CEO/CHAIRMAN        JOHN CALOZ, CFO/SECRETARY OF
    OF INTERNATIONAL REMOTE IMAGING          INTERNATIONAL REMOTE IMAGING
    SYSTEMS, INC.                            SYSTEMS, INC.


                         COMMERCIAL SECURITY AGREEMENT



- -------------------------------------------------------------------------------------------------------------------
 PRINCIPAL       LOAN DATE    MATURITY       LOAN NO      CALL/COLL      ACCOUNT    OFFICER    INITIALS
                                                                         
$6,500.000.00   02-07-2002   06-30-2004    932900001-1                 932900001-1   22163     [INITIALS ILLEGIBLE]
- -------------------------------------------------------------------------------------------------------------------
References in the shaded area are for Lender's use only and do not limit the applicability of this document to any
particular loan or item. Any item above containing "***" has been omitted due to text length limitations.
- -------------------------------------------------------------------------------------------------------------------



                                                     
BORROWER: INTERNATIONAL REMOTE IMAGING SYSTEMS, INC.    Lender: CALIFORNIA BANK & TRUST
          9162 ETON AVENUE                                      COMMERCIAL LOAN CENTER
          CHATSWORTH, CA 91311                                  550 SOUTH HOPE STREET, SUITE 300
                                                                LOS ANGELES, CA 90071

GRANTOR: ADVANCED DIGITAL IMAGING RESEARCH, LLC
          2525 SOUTH SHORE BOULEVARD, SUITE 100
          LEAGUE CITY, TX 77573



===============================================================================

THIS COMMERCIAL SECURITY AGREEMENT DATED FEBRUARY 7, 2002, IS MADE AND EXECUTED
AMONG ADVANCED DIGITAL IMAGING RESEARCH, LLC ("GRANTOR"); INTERNATIONAL REMOTE
IMAGING SYSTEMS, INC. ("BORROWER"); AND CALIFORNIA BANK & TRUST ("LENDER").

GRANT OF SECURITY INTEREST. FOR VALUABLE CONSIDERATION, GRANTOR GRANTS TO LENDER
A SECURITY INTEREST IN THE COLLATERAL TO SECURE THE INDEBTEDNESS AND AGREES THAT
LENDER SHALL HAVE THE RIGHTS STATED IN THIS AGREEMENT WITH RESPECT TO THE
COLLATERAL, IN ADDITION TO ALL OTHER RIGHTS WHICH LENDER MAY HAVE BY LAW.

COLLATERAL DESCRIPTION. The word "Collateral" as used in this Agreement means
the following described property, whether now owned or hereafter acquired,
whether now existing or hereafter arising, and wherever located, in which
Grantor is giving to Lender a security interest for the payment of the
Indebtedness and performance of all other obligations under the Note and this
Agreement:

      ALL INVENTORY, EQUIPMENT, ACCOUNTS (INCLUDING BUT NOT LIMITED TO ALL
      HEALTH-CARE-INSURANCE RECEIVABLES), CHATTEL PAPER, INSTRUMENTS (INCLUDING
      BUT NOT LIMITED TO ALL PROMISSORY NOTES), LETTER-OF-CREDIT RIGHTS, LETTERS
      OF CREDIT, DOCUMENTS, DEPOSIT ACCOUNTS, INVESTMENT PROPERTY, MONEY, OTHER
      RIGHTS TO PAYMENT AND PERFORMANCE, AND GENERAL INTANGIBLES (INCLUDING BUT
      NOT LIMITED TO ALL SOFTWARE AND ALL PAYMENT INTANGIBLES); ALL FIXTURES;
      ALL ATTACHMENTS, ACCESSIONS, ACCESSORIES, FITTINGS, INCREASES, TOOLS,
      PARTS, REPAIRS, SUPPLIES, AND COMMINGLED GOODS RELATING TO THE FOREGOING
      PROPERTY, AND ALL ADDITIONS, REPLACEMENTS OF AND SUBSTITUTIONS FOR ALL OR
      ANY PART OF THE FOREGOING PROPERTY; ALL INSURANCE REFUNDS RELATING TO THE
      FOREGOING PROPERTY; ALL GOOD WILL RELATING TO THE FOREGOING PROPERTY; ALL
      RECORDS AND DATA AND EMBEDDED SOFTWARE RELATING TO THE FOREGOING PROPERTY,
      AND ALL EQUIPMENT, INVENTORY AND SOFTWARE TO UTILIZE, CREATE, MAINTAIN AND
      PROCESS ANY SUCH RECORDS AND DATA ON ELECTRONIC MEDIA; AND ALL SUPPORTING
      OBLIGATIONS RELATING TO THE FOREGOING PROPERTY; ALL WHETHER NOW EXISTING
      OR HEREAFTER ARISING, WHETHER NOW OWNED OR HEREAFTER ACQUIRED OR WHETHER
      NOW OR HEREAFTER SUBJECT TO ANY RIGHTS IN THE FOREGOING PROPERTY; AND ALL
      PRODUCTS AND PROCEEDS (INCLUDING BUT NOT LIMITED TO ALL INSURANCE
      PAYMENTS) OF OR RELATING TO THE FOREGOING PROPERTY.

In addition, the word "Collateral" also includes all the following, whether now
owned or hereafter acquired, whether now existing or hereafter arising, and
wherever located:

      (A) All accessions, attachments, accessories, tools, parts, supplies,
      replacements of and additions to any of the collateral described herein,
      whether added now or later.

      (B) All products and produce of any of the property described in this
      Collateral section.

      (C) All accounts, general intangibles, instruments, rents, monies,
      payments, and all other rights, arising out of a sale, lease, or other
      disposition of any of the property described in this Collateral section.

      (D) All proceeds (including insurance proceeds) from the sale,
      destruction, loss, or other disposition of any of the property described
      in this Collateral section, and sums due from a third party who has
      damaged or destroyed the Collateral or from that party's insurer, whether
      due to judgment, settlement or other process.

      (E) All records and data relating to any of the property described in this
      Collateral section, whether in the form of a writing, photograph,
      microfilm, microfiche, or electronic media, together with all of Grantor's
      right, title, and interest in and to all computer software required to
      utilize, create, maintain, and process any such records or data on
      electronic media.

Despite any other provision of this Agreement, Lender is not granted, and will
not have, a nonpurchase money security interest in household goods, to the
extent such a security interest would be prohibited by applicable law. In
addition, if because of the type of any Property, Lender is required to give a
notice of the right to cancel under Truth in Lending for the Indebtedness, then
Lender will not have a security interest in such Collateral unless and until
such a notice is given.

CROSS-COLLATERALIZATION. In addition to the Note, this Agreement secures all
obligations, debts and liabilities, plus interest thereon, of Borrower to
Lender, or any one or more of them, as well as all claims by Lender against
Borrower or any one or more of them, whether now existing or hereafter arising,
whether related or unrelated to the purpose of the Note, whether voluntary or
otherwise, whether due or not due, direct or indirect, determined or
undetermined, absolute or contingent, liquidated or unliquidated whether
Borrower or Grantor may be liable individually or jointly with others, whether
obligated as guarantor, surety, accommodation party or otherwise, and whether
recovery upon such amounts may be or hereafter may become barred by any statute
of limitations, and whether the obligation to repay such amounts may be or
hereafter may become otherwise unenforceable.

BORROWER'S WAIVERS AND RESPONSIBILITIES. Except as otherwise required under this
Agreement or by applicable law, (A) Borrower agrees that Lender need not tell
Borrower about any action or inaction Lender takes in connection with this
Agreement; (B) Borrower assumes the responsibility for being and keeping
informed about the Collateral; and (C) Borrower waives any defenses that may
arise because of any action or inaction of Lender, including without limitation
any failure of Lender to realize upon the Collateral or any delay by Lender in
realizing upon the Collateral; and Borrower agrees to remain liable under the
Note no matter what action Lender takes or fails to take under this Agreement.

GRANTOR'S REPRESENTATIONS AND WARRANTIES. Grantor warrants that: (A) this
Agreement is executed at Borrower's request and not at the request of Lender;
(B) Grantor has the full right, power and authority to enter into this Agreement
and to pledge the Collateral to Lender; (C) Grantor has established adequate
means of obtaining from Borrower on a continuing basis information about
Borrower's financial condition; and (D) Lender has made no representation to
Grantor about Borrower or Borrower's creditworthiness.

GRANTOR'S WAIVERS. Grantor waives all requirements of presentment, protest,
demand, and notice of dishonor or non-payment to Borrower or Grantor, or any
other party to the Indebtedness or the Collateral. Lender may do any of the
following with respect to any obligation of any Borrower, without first
obtaining the consent of Grantor: (A) grant any extension of time for any
payment, (B) grant any renewal, (C) permit any modification of payment terms or
other terms, or (D) exchange or release any Collateral or other security. No
such act or failure to act shall affect Lender's rights




                          COMMERCIAL SECURITY AGREEMENT
 LOAN NO: 932900001-1               (CONTINUED)                          PAGE 2
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against Grantor or the Collateral.

GRANTOR'S REPRESENTATIONS AND WARRANTIES WITH RESPECT TO THE COLLATERAL. With
respect to the Collateral, Grantor represents and promises to Lender that:

PERFECTION OF SECURITY INTEREST. Grantor agrees to execute financing statements
and to take whatever other actions are requested by Lender to perfect and
continue Lender's security interest in the Collateral. Upon request of Lender,
Grantor will deliver to Lender any and all of the documents evidencing or
constituting the Collateral, and Grantor will note Lender's interest upon any
and all chattel paper if not delivered to Lender for possession by Lender. THIS
IS A CONTINUING SECURITY AGREEMENT AND WILL CONTINUE IN EFFECT EVEN THOUGH ALL
OR ANY PART OF THE INDEBTEDNESS IS PAID IN FULL AND EVEN THOUGH FOR A PERIOD OF
TIME BORROWER MAY NOT BE INDEBTED TO LENDER.


NOTICES TO LENDER. Grantor will promptly notify Lender in writing at Lender's
address shown above (or such other addresses as Lender may designate from time
to time) prior to any (1) change in Grantor's name; (2) change in Grantor's
assumed business name(s); (3) change in the management or in the members or
managers of the limited liability company Grantor; (4) change in the authorized
signer(s); (5) change in Grantor's principal office address; (6) change in
Grantor's state of organization; (7) conversion of Grantor to a new or different
type of business entity; or (8) change in any other aspect of Grantor that
directly or indirectly relates to any agreements between Grantor and Lender. No
change in Grantor's name or state of organization will take effect until after
Lender has received notice

NO VIOLATION. The execution and delivery of this Agreement will not violate any
law or agreement governing Grantor or to which Grantor is a party, and its
membership agreement does not prohibit any term or condition of this Agreement.

ENFORCEABILITY OF COLLATERAL. To the extent the Collateral consists of accounts,
chattel paper, or general intangibles, as defined by the Uniform Commercial
Code, the Collateral is enforceable in accordance with its terms, is genuine,
and fully complies with all applicable laws and regulations concerning form,
content and manner of preparation and execution, and all persons appearing to be
obligated on the Collateral have authority and capacity to contract and are in
fact obligated as they appear to be on the Collateral. At the time any Account
becomes subject to a security interest in favor of Lender, the Account shall be
a good and valid account representing an undisputed, bona fide indebtedness
incurred by the account debtor, for merchandise held subject to delivery
instructions or previously shipped or delivered pursuant to a contract of sale,
or for services previously performed by Grantor with or for the account debtor.
So long as this Agreement remains in effect, Grantor shall not, without Lender's
prior written consent, compromise, settle, adjust, or extend payment under or
with regard to any such Accounts. There shall be no setoffs or counterclaims
against any of the Collateral, and no agreement shall have been made under which
any deductions or discounts may be claimed concerning the Collateral except
those disclosed to Lender in writing.

LOCATION OF THE COLLATERAL. Except in the ordinary course of Grantor's business,
Grantor agrees to keep the Collateral (or to the extent the Collateral consists
of intangible property such as accounts or general intangibles, the records
concerning the Collateral) at Grantor's address shown above or at such other
locations as are acceptable to Lender. Upon Lender's request, Grantor will
deliver to Lender in form satisfactory to Lender a schedule of real properties
and Collateral locations relating to Grantor's operations, including without
limitation the following: (1) all real property Grantor owns or is purchasing;
(2) all real property Grantor is renting or leasing; (3) all storage facilities
Grantor owns, rents, leases, or uses; and (4) all other properties where
Collateral is or may be located.


REMOVAL OF THE COLLATERAL. Except in the ordinary course of Grantor's business,
including the sales of inventory, Grantor shall not remove the Collateral from
its existing location without Lender's prior written consent. To the extent that
the Collateral consists of vehicles, or other titled property, Grantor shall not
take or permit any action which would require application for certificates of
title for the vehicles outside the State of Delaware, without Lender's prior
written consent. Grantor shall, whenever requested, advise Lender of the exact
location of the Collateral.

TRANSACTIONS INVOLVING COLLATERAL. Except for inventory sold or accounts
collected in the ordinary course of Grantor's business, or as otherwise provided
for in this Agreement, Grantor shall not sell, offer to sell, or otherwise
transfer or dispose of the Collateral. While Grantor is not in default under
this Agreement, Grantor may sell inventory, but only in the ordinary course of
its business and only to buyers who qualify as a buyer in the ordinary course of
business. A sale in the ordinary course of Grantor's business does not include a
transfer in partial or total satisfaction of a debt or any bulk sale. Grantor
shall not pledge, mortgage, encumber or otherwise permit the Collateral to be
subject to any lien, security interest, encumbrance, or charge, other than the
security interest provided for in this Agreement, without the prior written
consent of Lender. This includes security interests even if junior in right to
the security interests granted under this Agreement. Unless waived by Lender,
all proceeds from any disposition of the Collateral (for whatever reason) shall
be held in trust for Lender and shall not be commingled with any other funds;
provided however, this requirement shall not constitute consent by Lender to any
sale or other disposition. Upon receipt, Grantor shall immediately deliver any
such proceeds to Lender.

TITLE. Grantor represents and warrants to Lender that Grantor holds good and
marketable title to the Collateral, free and clear of all liens and encumbrances
except for the lien of this Agreement. No financing statement covering any of
the Collateral is on file in any public office other than those which reflect
the security interest created by this Agreement or to which Lender has
specifically consented. Grantor shall defend Lender's rights in the Collateral
against the claims and demands of all other persons.

REPAIRS AND MAINTENANCE. Grantor agrees to keep and maintain, and to cause
others to keep and maintain, the Collateral in good order, repair and condition
at all times while this Agreement remains in effect. Grantor further agrees to
pay when due all claims for work done on, or services rendered or material
furnished in connection with the Collateral so that no lien or encumbrance may
ever attach to or be filed against the Collateral.

INSPECTION OF COLLATERAL. Lender and Lender's designated representatives and
agents shall have the right at all reasonable times to examine and inspect the
Collateral wherever located.

TAXES, ASSESSMENTS AND LIENS. Grantor will pay when due all taxes, assessments
and liens upon the Collateral, its use or operation, upon this Agreement, upon
any promissory note or notes evidencing the Indebtedness, or upon any of the
other Related Documents. Grantor may withhold any such payment or may elect to
contest any lien if Grantor is in good faith conducting an appropriate
proceeding to contest the obligation to pay and so long as Lender's interest in
the Collateral is not jeopardized in Lender's sole opinion. If the Collateral is
subjected to a lien which is not discharged within fifteen (15) days, Grantor
shall deposit with Lender cash, a sufficient corporate surety bond or other
security satisfactory to Lender in an amount adequate to provide for the
discharge of the lien plus any interest, costs, reasonable attorneys' fees or
other charges that could accrue as a result of foreclosure or sale of the
Collateral. In any contest Grantor shall defend itself and Lender and shall
satisfy any final adverse judgment before enforcement against the Collateral.
Grantor shall name Lender as an additional obligee under any surety bond
furnished in the contest proceedings. Grantor further agrees to furnish Lender
with evidence that such taxes, assessments, and governmental and other charges
have been paid in full and in a timely manner. Grantor may withhold any such
payment or may elect to contest any lien if Grantor is in good faith conducting
an appropriate proceeding to contest the obligation to pay and so long as
Lender's interest in the Collateral is not jeopardized.

COMPLIANCE WITH GOVERNMENTAL REQUIREMENTS. Grantor shall comply promptly with
all laws, ordinances, rules and regulations of all governmental authorities, now
or hereafter in effect, applicable to the ownership, production, disposition, or
use of the Collateral, including all laws or regulations relating to the undue
erosion of highly-erodible land or relating to the conversion of wetlands for
the production of an agricultural product or commodity. Grantor may contest in
good faith any such law, ordinance or regulation and withhold compliance during
any proceeding,





                          COMMERCIAL SECURITY AGREEMENT
 LOAN NO: 932900001-1               (CONTINUED)                          PAGE 3
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      including appropriate appeals, so long as Lender's interest in the
      Collateral, in Lender's opinion, is not jeopardized.

      HAZARDOUS SUBSTANCES. Grantor represents and warrants that the Collateral
      never has been, and never will be so long as this Agreement remains a lien
      on the Collateral, used in violation of any Environmental Laws or for the
      generation, manufacture, storage, transportation, treatment, disposal,
      release or threatened release of any Hazardous Substance. The
      representations and warranties contained herein are based on Grantor's due
      diligence in investigating the Collateral for Hazardous Substances.
      Grantor hereby (1) releases and waives any future claims against Lender
      for indemnity or contribution in the event Grantor becomes liable for
      cleanup or other costs under any Environmental Laws, and (2) agrees to
      indemnify and hold harmless Lender against any and all claims and losses
      resulting from a breach of this provision of this Agreement. This
      obligation to indemnify shall survive the payment of the Indebtedness and
      the satisfaction of this Agreement.

      MAINTENANCE OF CASUALTY INSURANCE. Grantor shall procure and maintain all
      risks insurance, including without limitation fire, theft and liability
      coverage together with such other insurance as Lender may require with
      respect to the Collateral, in form, amounts, coverages and basis
      reasonably acceptable to Lender and issued by a company or companies
      reasonably acceptable to Lender. Grantor, upon request of Lender, will
      deliver to Lender from time to time the policies or certificates of
      insurance in form satisfactory to Lender, including stipulations that
      coverages will not be cancelled or diminished without at least ten (10)
      days' prior written notice to Lender and not including any disclaimer of
      the insurer's liability for failure to give such a notice. Each insurance
      policy also shall include an endorsement providing that coverage in favor
      of Lender will not be impaired in any way by any act, omission or default
      of Grantor or any other person. In connection with all policies covering
      assets in which Lender holds or is offered a security interest, Grantor
      will provide Lender with such loss payable or other endorsements as Lender
      may require. If Grantor at any time fails to obtain or maintain any
      insurance as required under this Agreement, Lender may (but shall not be
      obligated to) obtain such insurance as Lender deems appropriate, including
      if Lender so chooses "single interest insurance," which will cover only
      Lender's interest in the Collateral.

      APPLICATION OF INSURANCE PROCEEDS. Grantor shall promptly notify Lender of
      any loss or damage to the Collateral. Lender may make proof of loss if
      Grantor fails to do so within fifteen (15) days of the casualty. All
      proceeds of any insurance on the Collateral, including accrued proceeds
      thereon, shall be held by Lender as part of the Collateral. If Lender
      consents to repair or replacement of the damaged or destroyed Collateral,
      Lender shall, upon satisfactory proof of expenditure, pay or reimburse
      Grantor from the proceeds for the reasonable cost of repair or
      restoration. If Lender does not consent to repair or replacement of the
      Collateral, Lender shall retain a sufficient amount of the proceeds to pay
      all of the Indebtedness, and shall pay the balance to Grantor. Any
      proceeds which have not been disbursed within six (6) months after their
      receipt and which Grantor has not committed to the repair or restoration
      of the Collateral shall be used to prepay the Indebtedness.

      INSURANCE RESERVES. Lender may require Grantor to maintain with Lender
      reserves for payment of insurance premiums, which reserves shall be
      created by monthly payments from Grantor of a sum estimated by Lender to
      be sufficient to produce, at least fifteen (15) days before the premium
      due date, amounts at least equal to the insurance premiums to be paid. If
      fifteen (15) days before payment is due, the reserve funds are
      insufficient, Grantor shall upon demand pay any deficiency to Lender. The
      reserve funds shall be held by Lender as a general deposit and shall
      constitute a non-interest-bearing account which Lender may satisfy by
      payment of the insurance premiums required to be paid by Grantor as they
      become due. Lender does not hold the reserve funds in trust for Grantor,
      and Lender is not the agent of Grantor for payment of the insurance
      premiums required to be paid by Grantor. The responsibility for the
      payment of premiums shall remain Grantor's sole responsibility.

      INSURANCE REPORTS. Grantor, upon request of Lender, shall furnish to
      Lender reports on each existing policy of insurance showing such
      information as Lender may reasonably request including the following: (1)
      the name of the insurer; (2) the risks insured; (3) the amount of the
      policy; (4) the property insured; (5) the then current value on the basis
      of which insurance has been obtained and the manner of determining that
      value; and (6) the expiration date of the policy. In addition, Grantor
      shall upon request by Lender (however not more often than annually) have
      an independent appraiser satisfactory to Lender determine, as applicable,
      the cash value or replacement cost of the Collateral.

      FINANCING STATEMENTS. Grantor authorizes Lender to file a UCC-1 financing
      statement, or alternatively, a copy of this Agreement to perfect Lender's
      security interest. At Lender's request, Grantor additionally agrees to
      sign all other documents that are necessary to perfect, protect, and
      continue Lender's security interest in the Property. Grantor will pay all
      filing fees, title transfer fees, and other fees and costs involved unless
      prohibited by law or unless Lender is required by law to pay such fees and
      costs. Grantor irrevocably appoints Lender to execute financing statements
      and documents of title in Grantor's name and to execute all documents
      necessary to transfer title if there is a default. Lender may file a copy
      of this Agreement as a financing statement. If Grantor changes Grantor's
      name or address, or the name or address of any person granting a security
      interest under this Agreement changes, Grantor will promptly notify the
      Lender of such change.

GRANTOR'S RIGHT TO POSSESSION AND TO COLLECT ACCOUNTS. Until default and except
as otherwise provided below with respect to accounts, Grantor may have
possession of the tangible personal property and beneficial use of all the
Collateral and may use it in any lawful manner not inconsistent with this
Agreement or the Related Documents, provided that Grantor's right to possession
and beneficial use shall not apply to any Collateral where possession of the
Collateral by Lender is required by law to perfect Lender's security interest in
such Collateral. Until otherwise notified by Lender, Grantor may collect any of
the Collateral consisting of accounts. At any time and even though no Event of
Default exists, Lender may exercise its rights to collect the accounts and to
notify account debtors to make payments directly to Lender for application to
the Indebtedness. If Lender at any time has possession of any Collateral,
whether before or after an Event of Default, Lender shall be deemed to have
exercised reasonable care in the custody and preservation of the Collateral if
Lender takes such action for that purpose as Grantor shall request or as Lender,
in Lender's sole discretion, shall deem appropriate under the circumstances, but
failure to honor any request by Grantor shall not of itself be deemed to be a
failure to exercise reasonable care. Lender shall not be required to take any
steps necessary to preserve any rights in the Collateral against prior parties,
nor to protect, preserve or maintain any security interest given to secure the
Indebtedness.

LENDER'S EXPENDITURES. If any action or proceeding is commenced that would
materially affect Lender's interest in the Collateral or if Grantor fails to
comply with any provision of this Agreement or any Related Documents, including
but not limited to Grantor's failure to discharge or pay when due any amounts
Grantor is required to discharge or pay under this Agreement or any Related
Documents, Lender on Grantor's behalf may (but shall not be obligated to) take
any action that Lender deems appropriate, including but not limited to
discharging or paying all taxes, liens, security interests, encumbrances and
other claims, at any time levied or placed on the Collateral and paying all
costs for insuring, maintaining and preserving the Collateral. All such
expenditures incurred or paid by Lender for such purposes will then bear
interest at the rate charged under the Note from the date incurred or paid by
Lender to the date of repayment by Grantor. All such expenses will become a part
of the Indebtedness and, at Lender's option, will (A) be payable on demand (B)
be added to the balance of the Note and be apportioned among and be payable with
any installment payments to become due during either (1) the term of any
applicable insurance policy; or (2) the remaining term of the Note; or (C) be
treated as a balloon payment which will be due and payable at the Note's
maturity. The Agreement also will secure payment of these amounts. Such right
shall be in addition to all other rights and remedies to which Lender may be
entitled upon Default.

DEFAULT. Each of the following shall constitute an Event of Default under this
Agreement:

      PAYMENT DEFAULT. Borrower fails to make any payment when due under the
      Indebtedness.

      OTHER DEFAULTS. Borrower or Grantor fails to comply with or to perform any
      other term, obligation, covenant or condition contained in this Agreement
      or in any of the Related Documents or to comply with or to perform any
      term, obligation, covenant or condition contained in any other agreement
      between Lender and Borrower or Grantor.




                          COMMERCIAL SECURITY AGREEMENT
LOAN NO: 932900001-1               (Continued)                           PAGE 4
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      DEFAULT IN FAVOR OF THIRD PARTIES. Should Borrower or any Grantor default
      under any loan, extension of credit, security agreement, purchase or sales
      agreement, or any other agreement, in favor of any other creditor or
      person that may materially affect any of Grantor's property or Borrower's
      or any Grantor's ability to repay the Indebtedness or perform their
      respective obligations under this Agreement or any of the Related
      Documents.

      FALSE STATEMENTS. Any warranty, representation or statement made or
      furnished to Lender by Borrower or Grantor or on Borrower's or Grantor's
      behalf under this Agreement or the Related Documents is false or
      misleading in any material respect, either now or at the time made or
      furnished or becomes false or misleading at any time thereafter.

      DEFECTIVE COLLATERALIZATION. This Agreement or any of the Related
      Documents ceases to be in full force and effect (including failure of any
      collateral document to create a valid and perfected security interest or
      lien) at any time and for any reason.

      INSOLVENCY. The dissolution or termination of Borrower's or Grantor's
      existence as a going business, the insolvency of Borrower or Grantor, the
      appointment of a receiver for any part of Borrower's or Grantor's
      property, any assignment for the benefit of creditors, any type of
      creditor workout, or the commencement of any proceeding under any
      bankruptcy or insolvency laws by or against Borrower or Grantor.

      CREDITOR OR FORFEITURE PROCEEDINGS. Commencement of foreclosure or
      forfeiture proceedings, whether by judicial proceeding, self-help,
      repossession or any other method, by any creditor of Borrower or Grantor
      or by any governmental agency against any collateral securing the
      Indebtedness. This includes a garnishment of any of Borrower's or
      Grantor's accounts, including deposit accounts, with Lender. However, this
      Event of Default shall not apply if there is a good faith dispute by
      Borrower or Grantor as to the validity or reasonableness of the claim
      which is the basis of the creditor or forfeiture proceeding and if
      Borrower or Grantor gives Lender written notice of the creditor or
      forfeiture proceeding and deposits with Lender monies or a surety bond for
      the creditor or forfeiture proceeding, in an amount determined by Lender,
      in its sole discretion, as being an adequate reserve or bond for the
      dispute.

      EVENTS AFFECTING GUARANTOR. Any of the preceding events occurs with
      respect to Guarantor of any of the Indebtedness or Guarantor dies or
      becomes incompetent or revokes or disputes the validity of, or liability
      under, any Guaranty of the Indebtedness.

      ADVERSE CHANGE. A material adverse change occurs in Borrower's or
      Grantor's financial condition, or Lender believes the prospect of payment
      or performance of the Indebtedness is impaired.

      INSECURITY. Lender in good faith believes itself insecure.

      CURE PROVISIONS. If any default, other than a default in payment is
      curable and if Grantor has not been given a notice of a breach of the same
      provision of this Agreement within the preceding twelve (12) months, it
      may be cured (and no event of default will have occurred) if Grantor,
      after receiving written notice from Lender demanding cure of such default:
      (1) cures the default within fifteen (15) days; or (2) if the cure
      requires more than fifteen (15) days, immediately initiates steps which
      Lender deems in Lender's sole discretion to be sufficient to cure the
      default and thereafter continues and completes all reasonable and
      necessary steps sufficient to produce compliance as soon as reasonably
      practical.

RIGHTS AND REMEDIES ON DEFAULT. If an Event of Default occurs under this
Agreement, at any time thereafter, Lender shall have all the rights of a secured
party under the Delaware Uniform Commercial Code. In addition and without
limitation, Lender may exercise any one or more of the following rights and
remedies:

      ACCELERATE INDEBTEDNESS. Lender may declare the entire Indebtedness,
      including any prepayment penalty which Borrower would be required to pay,
      immediately due and payable, without notice of any kind to Borrower or
      Grantor.

      ASSEMBLE COLLATERAL. Lender may require Grantor to deliver to Lender all
      or any portion of the Collateral and any and all certificates of title and
      other documents relating to the Collateral. Lender may require Grantor to
      assemble the Collateral and make it available to Lender at a place to be
      designated by Lender. Lender also shall have full power to enter upon the
      property of Grantor to take possession of and remove the Collateral. If
      the Collateral contains other goods not covered by this Agreement at the
      time of repossession, Grantor agrees Lender may take such other goods,
      provided that Lender makes reasonable efforts to return them to Grantor
      after repossession.

      SELL THE COLLATERAL. Lender shall have full power to sell, lease,
      transfer, or otherwise deal with the Collateral or proceeds thereof in
      Lender's own name or that of Grantor. Lender may sell the Collateral at
      public auction or private sale. Unless the Collateral threatens to decline
      speedily in value or is of a type customarily sold on a recognized market,
      Lender will give Grantor, and other persons as required by law, reasonable
      notice of the time and place of any public sale, or the time after which
      any private sale or any other disposition of the Collateral is to be made.
      However, no notice need be provided to any person who, after Event of
      Default occurs, enters into and authenticates an agreement waiving that
      person's right to notification of sale. The requirements of reasonable
      notice shall be met if such notice is given at least ten (10) days before
      the time of the sale or disposition. All expenses relating to the
      disposition of the Collateral, including without limitation the expenses
      of retaking, holding, insuring, preparing for sale and selling the
      Collateral, shall become a part of the Indebtedness secured by this
      Agreement and shall be payable on demand, with interest at the Note rate
      from date of expenditure until repaid.

      APPOINT RECEIVER. Lender shall have the right to have a receiver appointed
      to take possession of all or any part of the Collateral, with the power to
      protect and preserve the Collateral, to operate the Collateral preceding
      foreclosure or sale, and to collect the Rents from the Collateral and
      apply the proceeds, over and above the cost of the receivership, against
      the Indebtedness. The receiver may serve without bond if permitted by law.
      Lender's right to the appointment of a receiver shall exist whether or not
      the apparent value of the Collateral exceeds the Indebtedness by a
      substantial amount. Employment by Lender shall not disqualify a person
      from serving as a receiver.

      COLLECT REVENUES, APPLY ACCOUNTS. Lender, either itself or through a
      receiver, may collect the payments, rents, income, and revenues from the
      Collateral. Lender may at any time in Lender's discretion transfer any
      Collateral into Lender's own name or that of Lender's nominee and receive
      the payments, rents, income, and revenues therefrom and hold the same as
      security for the Indebtedness or apply it to payment of the Indebtedness
      in such order of preference as Lender may determine. Insofar as the
      Collateral consists of accounts, general intangibles, insurance policies,
      instruments, chattel paper, choses in action, or similar property, Lender
      may demand, collect, receipt for, settle, compromise, adjust, sue for,
      foreclose, or realize on the Collateral as Lender may determine, whether
      or not Indebtedness or Collateral is then due. For these purposes, Lender
      may, on behalf of and in the name of Grantor, receive, open and dispose of
      mail addressed to Grantor; change any address to which mail and payments
      are to be sent; and endorse notes, checks, drafts, money orders, documents
      of title, instruments and items pertaining to payment, shipment, or
      storage of any Collateral. To facilitate collection, Lender may notify
      account debtors and obligors on any Collateral to make payments directly
      to Lender.

      OBTAIN DEFICIENCY. If Lender chooses to sell any or all of the Collateral,
      Lender may obtain a judgment against Borrower for any deficiency
      remaining on the Indebtedness due to Lender after application of all
      amounts received from the exercise of the rights provided in this
      Agreement. Borrower shall be liable for a deficiency even if the
      transaction described in this subsection is a sale of accounts or chattel
      paper.

      OTHER RIGHTS AND REMEDIES. Lender shall have all the rights and remedies
      of a secured creditor under the provisions of the Uniform Commercial
      Code, as may be amended from time to time. In addition, Lender shall have
      and may exercise any or all other rights and remedies it may have
      available at law, in equity, or otherwise.

      ELECTION OF REMEDIES. Except as may be prohibited by applicable law, all
      of Lender's rights and remedies, whether evidenced by this Agreement, the
      Related Documents, or by any other writing, shall be cumulative and may be
      exercised singularly or concurrently. Election by




                          COMMERCIAL SECURITY AGREEMENT
 LOAN NO: 932900001-1               (Continued)                          PAGE 5
================================================================================

      Lender to pursue any remedy shall not exclude pursuit of any other remedy,
      and an election to make expenditures or to take action to perform an
      obligation of Grantor under this Agreement, after Grantor's failure to
      perform, shall not affect Lender's right to declare a default and exercise
      its remedies.

DEPOSIT AGREEMENT SECURITY. Grantor hereby grants a security interest to Lender
in any and all deposit accounts (checking, savings, money market or time) of
Grantor at Lender, now existing or hereinafter opened, to secure the
Indebtedness. This includes all deposit accounts Grantor holds jointly with
someone else.

MISCELLANEOUS PROVISIONS. The following miscellaneous provisions are a part of
this Agreement:

      AMENDMENTS. This Agreement, together with any Related Documents,
      constitutes the entire understanding and agreement of the parties as to
      the matters set forth in this Agreement. No alteration of or amendment to
      this Agreement shall be effective unless given in writing and signed by
      the party or parties sought to be charged or bound by the alteration or
      amendment.

      ATTORNEYS' FEES; EXPENSES. Grantor agrees to pay upon demand all of
      Lender's costs and expenses, including Lender's reasonable attorneys' fees
      and Lender's legal expenses, incurred in connection with the enforcement
      of this Agreement. Lender may hire or pay someone else to help enforce
      this Agreement, and Grantor shall pay the costs and expenses of such
      enforcement. Costs and expenses include Lender's reasonable attorneys'
      fees and legal expenses whether or not there is a lawsuit, including
      reasonable attorneys' fees and legal expenses for bankruptcy proceedings
      (including efforts to modify or vacate any automatic stay or injunction),
      appeals, and any anticipated post-judgment collection services. Lender may
      also recover from Grantor all court, alternative dispute resolution or
      other collection costs (including, without limitation, fees and charges of
      collection agencies) actually incurred by Lender.

      CAPTION HEADINGS. Caption headings in this Agreement are for convenience
      purposes only and are not to be used to interpret or define the provisions
      of this Agreement.

      GOVERNING LAW. THIS AGREEMENT WILL BE GOVERNED BY, CONSTRUED AND ENFORCED
      IN ACCORDANCE WITH FEDERAL LAW AND THE LAWS OF THE STATE OF CALIFORNIA,
      EXCEPT AND ONLY TO THE EXTENT OF PROCEDURAL MATTERS RELATED TO THE
      PERFECTION AND ENFORCEMENT OF LENDER'S RIGHTS AND REMEDIES AGAINST THE
      COLLATERAL, WHICH MATTERS SHALL BE GOVERNED BY THE LAWS OF THE STATE OF
      DELAWARE. HOWEVER, IN THE EVENT THAT THE ENFORCEABILITY OR VALIDITY OF ANY
      PROVISION OF THIS AGREEMENT IS CHALLENGED OR QUESTIONED, SUCH PROVISION
      SHALL BE GOVERNED BY WHICHEVER APPLICABLE STATE OR FEDERAL LAW WOULD
      UPHOLD OR WOULD ENFORCE SUCH CHALLENGED OR QUESTIONED PROVISION. THE LOAN
      TRANSACTION WHICH IS EVIDENCED BY THE NOTE AND THIS AGREEMENT HAS BEEN
      APPLIED FOR, CONSIDERED, APPROVED AND MADE, AND ALL NECESSARY LOAN
      DOCUMENTS HAVE BEEN ACCEPTED BY LENDER IN THE STATE OF CALIFORNIA.

      CHOICE OF VENUE. If there is a lawsuit, Grantor agrees upon Lender's
      request to submit to the jurisdiction of the courts of Los Angeles County,
      State of California.

      JOINT AND SEVERAL LIABILITY. All obligations of Borrower and Grantor under
      this Agreement shall be joint and several, and all references to Grantor
      shall mean each and every Grantor, and all references to Borrower shall
      mean each and every Borrower. This means that each Borrower and Grantor
      signing below is responsible for all obligations in this Agreement. Where
      any one or more of the parties is a corporation, partnership, limited
      liability company or similar entity, it is not necessary for Lender to
      inquire into the powers of any of the officers, directors, partners,
      members, or other agents acting or purporting to act on the entity's
      behalf, and any obligations made or created in reliance upon the professed
      exercise of such powers shall be guaranteed under this Agreement.


      NO WAIVER BY LENDER. Lender shall not be deemed to have waived any rights
      under this Agreement unless such waiver is given in writing and signed by
      Lender. No delay or omission on the part of Lender in exercising any right
      shall operate as a waiver of such right or any other right. A waiver by
      Lender of a provision of this Agreement shall not prejudice or constitute
      a waiver of Lender's right otherwise to demand strict compliance with that
      provision or any other provision of this Agreement. No prior waiver by
      Lender, nor any course of dealing between Lender and Grantor, shall
      constitute a waiver of any of Lender's rights or of any of Grantor's
      obligations as to any future transactions. Whenever the consent of Lender
      is required under this Agreement, the granting of such consent by Lender
      in any instance shall not constitute continuing consent to subsequent
      instances where such consent is required and in all cases such consent may
      be granted or withheld in the sole discretion of Lender.

      NOTICES. Any notice required to be given under this Agreement shall be
      given in writing, and shall be effective when actually delivered, when
      actually received by telefacsimile (unless otherwise required by law),
      when deposited with a nationally recognized overnight courier, or, if
      mailed, when deposited in the United States mail, as first class,
      certified or registered mail postage prepaid, directed to the addresses
      shown near the beginning of this Agreement. Any party may change its
      address for notices under this Agreement by giving formal written notice
      to the other parties, specifying that the purpose of the notice is to
      change the party's address. For notice purposes, Grantor agrees to keep
      Lender informed at all times of Grantor's current address. Unless
      otherwise provided or required by law, if there is more than one Grantor,
      any notice given by Lender to any Grantor is deemed to be notice given to
      all Grantors.

      POWER OF ATTORNEY. Grantor hereby appoints Lender as Grantor's irrevocable
      attorney-in-fact for the purpose of executing any documents necessary to
      perfect, amend, or to continue the security interest granted in this
      Agreement or to demand termination of filings of other secured parties.
      Lender may at any time, and without further authorization from Grantor,
      file a carbon, photographic or other reproduction of any financing
      statement or of this Agreement for use as a financing statement. Grantor
      will reimburse Lender for all expenses for the perfection and the
      continuation of the perfection of Lender's security interest in the
      Collateral.

      SEVERABILITY. If a court of competent jurisdiction finds any provision of
      this Agreement to be illegal, invalid, or unenforceable as to any
      circumstance, that finding shall not make the offending provision illegal,
      invalid, or unenforceable as to any other circumstance. If feasible, the
      offending provision shall be considered modified so that it becomes legal,
      valid and enforceable. If the offending provision cannot be so modified,
      it shall be considered deleted from this Agreement. Unless otherwise
      required by law, the illegality, invalidity, or unenforceability of any
      provision of this Agreement shall not affect the legality, validity or
      enforceability of any other provision of this Agreement.

      SUCCESSORS AND ASSIGNS. Subject to any limitations stated in this
      Agreement on transfer of Grantor's interest, this Agreement shall be
      binding upon and inure to the benefit of the parties, their successors and
      assigns. If ownership of the Collateral becomes vested in a person other
      than Grantor, Lender, without notice to Grantor, may deal with Grantor's
      successors with reference to this Agreement and the Indebtedness by way of
      forbearance or extension without releasing Grantor from the obligations of
      this Agreement or liability under the Indebtedness.

      SURVIVAL OF REPRESENTATIONS AND WARRANTIES. All representations,
      warranties, and agreements made by Grantor in this Agreement shall survive
      the execution and delivery of this Agreement, shall be continuing in
      nature, and shall remain in full force and effect until such time as
      Borrower's Indebtedness shall be paid in full.

      TIME IS OF THE ESSENCE. Time is of the essence in the performance of this
      Agreement.

      WAIVE JURY. ALL PARTIES TO THIS AGREEMENT HEREBY WAIVE THE RIGHT TO ANY
      JURY TRIAL IN ANY ACTION, PROCEEDING, OR COUNTERCLAIM BROUGHT BY ANY PARTY
      AGAINST ANY OTHER PARTY.

DEFINITIONS. The following capitalized words and terms shall have the following
meanings when used in this Agreement. Unless specifically stated



                          COMMERCIAL SECURITY AGREEMENT
 LOAN NO: 932900001-1               (Continued)                          PAGE 6
================================================================================

to the contrary, all references to dollar amounts shall mean amounts in lawful
money of the United States of America. Words and terms used in the singular
shall include the plural, and the plural shall include the singular, as the
context may require. Words and terms not otherwise defined in this Agreement
shall have the meanings attributed to such terms in the Uniform Commercial Code:

      ACCOUNT. The word "Account" means a trade account, account receivable,
      other receivable, or other right to payment for goods sold or services
      rendered owing to Grantor (or to a third party grantor acceptable to
      Lender).

      AGREEMENT. The word "Agreement" means this Commercial Security Agreement,
      as this Commercial Security Agreement may be amended or modified from time
      to time, together with all exhibits and schedules attached to this
      Commercial Security Agreement from time to time.

      BORROWER. The word "Borrower" means International Remote Imaging Systems,
      Inc., and all other persons and entities signing the Note in whatever
      capacity.

      COLLATERAL. The word "Collateral" means all of Grantor's right, title and
      interest in and to all the Collateral as described in the Collateral
      Description section of this Agreement.

      DEFAULT. The word "Default" means the Default set forth in this Agreement
      in the section titled "Default".

      ENVIRONMENTAL LAWS. The words "Environmental Laws" mean any and all state,
      federal and local statutes, regulations and ordinances relating to the
      protection of human health or the environment, including without
      limitation the Comprehensive Environmental Response, Compensation, and
      Liability Act of 1980, as amended, 42 U.S.C. Section 9601, et seq.
      ("CERCLA"), the Superfund Amendments and Reauthorization Act of 1986, Pub.
      L. No. 99-499 ("SARA"), the Hazardous Materials Transportation Act, 49
      U.S.C. Section 1801, et seq., the Resource Conservation and Recovery Act,
      42 U.S.C. Section 6901, et seq., Chapters 6.5 through 7.7 of Division 20
      of the California Health and Safety Code, Section 25100, et seq., or other
      applicable state or federal laws, rules, or regulations adopted pursuant
      thereto.

      EVENT OF DEFAULT. The words "Event of Default" mean any of the events of
      default set forth in this Agreement in the default section of this
      Agreement.

      GRANTOR. The word "Grantor" means Advanced Digital Imaging Research, LLC.

      GUARANTOR. The word "Guarantor" means any guarantor, surety, or
      accommodation party of any or all of the Indebtedness.

      GUARANTY. The word "Guaranty" means the guaranty from Guarantor to Lender,
      including without limitation a guaranty of all or part of the Note.

      HAZARDOUS SUBSTANCES. The words "Hazardous Substances" mean materials
      that, because of their quantity, concentration or physical, chemical or
      infectious characteristics, may cause or pose a present or potential
      hazard to human health or the environment when improperly used, treated,
      stored, disposed of, generated, manufactured, transported or otherwise
      handled. The words "Hazardous Substances" are used in their very broadest
      sense and include without limitation any and all hazardous or toxic
      substances, materials or waste as defined by or listed under the
      Environmental Laws. The term "Hazardous Substances" also includes, without
      limitation, petroleum and petroleum by-products or any fraction thereof
      and asbestos.

      INDEBTEDNESS. The word "Indebtedness" means the indebtedness evidenced by
      the Note or Related Documents, including all principal and interest
      together with all other indebtedness and costs and expenses for which
      Borrower is responsible under this Agreement or under any of the Related
      Documents.

      LENDER. The word "Lender" means California Bank & Trust, its successors
      and assigns.

      NOTE. The word "Note" means the Note executed by International Remote
      Imaging Systems, Inc. in the principal amount of $6,500,000.00 dated
      February 7, 2002, together with all renewals of, extensions of,
      modifications of, refinancings of, consolidations of, and substitutions
      for the note or credit agreement.

      PROPERTY. The word "Property" means all of Grantor's right, title and
      interest in and to all the Property as described in the "Collateral
      Description" section of this Agreement.

      RELATED DOCUMENTS. The words "Related Documents" mean all promissory
      notes, credit agreements, loan agreements, environmental agreements,
      guaranties, security agreements, mortgages, deeds of trust, security
      deeds, collateral mortgages, and all other instruments, agreements and
      documents, whether now or hereafter existing, executed in connection with
      the Indebtedness.

BORROWER AND GRANTOR HAVE READ AND UNDERSTOOD ALL THE PROVISIONS OF THIS
COMMERCIAL SECURITY AGREEMENT AND AGREE TO ITS TERMS. THIS AGREEMENT IS DATED
FEBRUARY 7, 2002. THIS AGREEMENT IS GIVEN UNDER SEAL AND IT IS INTENDED THAT
THIS AGREEMENT IS AND SHALL CONSTITUTE AND HAVE THE EFFECT OF A SEALED
INSTRUMENT ACCORDING TO LAW.

GRANTOR:

ADVANCED DIGITAL IMAGING RESEARCH, LLC

                                                          
By: /s/ JOHN A. O'MALLEY                            (SEAL)    By: /s/ DONALD HORACEK                        (SEAL)
  -----------------------------------------------------         ------------------------------------------
   DR: JOHN A. O'MALLEY, MANAGER OF ADVANCED  DIGITAL           DONALD HORACEK, MANAGER OF ADVANCED DIGITAL
   IMAGING RESEARCH, LLC                                        IMAGING RESEARCH, LLC




 BORROWWER


INTERNATIONAL REMOTE IMAGING SYSTEMS,  INC.

                                                          
BY: /s/ JOHN A. O'MALLEY                            (Seal)    BY: /s/ JOHN CALOZ                        (SEAL)
  ---------------------------------------------------           ----------------------------------------
   DR: JOHN A. O'MALLEY, CEO/CHAIRMAN OF                        JOHN CALOZ, CFO/SECRETARY OF INTERNATIONAL REMOTE
   INTERNATIONAL REMOTE IMAGING SYSTEMS, INC.                   IMAGING SYSTEMS, INC.





                          COMMERCIAL SECURITY AGREEMENT





- -------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL       LOAN DATE      MATURITY         LOAN NO       CALL/COLL        ACCOUNT       OFFICER       INITIALS
                                                                                      
$6,500,000.00    02-07-2002     06-30-2004      932900001-1                    932900001-1    22163        [INITIALS ILLEGIBLE]
- -------------------------------------------------------------------------------------------------------------------------------
References in the shaded area are for Lender's use only and do not limit the applicability of this document to any particular
loan or Any item above containing "***" has been omitted due to text length limitations.
- -------------------------------------------------------------------------------------------------------------------------------



BORROWER:   INTERNATIONAL REMOTE              LENDER:    CALIFORNIA BANK & TRUST
            IMAGING SYSTEMS, INC.                        COMMERCIAL LOAN CENTER
            9162 ETON AVENUE                             550 SOUTH HOPE STREET,
            CHATSWORTH, CA 91311                         SUITE 300
                                                         LOS ANGELES, CA 90071

GRANTOR:    STATSPIN, INC.
            85 MORSE STREET
            NORWOOD, MA 02062


THIS COMMERCIAL SECURITY AGREEMENT dated February 7, 2002, is made and executed
among Statspin, Inc. ("Grantor"); International Remote Imaging Systems, Inc.
("Borrower"); and California Bank & Trust ("Lender").

GRANT OF SECURITY INTEREST. For valuable consideration, Grantor grants to Lender
a security interest in the Collateral to secure the Indebtedness and agrees that
Lender shall have the rights stated in this Agreement with respect to the
Collateral, in addition to all other rights which Lender may have by law.

COLLATERAL DESCRIPTION. The word "Collateral" as used in this Agreement means
the following described property, whether now owned or hereafter acquired,
whether now existing or hereafter arising, and wherever located, in which
Grantor is giving to Lender a security interest for the payment of the
Indebtedness and performance of all other obligations under the Note and this
Agreement:

        ALL INVENTORY, EQUIPMENT, ACCOUNTS (INCLUDING BUT NOT LIMITED TO ALL
        HEALTH-CARE-INSURANCE RECEIVABLES), CHATTEL PAPER, INSTRUMENTS
        (INCLUDING BUT NOT LIMITED TO ALL PROMISSORY NOTES), LETTER-OF-CREDIT
        RIGHTS, LETTERS OF CREDIT, DOCUMENTS, DEPOSIT ACCOUNTS, INVESTMENT
        PROPERTY, MONEY, OTHER RIGHTS TO PAYMENT AND PERFORMANCE, AND GENERAL
        INTANGIBLES (INCLUDING BUT NOT LIMITED TO ALL SOFTWARE AND ALL PAYMENT
        INTANGIBLES); ALL FIXTURES; ALL ATTACHMENTS, ACCESSIONS, ACCESSORIES,
        FITTINGS, INCREASES, TOOLS, PARTS, REPAIRS, SUPPLIES, AND COMMINGLED
        GOODS RELATING TO THE FOREGOING PROPERTY, AND ALL ADDITIONS,
        REPLACEMENTS OF AND SUBSTITUTIONS FOR ALL OR ANY PART OF THE FOREGOING
        PROPERTY; ALL INSURANCE REFUNDS RELATING TO THE FOREGOING PROPERTY; ALL
        GOOD WILL RELATING TO THE FOREGOING PROPERTY; ALL RECORDS AND DATA AND
        EMBEDDED SOFTWARE RELATING TO THE FOREGOING PROPERTY, AND ALL EQUIPMENT,
        INVENTORY AND SOFTWARE TO UTILIZE, CREATE, MAINTAIN AND PROCESS ANY SUCH
        RECORDS AND DATA ON ELECTRONIC MEDIA; AND ALL SUPPORTING OBLIGATIONS
        RELATING TO THE FOREGOING PROPERTY; ALL WHETHER NOW EXISTING OR
        HEREAFTER ARISING, WHETHER NOW OWNED OR HEREAFTER ACQUIRED OR WHETHER
        NOW OR HEREAFTER SUBJECT TO ANY RIGHTS IN THE FOREGOING PROPERTY; AND
        ALL PRODUCTS AND PROCEEDS (INCLUDING BUT NOT LIMITED TO ALL INSURANCE
        PAYMENTS) OF OR RELATING TO THE FOREGOING PROPERTY.

In addition, the word "Collateral" also includes all the following, whether now
owned or hereafter acquired, whether now existing or hereafter arising, and
wherever located:

        (A) All accessions, attachments, accessories, tools, parts, supplies,
        replacements of and additions to any of the collateral described herein,
        whether added now or later.

        (B) All products and produce of any of the property described in this
        Collateral section.

        (C) All accounts, general intangibles, instruments, rents, monies,
        payments, and all other rights, arising out of a sale, lease, or other
        disposition of any of the property described in this Collateral section.

        (D) All proceeds (including insurance proceeds) from the sale,
        destruction, loss, or other disposition of any of the property described
        in this Collateral section, and sums due from a third party who has
        damaged or destroyed the Collateral or from that party's insurer,
        whether due to judgment, settlement or other process.

        (E) All records and data relating to any of the property described in
        this Collateral section, whether in the form of a writing, photograph,
        microfilm, microfiche, or electronic media, together with all of
        Grantor's right, title, and interest in and to all computer software
        required to utilize, create, maintain, and process any such records or
        data on electronic media.

Despite any other provision of this Agreement, Lender is not granted, and will
not have, a nonpurchase money security interest in household goods, to the
extent such a security interest would be prohibited by applicable law. In
addition, if because of the type of any Property, Lender is required to give a
notice of the right to cancel under Truth in Lending for the Indebtedness, then
Lender will not have a security interest in such Collateral unless and until
such a notice is given.

CROSS-COLLATERALIZATION. In addition to the Note, this Agreement secures all
obligations, debts and liabilities, plus interest thereon, of Borrower to
Lender, or any one or more of them, as well as all claims by Lender against
Borrower or any one or more of them, whether now existing or hereafter arising,
whether related or unrelated to the purpose of the Note, whether voluntary or
otherwise, whether due or not due, direct or indirect, determined or
undetermined, absolute or contingent, liquidated or unliquidated whether
Borrower or Grantor may be liable individually or jointly with others, whether
obligated as guarantor, surety, accommodation party or otherwise, and whether
recovery upon such amounts may be or hereafter may become barred by any statute
of limitations, and whether the obligation to repay such amounts may be or
hereafter may become otherwise unenforceable.

BORROWER'S WAIVERS AND RESPONSIBILITIES. Except as otherwise required under this
Agreement or by applicable law, (A) Borrower agrees that Lender need not tell
Borrower about any action or inaction Lender takes in connection with this
Agreement; (B) Borrower assumes the responsibility for being and keeping
informed about the Collateral; and (C) Borrower waives any defenses that may
arise because of any action or inaction of Lender, including without limitation
any failure of Lender to realize upon the Collateral or any delay by Lender in
realizing upon the Collateral; and Borrower agrees to remain liable under the
Note no matter what action Lender takes or fails to take under this Agreement.

GRANTOR'S REPRESENTATIONS AND WARRANTIES. Grantor warrants that: (A) this
Agreement is executed at Borrower's request and not at the request of Lender;
(B) Grantor has the full right, power and authority to enter into this Agreement
and to pledge the Collateral to Lender; (C) Grantor has established adequate
means of obtaining from Borrower on a continuing basis information about
Borrower's financial condition; and (D) Lender has made no representation to
Grantor about Borrower or Borrower's creditworthiness.

GRANTOR'S WAIVERS. Grantor waives all requirements of presentment, protest,
demand, and notice of dishonor or non-payment to Borrower or Grantor, or any
other party to the Indebtedness or the Collateral. Lender may do any of the
following with respect to any obligation of any Borrower, without first
obtaining the consent of Grantor: (A) grant any extension of time for any
payment, (B) grant any renewal, (C) permit any modification of payment terms or
other terms, or (D) exchange or release any Collateral or other security. No
such act or failure to act shall affect Lender's rights




                          COMMERCIAL SECURITY AGREEMENT

LOAN NO: 932900001-1                 (CONTINUED)                          PAGE 2

================================================================================

against Grantor or the Collateral.

GRANTOR'S REPRESENTATIONS AND WARRANTIES WITH RESPECT TO THE COLLATERAL. With
respect to the Collateral, Grantor represents and promises to Lender that:

        PERFECTION OF SECURITY INTEREST. Grantor agrees to execute financing
        statements and to take whatever other actions are requested by Lender to
        perfect and continue Lender's security interest in the Collateral. Upon
        request of Lender, Grantor will deliver to Lender any and all of the
        documents evidencing or constituting the Collateral, and Grantor will
        note Lender's interest upon any and all chattel paper if not delivered
        to Lender for possession by Lender. THIS IS A CONTINUING SECURITY
        AGREEMENT AND WILL CONTINUE IN EFFECT EVEN THOUGH ALL OR ANY PART OF THE
        INDEBTEDNESS IS PAID IN FULL AND EVEN THOUGH FOR A PERIOD OF TIME
        BORROWER MAY NOT BE INDEBTED TO LENDER.

        NOTICES TO LENDER. Grantor will promptly notify Lender in writing at
        Lender's address shown above (or such other addresses as Lender may
        designate from time to time) prior to any (1) change in Grantor's name;
        (2) change in Grantor's assumed business name(s); (3) change in the
        management of the Corporation Grantor; (4) change in the authorized
        signer(s); (5) change in Grantor's principal office address; (6) change
        in Grantor's state of organization; (7) conversion of Grantor to a new
        or different type of business entity; or (8) change in any other aspect
        of Grantor that directly or indirectly relates to any agreements between
        Grantor and Lender. No change in Grantor's name or state of organization
        will take effect until after Lender has received notice.

        NO VIOLATION. The execution and delivery of this Agreement will not
        violate any law or agreement governing Grantor or to which Grantor is a
        party, and its certificate or articles of incorporation and bylaws do
        not prohibit any term or condition of this Agreement.

        ENFORCEABILITY OF COLLATERAL. To the extent the Collateral consists of
        accounts, chattel paper, or general intangibles, as defined by the
        Uniform Commercial Code, the Collateral is enforceable in accordance
        with its terms, is genuine, and fully complies with all applicable laws
        and regulations concerning form, content and manner of preparation and
        execution, and all persons appearing to be obligated on the Collateral
        have authority and capacity to contract and are in fact obligated as
        they appear to be on the Collateral. At the time any Account becomes
        subject to a security interest in favor of Lender, the Account shall be
        a good and valid account representing an undisputed, bona fide
        indebtedness incurred by the account debtor, for merchandise held
        subject to delivery instructions or previously shipped or delivered
        pursuant to a contract of sale, or for services previously performed by
        Grantor with or for the account debtor. So long as this Agreement
        remains in effect, Grantor shall not, without Lender's prior written
        consent, compromise, settle, adjust, or extend payment under or with
        regard to any such Accounts. There shall be no setoffs or counterclaims
        against any of the Collateral, and no agreement shall have been made
        under which any deductions or discounts may be claimed concerning the
        Collateral except those disclosed to Lender in writing.

        LOCATION OF THE COLLATERAL. Except in the ordinary course of Grantor's
        business, Grantor agrees to keep the Collateral (or to the extent the
        Collateral consists of intangible property such as accounts or general
        intangibles, the records concerning the Collateral) at Grantor's address
        shown above or at such other locations as are acceptable to Lender. Upon
        Lender's request, Grantor will deliver to Lender in form satisfactory to
        Lender a schedule of real properties and Collateral locations relating
        to Grantor's operations, including without limitation the following: (1)
        all real property Grantor owns or is purchasing; (2) all real property
        Grantor is renting or leasing; (3) all storage facilities Grantor owns,
        rents, leases, or uses; and (4) all other properties where Collateral is
        or may be located.

        REMOVAL OF THE COLLATERAL. Except in the ordinary course of Grantor's
        business, including the sales of inventory, Grantor shall not remove the
        Collateral from its existing location without Lender's prior written
        consent. To the extent that the Collateral consists of vehicles, or
        other titled property, Grantor shall not take or permit any action which
        would require application for certificates of title for the vehicles
        outside the Commonwealth of Massachusetts, without Lender's prior
        written consent. Grantor shall, whenever requested, advise Lender of the
        exact location of the Collateral.

        TRANSACTIONS INVOLVING COLLATERAL. Except for inventory sold or accounts
        collected in the ordinary course of Grantor's business, or as otherwise
        provided for in this Agreement, Grantor shall not sell, offer to sell,
        or otherwise transfer or dispose of the Collateral. While Grantor is not
        in default under this Agreement, Grantor may sell inventory, but only in
        the ordinary course of its business and only to buyers who qualify as a
        buyer in the ordinary course of business. A sale in the ordinary course
        of Grantor's business does not include a transfer in partial or total
        satisfaction of a debt or any bulk sale. Grantor shall not pledge,
        mortgage, encumber or otherwise permit the Collateral to be subject to
        any lien, security interest, encumbrance, or charge, other than the
        security interest provided for in this Agreement, without the prior
        written consent of Lender. This includes security interests even if
        junior in right to the security interests granted under this Agreement.
        Unless waived by Lender, all proceeds from any disposition of the
        Collateral (for whatever reason) shall be held in trust for Lender and
        shall not be commingled with any other funds; provided however, this
        requirement shall not constitute consent by Lender to any sale or other
        disposition. Upon receipt, Grantor shall immediately deliver any such
        proceeds to Lender.

        TITLE. Grantor represents and warrants to Lender that Grantor holds good
        and marketable title to the Collateral, free and clear of all liens and
        encumbrances except for the lien of this Agreement. No financing
        statement covering any of the Collateral is on file in any public office
        other than those which reflect the security interest created by this
        Agreement or to which Lender has specifically consented. Grantor shall
        defend Lender's rights in the Collateral against the claims and demands
        of all other persons.

        REPAIRS AND MAINTENANCE. Grantor agrees to keep and maintain, and to
        cause others to keep and maintain, the Collateral in good order, repair
        and condition at all times while this Agreement remains in effect.
        Grantor further agrees to pay when due all claims for work done on, or
        services rendered or material furnished in connection with the
        Collateral so that no lien or encumbrance may ever attach to or be filed
        against the Collateral.

        INSPECTION OF COLLATERAL. Lender and Lender's designated representatives
        and agents shall have the right at all reasonable times to examine and
        inspect the Collateral wherever located.

        TAXES, ASSESSMENTS AND LIENS. Grantor will pay when due all taxes,
        assessments and liens upon the Collateral, its use or operation, upon
        this Agreement, upon any promissory note or notes evidencing the
        Indebtedness, or upon any of the other Related Documents. Grantor may
        withhold any such payment or may elect to contest any lien if Grantor is
        in good faith conducting an appropriate proceeding to contest the
        obligation to pay and so long as Lender's interest in the Collateral is
        not jeopardized in Lender's sole opinion. If the Collateral is subjected
        to a lien which is not discharged within fifteen (15) days, Grantor
        shall deposit with Lender cash, a sufficient corporate surety bond or
        other security satisfactory to Lender in an amount adequate to provide
        for the discharge of the lien plus any interest, costs, attorneys' fees
        or other charges that could accrue as a result of foreclosure or sale of
        the Collateral. In any contest Grantor shall defend itself and Lender
        and shall satisfy any final adverse judgment before enforcement against
        the Collateral. Grantor shall name Lender as an additional obligee under
        any surety bond furnished in the contest proceedings. Grantor further
        agrees to furnish Lender with evidence that such taxes, assessments, and
        governmental and other charges have been paid in full and in a timely
        manner. Grantor may withhold any such payment or may elect to contest
        any lien if Grantor is in good faith conducting an appropriate
        proceeding to contest the obligation to pay and so long as Lender's
        interest in the Collateral is not jeopardized.

        COMPLIANCE WITH GOVERNMENTAL REQUIREMENTS. Grantor shall comply promptly
        with all laws, ordinances, rules and regulations of all governmental
        authorities, now or hereafter in effect, applicable to the ownership,
        production, disposition, or use of the Collateral, including all laws or
        regulations relating to the undue erosion of highly-erodible land or
        relating to the conversion of wetlands for the production of an
        agricultural product or commodity. Grantor may contest in good faith any
        such law, ordinance or regulation and withhold compliance during any
        proceeding,





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        including appropriate appeals, so long as Lender's interest in the
        Collateral, in Lender's opinion, is not jeopardized.

        HAZARDOUS SUBSTANCES. Grantor represents and warrants that the
        Collateral never has been, and never will be so long as this Agreement
        remains a lien on the Collateral, used in violation of any Environmental
        Laws or for the generation, manufacture, storage, transportation,
        treatment, disposal, release or threatened release of any Hazardous
        Substance. In addition, Grantor represents and warrants that the
        Collateral does not contain urea formaldehyde foam insulation or urea
        formaldehyde resin in violation of any Massachusetts state laws. The
        representations and warranties contained herein are based on Grantor's
        due diligence in investigating the Collateral for Hazardous Substances.
        Grantor hereby (1) releases and waives any future claims against Lender
        for indemnity or contribution in the event Grantor becomes liable for
        cleanup or other costs under any Environmental Laws, and (2) agrees to
        indemnify and hold harmless Lender against any and all claims and losses
        resulting from a breach of this provision of this Agreement. This
        obligation to indemnify shall survive the payment of the Indebtedness
        and the satisfaction of this Agreement.

        MAINTENANCE OF CASUALTY INSURANCE. Grantor shall procure and maintain
        all risks insurance, including without limitation fire, theft and
        liability coverage together with such other insurance as Lender may
        require with respect to the Collateral, in form, amounts, coverages and
        basis reasonably acceptable to Lender and issued by a company or
        companies reasonably acceptable to Lender. Grantor, upon request of
        Lender, will deliver to Lender from time to time the policies or
        certificates of insurance in form satisfactory to Lender, including
        stipulations that coverages will not be cancelled or diminished without
        at least ten (10) days' prior written notice to Lender and not including
        any disclaimer of the insurer's liability for failure to give such a
        notice. Each insurance policy also shall include an endorsement
        providing that coverage in favor of Lender will not be impaired in any
        way by any act, omission or default of Grantor or any other person. In
        connection with all policies covering assets in which Lender holds or is
        offered a security interest, Grantor will provide Lender with such loss
        payable or other endorsements as Lender may require. If Grantor at any
        time fails to obtain or maintain any insurance as required under this
        Agreement, Lender may (but shall not be obligated to) obtain such
        insurance as Lender deems appropriate, including if Lender so chooses
        "single interest insurance," which will cover only Lender's interest in
        the Collateral.

        APPLICATION OF INSURANCE PROCEEDS. Grantor shall promptly notify Lender
        of any loss or damage to the Collateral. Lender may make proof of loss
        if Grantor fails to do so within fifteen (15) days of the casualty. All
        proceeds of any insurance on the Collateral, including accrued proceeds
        thereon, shall be held by Lender as part of the Collateral. If Lender
        consents to repair or replacement of the damaged or destroyed
        Collateral, Lender shall, upon satisfactory proof of expenditure, pay or
        reimburse Grantor from the proceeds for the reasonable cost of repair or
        restoration. If Lender does not consent to repair or replacement of the
        Collateral, Lender shall retain a sufficient amount of the proceeds to
        pay all of the Indebtedness, and shall pay the balance to Grantor. Any
        proceeds which have not been disbursed within six (6) months after their
        receipt and which Grantor has not committed to the repair or restoration
        of the Collateral shall be used to prepay the Indebtedness.

        INSURANCE RESERVES. Lender may require Grantor to maintain with Lender
        reserves for payment of insurance premiums, which reserves shall be
        created by monthly payments from Grantor of a sum estimated by Lender to
        be sufficient to produce, at least fifteen (15) days before the premium
        due date, amounts at least equal to the insurance premiums to be paid.
        If fifteen (15) days before payment is due, the reserve funds are
        insufficient, Grantor shall upon demand pay any deficiency to Lender.
        The reserve funds shall be held by Lender as a general deposit and shall
        constitute a non-interest-bearing account which Lender may satisfy by
        payment of the insurance premiums required to be paid by Grantor as they
        become due. Lender does not hold the reserve funds in trust for Grantor,
        and Lender is not the agent of Grantor for payment of the insurance
        premiums required to be paid by Grantor. The responsibility for the
        payment of premiums shall remain Grantor's sole responsibility.

        INSURANCE REPORTS. Grantor, upon request of Lender, shall furnish to
        Lender reports on each existing policy of insurance showing such
        information as Lender may reasonably request including the following:
        (1) the name of the insurer; (2) the risks insured; (3) the amount of
        the policy; (4) the property insured; (5) the then current value on the
        basis of which insurance has been obtained and the manner of determining
        that value; and (6) the expiration date of the policy. In addition,
        Grantor shall upon request by Lender (however not more often than
        annually) have an independent appraiser satisfactory to Lender
        determine, as applicable, the cash value or replacement cost of the
        Collateral.

FINANCING STATEMENTS. Grantor authorizes Lender to file a UCC-1 financing
statement, or alternatively, a copy of this Agreement to perfect Lender's
security interest. At Lender's request, Grantor additionally agrees to sign all
other documents that are necessary to perfect, protect, and continue Lender's
security interest in the Property. Grantor will pay all filing fees, title
transfer fees, and other fees and costs involved unless prohibited by law or
unless Lender is required by law to pay such fees and costs. Grantor irrevocably
appoints Lender to execute financing statements and documents of title in
Grantor's name and to execute all documents necessary to transfer title if there
is a default. Lender may file a copy of this Agreement as a financing statement.
If Grantor changes Grantor's name or address, or the name or address of any
person granting a security interest under this Agreement changes, Grantor will
promptly notify the Lender of such change.

GRANTOR'S RIGHT TO POSSESSION AND TO COLLECT ACCOUNTS. Until default and except
as otherwise provided below with respect to accounts, Grantor may have
possession of the tangible personal property and beneficial use of all the
Collateral and may use it in any lawful manner not inconsistent with this
Agreement or the Related Documents, provided that Grantor's right to possession
and beneficial use shall not apply to any Collateral where possession of the
Collateral by Lender is required by law to perfect Lender's security interest in
such Collateral. Until otherwise notified by Lender, Grantor may collect any of
the Collateral consisting of accounts. At any time and even though no Event of
Default exists, Lender may exercise its rights to collect the accounts and to
notify account debtors to make payments directly to Lender for application to
the Indebtedness. If Lender at any time has possession of any Collateral,
whether before or after an Event of Default, Lender shall be deemed to have
exercised reasonable care in the custody and preservation of the Collateral if
Lender takes such action for that purpose as Grantor shall request or as Lender,
in Lender's sole discretion, shall deem appropriate under the circumstances, but
failure to honor any request by Grantor shall not of itself be deemed to be a
failure to exercise reasonable care. Lender shall not be required to take any
steps necessary to preserve any rights in the Collateral against prior parties,
nor to protect, preserve or maintain any security interest given to secure the
Indebtedness.

LENDER'S EXPENDITURES. If any action or proceeding is commenced that would
materially affect Lender's interest in the Collateral or if Grantor fails to
comply with any provision of this Agreement or any Related Documents, including
but not limited to Grantor's failure to discharge or pay when due any amounts
Grantor is required to discharge or pay under this Agreement or any Related
Documents, Lender on Grantor's behalf may (but shall not be obligated to) take
any action that Lender deems appropriate, including but not limited to
discharging or paying all taxes, liens, security interests, encumbrances and
other claims, at any time levied or placed on the Collateral and paying all
costs for insuring, maintaining and preserving the Collateral. All such
expenditures incurred or paid by Lender for such purposes will then bear
interest at the rate charged under the Note from the date incurred or paid by
Lender to the date of repayment by Grantor. All such expenses will become a part
of the Indebtedness and, at Lender's option, will (A) be payable on demand; (B)
be added to the balance of the Note and be apportioned among and be payable with
any installment payments to become due during either (1) the term of any
applicable insurance policy; or (2) the remaining term of the Note; or (C) be
treated as a balloon payment which will be due and payable at the Note's
maturity. The Agreement also will secure payment of these amounts. Such right
shall be in, addition to all other rights and remedies to which Lender may be
entitled upon Default.

DEFAULT. Each of the following shall constitute an Event of Default under this
Agreement:

        PAYMENT DEFAULT. Borrower fails to make any payment when due under the
        Indebtedness.

        OTHER DEFAULTS. Borrower or Grantor fails to comply with or to perform
        any other term, obligation, covenant or condition contained in this
        Agreement or in any of the Related Documents or to comply with or to
        perform any term, obligation, covenant or condition contained in any
        other




                          COMMERCIAL SECURITY AGREEMENT

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        agreement between Lender and Borrower or Grantor.

        Default in Favor of Third Parties. Should Borrower or any Grantor
        default under any loan, extension of credit, security agreement,
        purchase or sales agreement, or any other agreement, in favor of any
        other creditor or person that may materially affect any of Grantor's
        property or Borrower's or any Grantor's ability to repay the
        Indebtedness or perform their respective obligations under this
        Agreement or any of the Related Documents.

        FALSE STATEMENTS. Any warranty, representation or statement made or
        furnished to Lender by Borrower or Grantor or on Borrower's or Grantor's
        behalf under this Agreement or the Related Documents is false or
        misleading in any material respect, either now or at the time made or
        furnished or becomes false or misleading at any time thereafter.

        DEFECTIVE COLLATERALIZATION. This Agreement or any of the Related
        Documents ceases to be in full force and effect (including failure of
        any collateral document to create a valid and perfected security
        interest or lien) at any time and for any reason.

        INSOLVENCY. The dissolution or termination of Borrower's or Grantor's
        existence as a going business, the insolvency of Borrower or Grantor,
        the appointment of a receiver for any part of Borrower's or Grantor's
        property, any assignment for the benefit of creditors, any type of
        creditor workout, or the commencement of any proceeding under any
        bankruptcy or insolvency laws by or against Borrower or Grantor.

        CREDITOR OR FORFEITURE PROCEEDINGS. Commencement of foreclosure or
        forfeiture proceedings, whether by judicial proceeding, self-help,
        repossession or any other method, by any creditor of Borrower or Grantor
        or by any governmental agency against any collateral securing the
        Indebtedness. This includes a garnishment of any of Borrower's or
        Grantor's accounts, including deposit accounts, with Lender. However,
        this Event of Default shall not apply if there is a good faith dispute
        by Borrower or Grantor as to the validity or reasonableness of the claim
        which is the basis of the creditor or forfeiture proceeding and if
        Borrower or Grantor gives Lender written notice of the creditor or
        forfeiture proceeding and deposits with Lender monies or a surety bond
        for the creditor or forfeiture proceeding, in an amount determined by
        Lender, in its sole discretion, as being an adequate reserve or bond for
        the dispute.

        EVENTS AFFECTING GUARANTOR. Any of the preceding events occurs with
        respect to Guarantor of any of the Indebtedness or Guarantor dies or
        becomes incompetent or revokes or disputes the validity of, or liability
        under, any Guaranty of the Indebtedness.

        Adverse Change. A material adverse change occurs in Borrower's or
        Grantor's financial condition, or Lender believes the prospect of
        payment or performance of the Indebtedness is impaired.

        INSECURITY. Lender in good faith believes itself insecure.

        CURE PROVISIONS. If any default, other than a default in payment is
        curable and if Grantor has not been given a notice of a breach of the
        same provision of this Agreement within the preceding twelve (12)
        months, it may be cured (and no event of default will have occurred) if
        Grantor, after receiving written notice from Lender demanding cure of
        such default: (1) cures the default within fifteen (15) days; or (2) if
        the cure requires more than fifteen (15) days, immediately initiates
        steps which Lender deems in Lender's sole discretion to be sufficient to
        cure the default and thereafter continues and completes all reasonable
        and necessary steps sufficient to produce compliance as soon as
        reasonably practical.

RIGHTS AND REMEDIES ON DEFAULT. If an Event of Default occurs under this
Agreement, at any time thereafter, Lender shall have all the rights of a secured
party under the Massachusetts Uniform Commercial Code. In addition and without
limitation, Lender may exercise any one or more of the following rights and
remedies:

        ACCELERATE INDEBTEDNESS. Lender may declare the entire Indebtedness,
        including any prepayment penalty which Borrower would be required to
        pay, immediately due and payable, without notice of any kind to Borrower
        or Grantor.

        ASSEMBLE COLLATERAL. Lender may require Grantor to deliver to Lender all
        or any portion of the Collateral and any and all certificates of title
        and other documents relating to the Collateral. Lender may require
        Grantor to assemble the Collateral and make it available to Lender at a
        place to be designated by Lender. Lender also shall have full power to
        enter upon the property of Grantor to take possession of and remove the
        Collateral. If the Collateral contains other goods not covered by this
        Agreement at the time of repossession, Grantor agrees Lender may take
        such other goods, provided that Lender makes reasonable efforts to
        return them to Grantor after repossession.

        SELL THE COLLATERAL. Lender shall have full power to sell, lease,
        transfer, or otherwise deal with the Collateral or proceeds thereof in
        Lender's own name or that of Grantor. Lender may sell the Collateral at
        public auction or private sale. Unless the Collateral threatens to
        decline speedily in value or is of a type customarily sold on a
        recognized market, Lender will give Grantor, and other persons as
        required by law, reasonable notice of the time and place of any public
        sale, or the time after which any private sale or any other disposition
        of the Collateral is to be made. However, no notice need be provided to
        any person who, after Event of Default occurs, enters into and
        authenticates an agreement waiving that person's right to notification
        of sale. The requirements of reasonable notice shall be met if such
        notice is given at least ten (10) days before the time of the sale or
        disposition. All expenses relating to the disposition of the Collateral,
        including without limitation the expenses of retaking, holding,
        insuring, preparing for sale and selling the Collateral, shall become a
        part of the Indebtedness secured by this Agreement and shall be payable
        on demand, with interest at the Note rate from date of expenditure until
        repaid.

        APPOINT RECEIVER. Lender shall have the right to have a receiver
        appointed to take possession of all or any part of the Collateral, with
        the power to protect and preserve the Collateral, to operate the
        Collateral preceding foreclosure or sale, and to collect the Rents from
        the Collateral and apply the proceeds, over and above the cost of the
        receivership, against the Indebtedness. The receiver may serve without
        bond if permitted by law. Lender's right to the appointment of a
        receiver shall exist whether or not the apparent value of the Collateral
        exceeds the Indebtedness by a substantial amount. Employment by Lender
        shall not disqualify a person from serving as a receiver.

        COLLECT REVENUES, APPLY ACCOUNTS. Lender, either itself or through a
        receiver, may collect the payments, rents, income, and revenues from the
        Collateral. Lender may at any time in Lender's discretion transfer any
        Collateral into Lender's own name or that of Lender's nominee and
        receive the payments, rents, income, and revenues therefrom and hold the
        same as security for the Indebtedness or apply it to payment of the
        Indebtedness in such order of preference as Lender may determine.
        Insofar as the Collateral consists of accounts, general intangibles,
        insurance policies, instruments, chattel paper, chooses in action, or
        similar property, Lender may demand, collect, receipt for, settle,
        compromise, adjust, sue for, foreclose, or realize on the Collateral as
        Lender may determine, whether or not Indebtedness or Collateral is then
        due. For these purposes, Lender may, on behalf of and in the name of
        Grantor, receive, open and dispose of mail addressed to Grantor; change
        any address to which mail and payments are to be sent; and endorse
        notes, checks, drafts, money orders, documents of title, instruments and
        items pertaining to payment, shipment, or storage of any Collateral. To
        facilitate collection, Lender may notify account debtors and obligors on
        any Collateral to make payments directly to Lender.

        OBTAIN DEFICIENCY. If Lender chooses to sell any or all of the
        Collateral, Lender may obtain a judgment against Borrower for any
        deficiency co remaining on the Indebtedness due to Lender after
        application of all amounts received from the exercise of the rights
        provided in this Agreement. Borrower shall be liable for a deficiency
        even if the transaction described in this subsection is a sale of
        accounts or chattel paper.

        OTHER RIGHTS AND REMEDIES. Lender shall have all the rights and remedies
        of a secured creditor under the provisions of the Uniform Commercial
        Code, as may be amended from time to time. In addition, Lender shall
        have and may exercise any or all other rights and remedies it may have
        available at law, in equity, or otherwise.





                          COMMERCIAL SECURITY AGREEMENT

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        ELECTION OF REMEDIES. Except as may be prohibited by applicable law, all
        of Lender's rights and remedies, whether evidenced by this Agreement,
        the Related Documents, or by any other writing, shall be cumulative and
        may be exercised singularly or concurrently. Election by Lender to
        pursue any remedy shall not exclude pursuit of any other remedy, and an
        election to make expenditures or to take action to perform an obligation
        of Grantor under this Agreement, after Grantor's failure to perform,
        shall not affect Lender's right to declare a default and exercise its
        remedies.

DEPOSIT AGREEMENT SECURITY. Grantor hereby grants a security interest to Lender
in any and all deposit accounts (checking, savings, money market or time) of
Grantor at Lender, now existing or hereinafter opened, to secure the
Indebtedness. This includes all deposit accounts Grantor holds jointly with
someone else.

WAIVERS AND MISCELLANEOUS PROVISIONS. The following miscellaneous provisions are
a part of this Agreement:

        AMENDMENTS. This Agreement, together with any Related Documents,
        constitutes the entire understanding and agreement of the parties as to
        the matters set forth in this Agreement. No alteration of or amendment
        to this Agreement shall be effective unless given in writing and signed
        by the party or parties sought to be charged or bound by the alteration
        or amendment.

        ATTORNEYS' FEES; EXPENSES. Grantor agrees to pay upon demand all of
        Lender's costs and expenses, including Lender's attorneys' fees and
        Lender's legal expenses, incurred in connection with the enforcement of
        this Agreement. Lender may hire or pay someone else to help enforce this
        Agreement, and Grantor shall pay the costs and expenses of such
        enforcement. Costs and expenses include Lender's attorneys' fees and
        legal expenses whether or not there is a lawsuit, including attorneys'
        fees and legal expenses for bankruptcy proceedings (including efforts to
        modify or vacate any automatic stay or injunction), appeals, and any
        anticipated post-judgment collection services. Grantor also shall pay
        all court costs and such additional fees as may be directed by the
        court.

        CAPTION HEADINGS. Caption headings in this Agreement are for convenience
        purposes only and are not to be used to interpret or define the
        provisions of this Agreement.

        GOVERNING LAW. THIS AGREEMENT WILL BE GOVERNED BY, CONSTRUED AND
        ENFORCED IN ACCORDANCE WITH FEDERAL LAW AND THE LAWS OF THE STATE OF
        CALIFORNIA, EXCEPT AND ONLY TO THE EXTENT OF PROCEDURAL MATTERS RELATED
        TO THE PERFECTION AND ENFORCEMENT OF LENDER'S RIGHTS AND REMEDIES
        AGAINST THE COLLATERAL, WHICH MATTERS SHALL BE GOVERNED BY THE LAWS OF
        THE COMMONWEALTH OF MASSACHUSETTS. HOWEVER, IN THE EVENT THAT THE
        ENFORCEABILITY OR VALIDITY OF ANY PROVISION OF THIS AGREEMENT IS
        CHALLENGED OR QUESTIONED, SUCH PROVISION SHALL BE GOVERNED BY WHICHEVER
        APPLICABLE STATE OR FEDERAL LAW WOULD UPHOLD OR WOULD ENFORCE SUCH
        CHALLENGED OR QUESTIONED PROVISION. THE LOAN TRANSACTION WHICH IS
        EVIDENCED BY THE NOTE AND THIS AGREEMENT HAS BEEN APPLIED FOR,
        CONSIDERED, APPROVED AND MADE, AND ALL NECESSARY LOAN DOCUMENTS HAVE
        BEEN ACCEPTED BY LENDER IN THE STATE OF CALIFORNIA.

        CHOICE OF VENUE. If there is a lawsuit, Grantor agrees upon Lender's
        request to submit to the jurisdiction of the courts of Los Angeles
        County, State of California.

        JOINT AND SEVERAL LIABILITY. All obligations of Borrower and Grantor
        under this Agreement shall be joint and several, and all references to
        Grantor shall mean each and every Grantor, and all references to
        Borrower shall mean each and every Borrower. This means that each
        Borrower and Grantor signing below is responsible for all obligations in
        this Agreement. Where any one or more of the parties is a corporation,
        partnership, limited liability company or similar entity, it is not
        necessary for Lender to inquire into the powers of any of the officers,
        directors, partners, members, or other agents acting or purporting to
        act on the entity's behalf, and any obligations made or created in
        reliance upon the professed exercise of such powers shall be guaranteed
        under this Agreement.

        NO WAIVER BY LENDER. Lender shall not be deemed to have waived any
        rights under this Agreement unless such waiver is given in writing and
        signed by Lender. No delay or omission on the part of Lender in
        exercising any right shall operate as a waiver of such right or any
        other right. A waiver by Lender of a provision of this Agreement shall
        not prejudice or constitute a waiver of Lender's right otherwise to
        demand strict compliance with that provision or any other provision of
        this Agreement. No prior waiver by Lender, nor any course of dealing
        between Lender and Grantor, shall constitute a waiver of any of Lender's
        rights or of any of Grantor's obligations as to any future transactions.
        Whenever the consent of Lender is required under this Agreement, the
        granting of such consent by Lender in any instance shall not constitute
        continuing consent to subsequent instances where such consent is
        required and in all cases such consent may be granted or withheld in the
        sole discretion of Lender.

        NOTICES. Any notice required to be given under this Agreement shall be
        given in writing, and shall be effective when actually delivered, when
        actually received by telefacsimile (unless otherwise required by law),
        when deposited with a nationally recognized overnight courier, or, if
        mailed, when deposited in the United States mail, as first class,
        certified or registered mail postage prepaid, directed to the addresses
        shown near the beginning of this Agreement. Any party may change its
        address for notices under this Agreement by giving formal written notice
        to the other parties, specifying that the purpose of the notice is to
        change the party's address. For notice purposes, Grantor agrees to keep
        Lender informed at all times of Grantor's current address. Unless
        otherwise provided or required by law, if there is more than one
        Grantor, any notice given by Lender to any Grantor is deemed to be
        notice given to all Grantors.

        POWER OF ATTORNEY. Grantor hereby appoints Lender as Grantor's
        irrevocable attorney-in-fact for the purpose of executing any documents
        necessary to perfect, amend, or to continue the security interest
        granted in this Agreement or to demand termination of filings of other
        secured parties. Lender may at any time, and without further
        authorization from Grantor, file a carbon, photographic or other
        reproduction of any financing statement or of this Agreement for use as
        a financing statement. Grantor will reimburse Lender for all expenses
        for the perfection and the continuation of the perfection of Lender's
        security interest in the Collateral.

        SEVERABILITY. If a court of competent jurisdiction finds any provision
        of this Agreement to be illegal, invalid, or unenforceable as to any
        circumstance, that finding shall not make the offending provision
        illegal, invalid, or unenforceable as to any other circumstance. If
        feasible, the offending provision shall be considered modified so that
        it becomes legal, valid and enforceable. If the offending provision
        cannot be so modified, it shall be considered deleted from this
        Agreement. Unless otherwise required by law, the illegality, invalidity,
        or unenforceability of any provision of this Agreement shall not affect
        the legality, validity or enforceability of any other provision of this
        Agreement.

        SUCCESSORS AND ASSIGNS. Subject to any limitations stated in this
        Agreement on transfer of Grantor's interest, this Agreement shall be
        binding upon and inure to the benefit of the parties, their successors
        and assigns. If ownership of the Collateral becomes vested in a person
        other than Grantor, Lender, without notice to Grantor, may deal with
        Grantor's successors with reference to this Agreement and the
        Indebtedness by way of forbearance or extension without releasing
        Grantor from the obligations of this Agreement or liability under the
        Indebtedness.

        SURVIVAL OF REPRESENTATIONS AND WARRANTIES. All representations,
        warranties, and agreements made by Grantor in this Agreement shall
        survive the execution and delivery of this Agreement, shall be
        continuing in nature, and shall remain in full force and effect until
        such time as Borrower's Indebtedness shall be paid in full.

        TIME IS OF THE ESSENCE. Time is of the essence in the performance of
        this Agreement.

        WAIVE JURY. ALL PARTIES TO THIS AGREEMENT HEREBY WAIVE THE RIGHT TO ANY
        JURY TRIAL IN ANY ACTION, PROCEEDING, OR COUNTERCLAIM BROUGHT BY ANY
        PARTY AGAINST ANY OTHER PARTY.




                          COMMERCIAL SECURITY AGREEMENT

LOAN NO: 932900001-1                 (CONTINUED)                          PAGE 6
================================================================================


DEFINITIONS. The following capitalized words and terms shall have the following
meanings when used in this Agreement. Unless specifically stated to the
contrary, all references to dollar amounts shall mean amounts in lawful money of
the United States of America. Words and terms used in the singular shall include
the plural, and the plural shall include the singular, as the context may
require. Words and terms not otherwise defined in this Agreement shall have the
meanings attributed to such terms in the Uniform Commercial Code:

        ACCOUNT. The word "Account" means a trade account, account receivable,
        other receivable, or other right to payment for goods sold or services
        rendered owing to Grantor (or to a third party grantor acceptable to
        Lender).

        AGREEMENT. The word "Agreement" means this Commercial Security
        Agreement, as this Commercial Security Agreement may be amended or
        modified from time to time, together with all exhibits and schedules
        attached to this Commercial Security Agreement from time to time.

        BORROWER. The word "Borrower" means International Remote Imaging
        Systems, Inc., and all other persons and entities signing the Note in
        whatever capacity.

        COLLATERAL. The word "Collateral" means all of Grantor's right, title
        and interest in and to all the Collateral as described in the Collateral
        Description section of this Agreement.

        DEFAULT. The word "Default" means the Default set forth in this
        Agreement in the section titled "Default".

        ENVIRONMENTAL LAWS. The words "Environmental Laws" mean any and all
        state, federal and local statutes, regulations and ordinances relating
        to the protection of human health or the environment, including without
        limitation the Comprehensive Environmental Response, Compensation, and
        Liability Act of 1980, as amended, 42 U.S.C. Section 9601, et seq.
        ("CERCLA"), the Superfund Amendments and Reauthorization Act of 1986,
        Pub. L. No. 99-499 ("SARA"), the Hazardous Materials Transportation Act,
        49 U.S.C. Section 1801, et seq., the Resource Conservation and Recovery
        Act, 42 U.S.C. Section 6901, et seq., Chapters 6.5 through 7.7 of
        Division 20 of the California Health and Safety Code, Section 25100, et
        sec., or other applicable state or federal laws, rules, or regulations
        adopted pursuant thereto.

        EVENT OF DEFAULT. The words "Event of Default" mean any of the events of
        default set forth in this Agreement in the default section of this
        Agreement.

        GRANTOR. The word "Grantor" means Statspin, Inc..

        GUARANTOR. The word "Guarantor" means any guarantor, surety, or
        accommodation party of any or all of the Indebtedness.

        GUARANTY. The word "Guaranty" means the guaranty from Guarantor to
        Lender, including without limitation a guaranty of all or part of the
        Note.

        HAZARDOUS SUBSTANCES. The words "Hazardous Substances" mean materials
        that, because of their quantity, concentration or physical, chemical or
        infectious characteristics, may cause or pose a present or potential
        hazard to human health or the environment when improperly used, treated,
        stored, disposed of, generated, manufactured, transported or otherwise
        handled. The words "Hazardous Substances" are used in their very
        broadest sense and include without limitation any and all hazardous or
        toxic substances, materials or waste as defined by or listed under the
        Environmental Laws. The term "Hazardous Substances" also includes,
        without limitation, petroleum and petroleum by-products or any fraction
        thereof and asbestos.

        INDEBTEDNESS. The word "Indebtedness" means the indebtedness evidenced
        by the Note or Related Documents, including all principal and interest
        together with all other indebtedness and costs and expenses for which
        Borrower is responsible under this Agreement or under any of the Related
        Documents.

        LENDER. The word "Lender" means California Bank & Trust, its successors
        and assigns.

        NOTE. The word "Note" means the Note executed by International Remote
        Imaging Systems, Inc. in the principal amount of $6,500,000.00 dated
        February 7, 2002, together with all renewals of, extensions of,
        modifications of, refinancings of, consolidations of, and substitutions
        for the note or credit agreement.

        PROPERTY. The word "Property" means all of Grantor's right, title and
        interest in and to all the Property as described in the "Collateral
        Description" section of this Agreement.

        RELATED DOCUMENTS. The words "Related Documents" mean all promissory
        notes, credit agreements, loan agreements, environmental agreements,
        guaranties, security agreements, mortgages, deeds of trust, security
        deeds, collateral mortgages, and all other instruments, agreements and
        documents, whether now or hereafter existing, executed in connection
        with the Indebtedness.

BORROWER AND GRANTOR HAVE READ AND UNDERSTOOD ALL THE PROVISIONS OF THIS
COMMERCIAL SECURITY AGREEMENT AND AGREE TO ITS TERMS. THIS AGREEMENT IS DATED
FEBRUARY 7, 2002.

THIS AGREEMENT IS GIVEN UNDER SEAL AND IT IS INTENDED THAT THIS AGREEMENT IS AND
SHALL CONSTITUTE AND HAVE THE EFFECT OF A SEALED INSTRUMENT ACCORDING TO LAW.


GRANTOR:



STATSPIN, INC.


BY: /S/ DR. JOHN A. O'MALLEY   (SEAL)     BY: /S/ DONALD HORACEK         (SEAL)
    ---------------------------               ---------------------------
    DR. JOHN A. O'MALLEY,                     DONALD HORACEK,
    CEO OF STATPIN, INC.                      SECRETARY OF STATSPIN, INC.




INTERNATIONAL REMOTE IMAGING SYSTEMS, INC.;



BY: /S/ DR. JOHN A. O'MALLEY,  (SEAL)     BY: /S/ JOHN CALOZ             (SEAL)
    ---------------------------               ---------------------------
    DR. JOHN A. O'MALLEY,                     JOHN CALOZ,
    CEO/CHAIRMAN OF                           SECRETARY OF INTERNATIONAL REMOTE
    INTERNATIONAL REMOTE                      IMAGING SYSTEMS, INC.
    IMAGING SYSTEMS, INC.

EX-11.1(D)

                                                                 EXHIBIT 11.1(d)



===============================================================================================================
                               LANDLORD'S CONSENT
PRINCIPAL      LOAN DATE      MATURITY       LOAN NO        CALL/COLL     ACCOUNT        OFFICER        INITIALS
                                                                                       
               02-07-2002    02-28-2007    932900001-4                    932900001-4     22163          [INITIALS ILLEGIBLE]

================================================================================================================
References in the shaded area are for Lender's use only and do not limit the applicability of this document to any particular loan
or item. Any item above containing "***" has been omitted due to text length limitations.




                                                 
BORROWER:  INTERNATIONAL REMOTE                     LENDER:  CALIFORNIA BANK & TRUST
           IMAGING SYSTEMS, INC.                             COMMERCIAL LOAN CENTER
           9162 ETON AVENUE                                  550 SOUTH HOPE STREET, SUITE 300
           CHATSWORTH, CA 91311                              LOS ANGELES, CA 90071

================================================================================


THIS LANDLORD'S CONSENT IS ENTERED INTO AMONG INTERNATIONAL REMOTE IMAGING
SYSTEMS, INC. ("BORROWER"), WHOSE ADDRESS IS 9162 ETON AVENUE, CHATSWORTH, CA
91311; CALIFORNIA BANK & TRUST ("LENDER"), WHOSE ADDRESS IS COMMERCIAL LOAN
CENTER, 550 SOUTH HOPE STREET, SUITE 300, LOS ANGELES, CA 90071; AND NORTH PARK
INDUSTRIAL CENTER ("LANDLORD"), WHOSE ADDRESS IS C/O WEST AMERICAN CONSTRUCTION,
CORPORATION, 8929 WILSHIRE BLVD., #400, BEVERLY HILLS, CA 90211. Borrower and
Lender have entered into, or are about to enter into, an agreement whereby
Lender has acquired or will acquire a security interest or other interest in the
Collateral. Some or all of the Collateral may be affixed or otherwise become
located on the Premises. To induce Lender to extend the Loan to Borrower against
such security interest in the Collateral and for other valuable consideration,
Landlord hereby agrees with Lender and Borrower as follows.

COLLATERAL DESCRIPTION. The word "Collateral" means certain of Borrower's
personal property in which Lender has acquired or will acquire a security
interest, including without limitation the following specific property:

      ALL INVENTORY, EQUIPMENT, ACCOUNTS (INCLUDING BUT NOT LIMITED TO ALL
      HEALTH-CARE-INSURANCE RECEIVABLES), CHATTEL PAPER, INSTRUMENTS (INCLUDING
      BUT NOT LIMITED TO ALL PROMISSORY NOTES), LETTER-OF-CREDIT RIGHTS, LETTERS
      OF CREDIT, DOCUMENTS, DEPOSIT ACCOUNTS, INVESTMENT PROPERTY, MONEY, OTHER
      RIGHTS TO PAYMENT AND PERFORMANCE, AND GENERAL INTANGIBLES (INCLUDING BUT
      NOT LIMITED TO ALL SOFTWARE AND ALL PAYMENT INTANGIBLES); ALL FIXTURES;
      ALL ATTACHMENTS, ACCESSIONS, ACCESSORIES, FITTINGS, INCREASES, TOOLS,
      PARTS, REPAIRS, SUPPLIES, AND COMMINGLED GOODS RELATING TO THE FOREGOING
      PROPERTY, AND ALL ADDITIONS, REPLACEMENTS OF AND SUBSTITUTIONS FOR ALL OR
      ANY PART OF THE FOREGOING PROPERTY; ALL INSURANCE REFUNDS RELATING TO THE
      FOREGOING PROPERTY; ALL GOOD WILL RELATING TO THE FOREGOING PROPERTY; ALL
      RECORDS AND DATA AND EMBEDDED SOFTWARE RELATING TO THE FOREGOING PROPERTY,
      AND ALL EQUIPMENT, INVENTORY AND SOFTWARE TO UTILIZE, CREATE, MAINTAIN AND
      PROCESS ANY SUCH RECORDS AND DATA ON ELECTRONIC MEDIA; AND ALL SUPPORTING
      OBLIGATIONS RELATING TO THE FOREGOING PROPERTY; ALL WHETHER NOW EXISTING
      OR HEREAFTER ARISING, WHETHER NOW OWNED OR HEREAFTER ACQUIRED OR WHETHER
      NOW OR HEREAFTER SUBJECT TO ANY RIGHTS IN THE FOREGOING PROPERTY; AND ALL
      PRODUCTS AND PROCEEDS (INCLUDING BUT NOT LIMITED TO ALL INSURANCE
      PAYMENTS) OF OR RELATING TO THE FOREGOING PROPERTY.

DISCLAIMER OF INTEREST. Landlord hereby consents to Lender's security interest
(or other interest) in the Collateral and disclaims all interests, liens and
claims which Landlord now has or may hereafter acquire in the Collateral.
Landlord agrees that any lien or claim it may now have or may hereafter have in
the Collateral will be subject at all times to Lender's security interest (or
other present or future interest) in the Collateral and will be subject to the
rights granted by Landlord to Lender in this Agreement.

ENTRY ONTO PREMISES. Landlord and Borrower grant to Lender the right to enter
upon the Premises for the purpose of removing the Collateral from the Premises
or conducting sales of the Collateral on the Premises. The rights granted to
Lender in this Agreement will continue until a reasonable time after Lender
receives notice in writing from Landlord that Borrower no longer is in lawful
possession of the Premises. If Lender enters onto the Premises and removes the
Collateral, Lender agrees with Landlord not to remove any Collateral in such a
way that the Premises are damaged, without either repairing any such damage or
reimbursing Landlord for the cost of repair.

MISCELLANEOUS PROVISIONS. The following miscellaneous provisions are a part of
this Agreement: This Agreement shall extend to and bind the respective heirs,
personal representatives, successors and assigns of the parties to this
Agreement. The covenants of Borrower and Landlord respecting subordination of
the claim or claims of Landlord in favor of Lender shall extend to, include, and
be enforceable by any transferee or endorsee to whom Lender may transfer any
claim or claims to which this Agreement shall apply. Lender need not accept this
Agreement in writing or otherwise to make it effective. This Agreement shall be
governed by and construed in accordance with the laws of the State of
California. If Landlord is other than an individual, any agent or other person
executing this Agreement on behalf of Landlord represents and warrants to Lender
that he or she has full power and authority to execute this Agreement on
Landlord's behalf. Lender shall not be deemed to have waived any rights under
this Agreement unless such waiver is in writing and signed by Lender. Without
notice to Landlord and without affecting the validity of this Consent, Lender
may do or not do anything it deems appropriate or necessary with respect to the
Loan, any obligors on the Loan, or any Collateral for the Loan; including
without limitation extending, renewing, rearranging, or accelerating any of the
Loan indebtedness.

AMENDMENTS. This Agreement, together with any Related Documents, constitutes the
entire understanding and agreement of the parties as to the matters set forth in
this Agreement. No alteration of or amendment to this Agreement shall be
effective unless given in writing and signed by the party or parties sought to
be charged or bound by the alteration or amendment.

NO WAIVER BY LENDER. Lender shall not be deemed to have waived any rights under
this Agreement unless such waiver is given in writing and signed by Lender. No
delay or omission on the part of Lender in exercising any right shall operate as
a waiver of such right or any other right. A waiver by Lender of a provision of
this Agreement shall not prejudice or constitute a waiver of Lender's right
otherwise to demand strict compliance with that provision or any other provision
of this Agreement. No prior waiver by Lender, nor any course of dealing between
Lender and Landlord, shall constitute a waiver of any of Lender's rights or of
any of Landlord's obligations as to any future transactions. Whenever the
consent of Lender is required under this Agreement, the granting of such consent
by Lender in any instance shall not constitute continuing consent to subsequent
instances where such consent is required and in all cases such consent may be
granted or withheld in the sole discretion of Lender.

SEVERABILITY. If a court of competent jurisdiction finds any provision of this
Agreement to be illegal, invalid, or unenforceable as to any circumstance, that
finding shall not make the offending provision illegal, invalid, or
unenforceable as to any other circumstance. If feasible, the offending provision
shall be considered modified so that it becomes legal, valid and enforceable. If
the offending provision cannot be so modified, it shall be considered deleted
from this Agreement. Unless otherwise required by law, the illegality,
invalidity, or unenforceability of any provision of this Agreement shall not
affect the legality, validity or enforceability of any other provision of this
Agreement.

DEFINITIONS. The following capitalized words and terms shall have the following
meanings when used in this Agreement. Unless specifically stated to the
contrary, all references to dollar amounts shall mean amounts in lawful money of
the United States of America. Words and terms used in the singular shall include
the plural, and the plural shall include the singular, as the context may
require. Words and terms not otherwise defined in this Agreement shall have the
meanings attributed to such terms in the Uniform Commercial Code:

      AGREEMENT. The word "Agreement" means this Landlord's Consent, as this
      Landlord's Consent may be amended or modified from time to time, together
      with all exhibits and schedules attached to this Landlord's Consent from
      time to time.

      BORROWER. The word "Borrower" means International Remote Imaging Systems,
      Inc., and all other persons and entities signing the Note in whatever
      capacity.




                               LANDLORD'S CONSENT
LOAN NO: 932900001-4               (CONTINUED)                            PAGE 2

================================================================================

      COLLATERAL. The word "Collateral" means all of Borrower's right, title and
      interest in and to all the Collateral as described in the Collateral
      Description section of this Agreement.

      LANDLORD. The word "Landlord" means North Park Industrial Center, and is
      used for convenience purposes only. Landlord's interest in the Premises
      may be that of a fee owner, lessor, sublessor or lienholder, or that of
      any other holder of an interest in the Premises which may be, or may
      become, prior to the interest of Lender.

      LENDER. The word "Lender" means California Bank & Trust, its successors
      and assigns.

      LOAN. The word "Loan" means any and all loans and financial accommodations
      from Lender to Borrower whether now or hereafter existing, and however
      evidenced.

      PREMISES. The word "Premises" means the real property.

      RELATED DOCUMENTS. The words "Related Documents" mean all promissory
      notes, credit agreements, loan agreements, environmental agreements,
      guaranties, security agreements, mortgages, deeds of trust, security
      deeds, collateral mortgages, and all other instruments, agreements and
      documents, whether now or hereafter existing, executed in connection with
      the Loan.

BORROWER AND LANDLORD ACKNOWLEDGE HAVING READ ALL THE PROVISIONS OF THIS
LANDLORD'S CONSENT, AND BORROWER AND LANDLORD AGREE TO ITS TERMS. THIS AGREEMENT
IS DATED FEBRUARY 7, 2002.


BORROWER:



INTERNATIONAL REMOTE IMAGING SYSTEMS, INC.

BY:  /s/ JOHN A. O'MALLEY
   -------------------------------------------
   DR. JOHN A. O'MALLEY, CEO/CHAIRMAN OF
   INTERNATIONAL REMOTE IMAGING SYSTEMS, INC.

BY:  /s/ JOHN CALOZ
   -------------------------------------------
   JOHN CALOZ, CFO/SECRETARY OF INTERNATIONAL
   REMOTE IMAGING SYSTEMS, INC.


LANDLORD:                                           LENDER:



NORTH PARK INDUSTRIAL CENTER                        CALIFORNIA BANK & TRUST

BY:  /s/ [SIGNATURE ILLEGIBLE]                      X  /s/ [SIGNATURE ILLEGIBLE]
   -------------------------------------------      ----------------------------
   AUTHORIZED SIGNER FOR NORTH PARK INDUSTRIAL      AUTHORIZED OFFICER
   CENTER

BY:
   -------------------------------------------
   AUTHORIZED SIGNER FOR NORTH PARK INDUSTRIAL
   CENTER


================================================================================
LASER PRO Lending, Ver. 5.19.00.08 Copr. Harland Financial Solutions, Inc. 1997,
     2002. All Rights Reserved. - CA M:\WINAPPS\CFI\LPL\E45.FC TR-5164 PR-1



The signature of the lessor hereon is not binding upon the Lessor until the
Rider attached hereto contains the signature and, if necessary, a notarization
of the signature, of the Lender or Secured Party.




                         RIDER TO SECURED LOAN DOCUMENT

      This Agreement is a Rider to and is hereby made a part of the particular
secured loan document ("Secured Loan Document") to which it is attached, whether
such document be entitled a Consent to Removal of Personal Property Affixed to
Real Property, an Easement and Subordination or other title providing for the
rights of the undersigned Secured Party, Lender, or Bank ("Secured Party") to
enter upon the real property ("Premises") described in the Secured Loan Document
and owned by the Lessor identified in the Secured Loan Document ("Lessor"), to
remove certain personal property described in the Secured Loan Document and, if
applicable, to occupy the Premises for the purpose of carrying out Secured
Party's rights under the Secured Loan Document:

                                  WITNESSETH:

      In consideration of the Lessor entering into the Secured Loan Document to
which this Rider is attached, Secured Party hereby agrees as follows, in
addition to any and all agreements of Secured Party contained in the Secured
Loan Document and notwithstanding anything to the contrary contained in the
Secured Loan Document:

      1 . In the event that the Premises are damaged by the removal of any
personal property from the Premises, Secured Party shall repair any and all such
damage or shall reimburse Lessor for the cost thereof within five (5) business
days after receipt of an itemized statement from Lessor as to the cost of repair
of such damage.

      2. In the event that the Lessee which is Secured Party's debtor has failed
to make any payment of rent or other charges to Lessor, and Secured Party
occupies the Premises for any period of time in order to carry out its rights
under the Secured Loan Document, Secured Party shall pay to Lessor the rent and
other charges, including but not limited to taxes and insurance, provided in the
lease agreement between Lessor and Lessee attributable to the period commencing
upon Secured Party's entering into occupation of the Premises and ending upon
Secured Party's vacating the Premises.

      3. If the Secured Loan Document and/or this Rider is recorded, Secured
Party agrees that it shall, at its sole expense, remove the lien of the Secured
Loan Document from the Premises on the earlier of (i) repayment of the secured
indebtedness or (ii) expiration of the lease between Lessor and Lessee. In the
event that Secured Party fails to remove such lien and Lessor is required to
remove such lien, at its expense, Secured Party hereby agrees to reimburse
Lessor, within five (5) business days of receipt of a statement therefore, for
all expenses incurred by Lessor, including but not limited to recording fees and
attorneys' fees, incurred by Lessor in removing said lien from the Premises.

      4. Lessor's signature on the Secured Loan Document is not valid unless
Secured Party has signed this Rider and, if signatures on the Secured Loan
Document are notarized, unless Secured Party's signature on this Rider is
notarized.


Date:    2/8/02
     ----------------                        SECURED PARTY


                                             /s/ [SIGNATURE ILLEGIBLE]
                                             -------------------------

                                             /s/ [SIGNATURE ILLEGIBLE]
                                             -------------------------

EX-11.1(E)

                                                                 EXHIBIT 11.1(e)

                            SUBORDINATION AGREEMENT


- ---------------------------------------------------------------------------------------------------------------------------------
   PRINCIPAL         LOAN DATE      MATURITY       LOAN NO        CALL/COLL       ACCOUNT       OFFICER            INITIALS
                                                                                           
 $6,500,000.00      02-07-2002     06-30-2004     932900001-1                   932900001-1     22163        [INITIALS ILLEGIBLE]
- ---------------------------------------------------------------------------------------------------------------------------------
References in the shaded area are for Lender's use only and do not limit the applicability of this document
to any particular loan or item. Any item above containing "***" has been omitted due to text length limitations.
- ---------------------------------------------------------------------------------------------------------------------------------


BORROWER: INTERNATIONAL REMOTE          LENDER: CALIFORNIA BANK & TRUST
            IMAGING SYSTEMS, INC.               COMMERCIAL LOAN CENTER
          9162 ETON AVENUE                      550 SOUTH HOPE STREET, SUITE 300
          CHATSWORTH, CA 91311                  LOS ANGELES, CA 90071

CREDITOR: DIGITAL IMAGING TECHNOLOGIES, INC.
          1900 ST. JAMES PLACE, #700
          HOUSTON, TX 77056
================================================================================
THIS SUBORDINATION AGREEMENT DATED FEBRUARY 7, 2002, IS MADE AND EXECUTED AMONG
INTERNATIONAL REMOTE IMAGING SYSTEMS, INC., 9162 ETON AVENUE; CHATSWORTH, CA
91311 ("BORROWER"); DIGITAL IMAGING TECHNOLOGIES, INC.; 1900 ST. JAMES PLACE,
#700; HOUSTON, TX 77056 ("CREDITOR"); AND CALIFORNIA BANK & TRUST, COMMERCIAL
LOAN CENTER, 550 SOUTH HOPE STREET, SUITE 300, LOS ANGELES, CA 90071 ("LENDER").

CURRENT INDEBTEDNESS OWING TO CREDITOR. As of the date of this Agreement,
Borrower is indebted to Creditor in the AGGREGATE AMOUNT OF $7,000,000.00. This
amount is the total indebtedness of every kind from Borrower to Creditor.

REQUESTED FINANCIAL ACCOMMODATIONS. Borrower and Creditor each want Lender to
provide financial accommodations to Borrower in the form of (A) new credit or
loan advances, (B) an extension of time to pay or other compromises regarding
all or part of Borrower's present indebtedness to Lender, or (C) other benefits
to Borrower. Borrower and Creditor each represent and acknowledge to Lender
that Creditor will benefit as a result of these financial accommodations from
Lender to Borrower, and Creditor acknowledges receipt of valuable consideration
for entering into this Agreement. BASED ON THE REPRESENTATIONS AND
ACKNOWLEDGMENTS CONTAINED IN THIS AGREEMENT, BORROWER AND CREDITOR AGREE WITH
LENDER AS FOLLOWS:

SUBORDINATED INDEBTEDNESS. The words "Subordinated Indebtedness" as used in
this agreement mean the following specific indebtedness from BORROWER TO
CREDITOR, including all renewals, extensions, modifications and substitutions
for the indebtedness, including principal, interest, and all costs and
attorneys' fees, relating to the indebtedness: $7,000,000.00.

SUPERIOR INDEBTEDNESS. The words "Superior Indebtedness" as used in this
Agreement mean and include all present and future indebtedness, obligations,
liabilities, claims, rights, and demands of any kind which may be now or
hereafter owing from BORROWER TO LENDER. The term "Superior Indebtedness" is
used in its broadest sense and includes without limitation all principal, all
interest, all costs, attorneys' fees, all sums paid for the purpose of
protecting Lender's rights in security (such as paying for insurance on
collateral if the owner fails to do so), all contingent obligations of Borrower
(such as a guaranty), all obligations arising by reason of Borrower's accounts
with Lender (such as an overdraft on a checking account), and all other
obligations of Borrower to Lender, secured or unsecured, of any nature
whatsoever.

SUBORDINATION. All Subordinated Indebtedness of Borrower to Creditor is and
shall be subordinated in all respects to all Superior Indebtedness of Borrower
to Lender. If Creditor holds one or more Security Interests, whether now
existing or hereafter acquired, in any of Borrower's real property or personal
property, Creditor also subordinates all Creditor's Security Interests to all
Security Interests held by Lender, whether now existing or hereafter acquired.

PAYMENTS TO CREDITOR. Except as provided below, Borrower will not make and
Creditor will not accept, at any time while any Superior Indebtedness is owing
to Lender, (A) any payment upon any Subordinated Indebtedness, (B) any advance,
transfer, or assignment of assets to Creditor in any form whatsoever that would
reduce at any time or in any way the amount of Subordinated Indebtedness, or
(C) any transfer of any assets as security for the Subordinated Indebtedness.
Notwithstanding the foregoing, Borrower may make regularly scheduled payments
of interest only to Creditor so long as Borrower is not in default under any
written agreement between Lender and Borrower. Creditor may not accelerate any
amounts owed to Creditor without Lender's prior written consent.
Notwithstanding the foregoing, Borrower may make regularly scheduled payments
of $97,250.00 EACH MONTH (PRINCIPAL PAYMENT) to Creditor in accordance with the
terms of the Subordinated Indebtedness so long as Borrower is not in default
under any written agreement between Lender and Borrower. Creditor may not
accelerate any amounts owed to Creditor without Lender's prior written consent.

In the event of any distribution, division, or application, whether partial or
complete, voluntary or involuntary, by operation of law or otherwise, of all or
any part of Borrower's assets, or the proceeds of Borrower's assets, in
whatever form, to creditors of Borrower or upon any indebtedness of Borrower,
whether by reason of the liquidation, dissolution or other winding-up of
Borrower, or by reason of any execution sale, receivership, insolvency, or
bankruptcy proceeding, assignment for the benefit of creditors, proceedings for
reorganization, or readjustment of Borrower or Borrower's properties, then and
in such event, (A) the Superior Indebtedness shall be paid in full before any
payment is made upon the Subordinated Indebtedness, and (B) all payments and
distributions, of any kind or character and whether in cash, property, or
securities, which shall be payable or deliverable upon or in respect of the
Subordinated Indebtedness shall be paid or delivered directly to Lender for
application in payment of the amounts then due on the Superior Indebtedness
until the Superior Indebtedness shall have been paid in full.

Should any payment, distribution, security or proceeds thereof be received by
Creditor at any time on the Subordinated Indebtedness contrary to the terms of
this Agreement, Creditor immediately will deliver the same to Lender in
precisely the form received (except for the endorsement or assignment of
Creditor if necessary), for application on or to secure the Superior
Indebtedness, whether it is due or not due, and until so delivered the same
shall be held in trust by Creditor as property of Lender. In the event Creditor
fails to make any such endorsement or assignment, Lender, or any of its
officers on behalf of Lender, is hereby irrevocably authorized by Creditor to
make the same.

CREDITOR'S NOTES. Creditor agrees to deliver to Lender, at Lender's request,
copies of all notes of Borrower to Creditor, or other evidence of the
Subordinated Indebtedness, now held or hereafter acquired by Creditor, while
this Agreement remains in effect. At Lender's request, Borrower also will
execute and deliver to Creditor a promissory note evidencing any book account
or claim now or hereafter owed by Borrower to Creditor, which not also shall be
delivered by Creditor to Lender. Creditor agrees not to sell, assign, pledge or
otherwise transfer any of such notes except subject to all the terms and
conditions of this Agreement.




                                            **not outlined under this agreement.


                            SUBORDINATION AGREEMENT
LOAN NO: 932900001-1               (CONTINUED)                            PAGE 2
PAGE 2
================================================================================
CREDITOR'S REPRESENTATIONS AND WARRANTIES. Creditor represents and warrants to
Lender that: (A) no representations or agreements of any kind have been made to
Creditor which would limit or qualify in any way the terms of this Agreement;
(B) this Agreement is executed at Borrower's request and not at the request of
Lender; (C) Lender has made no representation to Creditor as to the
creditworthiness of Borrower; and (D) Creditor has established adequate means of
obtaining from Borrower on a continuing basis information regarding Borrower's
financial condition. Creditor agrees to keep adequately informed from such means
of any facts, events, or circumstances which might in any way affect Creditor's
risks under this Agreement, and Creditor further agrees that Lender shall have
no obligation to disclose to Creditor information or material acquired by Lender
in the course of its relationship with Borrower.

CREDITOR'S WAIVERS. Creditor waives any right to require Lender: (A) to make,
extend, renew, or modify any loan to Borrower or to grant any other financial
accommodations to Borrower whatsoever; (B) to make any presentment, protest,
demand, or notice of any kind, including notice of any nonpayment of the
Superior Indebtedness or of any nonpayment related to any Security Interests, or
notice of any action or nonaction on the part of Borrower, Lender, any surety,
endorser, or other guarantor in connection with the Superior Indebtedness, or in
connection with the creation of new or additional Superior Indebtedness; (C) to
resort for payment or to proceed directly or at once against any person,
including Borrower; (D) to proceed directly against or exhaust any Security
Interests held by Lender from Borrower, any other guarantor, or any other person
(E) to pursue any other remedy within Lender's power; or (F) to commit any act
or omission of any kind, at any time, with respect to any matter whatsoever.??

LENDER'S RIGHTS. Lender may take or omit any and all actions with respect to the
Superior Indebtedness or any Security Interests for the SUPERIOR Indebtedness
without affecting whatsoever any of Lender's rights under this Agreement. In
particular, without limitation, Lender may, without notice of any kind to
Creditor, (A) make one or more additional secured or unsecured loans to
Borrower; (B) repeatedly alter, compromise, renew, extend, accelerate, or
otherwise change the time for payment or other terms of the Superior
Indebtedness or any part thereof, including increases and decreases of the rate
of interest on the Superior Indebtedness; extensions may be repeated and may be
for longer than the original loan term; (C) take and hold Security Interests for
the payment of the Superior Indebtedness, and exchange, enforce, waive, and
release any such Security Interests, with or without the substitution of new
collateral; (D) release, substitute, agree not to sue, or deal with any one or
more of Borrower's sureties, endorsers, or guarantors on any terms or manner
Lender chooses; (E) determine how, when and what application of payments and
credits, shall be made on the Superior Indebtedness; (F) apply such security and
direct the order or manner of sale thereof, as Lender in its discretion may
determine; and (G) assign this Agreement in whole or in part.

DEFAULT BY BORROWER. If Borrower becomes insolvent or bankrupt, this Agreement
shall remain in full force and effect. In the event of a corporate
reorganization or corporate arrangement of Borrower under the provisions of the
Bankruptcy Code, as amended, this Agreement shall remain in full force and
effect and the court having jurisdiction over the reorganization or arrangement
is hereby authorized to preserve such priority and subordination provided under
this Agreement in approving any such plan of reorganization or arrangement.

DURATION AND TERMINATION. This Agreement will take effect when received by
Lender, without the necessity of any acceptance by Lender, in writing or
otherwise, and will remain in full force and effect until Creditor shall notify
Lender in writing at the address shown above to the contrary. Any such notice
shall not affect the Superior Indebtedness owed Lender by Borrower at the time
of such notice, nor shall such notice affect Superior Indebtedness thereafter
granted in compliance with a commitment made by Lender to Borrower prior to
receipt of such notice, nor shall such notice affect any renewals of or
substitutions for any of the foregoing. Such notice shall affect only
indebtedness of Borrower to Lender arising after receipt of such notice and not
arising from financial assistance granted by Lender to Borrower in compliance
with Lender's obligations under a commitment. Any notes lodged with Lender
pursuant to the section titled "Creditor's Notes" above need not be returned
until this Agreement has no further force or effect.

MISCELLANEOUS PROVISIONS. The following miscellaneous provisions are a part of
this Agreement:

        AMENDMENTS. This Agreement, together with any Related Documents,
        constitutes the entire understanding and agreement of the parties as to
        the matters set forth in this Agreement. No alteration of or amendment
        to this Agreement shall be effective unless given in writing and signed
        by the party or parties sought to be charged or bound by the alteration
        or amendment.

        ATTORNEYS' FEES; EXPENSES. Creditor agrees to pay upon demand all of
        Lender's costs and expenses, including Lender's attorneys' fees and
        Lender's legal expenses, incurred in connection with the enforcement of
        this Agreement. Lender may hire or pay someone else to help enforce this
        Agreement, and Creditor shall pay the costs and expenses of such
        enforcement. Costs and expenses include Lender's attorneys' fees and
        legal expenses whether or not there is a lawsuit, including attorneys'
        fees and legal expenses for bankruptcy proceedings (including efforts to
        modify or vacate any automatic stay or injunction), appeals, and any
        anticipated post-judgment collection services. Creditor also shall pay
        all court costs and such additional fees as may be directed by the
        court.

        AUTHORITY. The person who signs this Agreement as or on behalf of
        Creditor represents and warrants that he or she has authority to execute
        this Agreement and to subordinate the Subordinated Indebtedness and the
        Creditor's security interests in Borrower's property, if any.

        CAPTION HEADINGS. Caption headings in this Agreement are for convenience
        purposes only and are not to be used to interpret or define the
        provisions of this Agreement.

        GOVERNING LAW. THIS AGREEMENT WILL BE GOVERNED BY, CONSTRUED AND
        ENFORCED IN ACCORDANCE WITH FEDERAL LAW AND THE LAWS OF THE STATE OF
        CALIFORNIA. THIS AGREEMENT HAS BEEN ACCEPTED BY LENDER IN THE STATE OF
        CALIFORNIA.

        CHOICE OF VENUE. If there is a lawsuit, Creditor agrees upon Lender's
        request to submit to the jurisdiction of the courts of Los Angeles
        County, State of California.

        INTERPRETATION. In all cases where there is more than one Creditor, then
        all words used in this Agreement in the singular shall be deemed to have
        been used in the plural where the context and construction so require;
        and where there is more than one Creditor named in this Agreement or
        when this Agreement is executed by more than one , the words "Creditor"
        shall mean all and any one or more of them. Reference to the phrase
        "Creditor" includes the heirs, successors, assigns, and transferees of
        each of them.

        SUCCESSORS AND ASSIGNS. This Agreement shall be understood to be for the
        benefit of Lender and for such other person or persons as may from time
        to time become or be the holder or owner of any of the Indebtedness or
        any interest therein, and this Agreement shall be transferable to the
        same extent and with the same force and effect as any such Indebtedness
        may be transferable.

        NO WAIVER BY LENDER. Lender shall not be deemed to have waived any
        rights under this Agreement unless such waiver is given in writing and
        signed by Lender. No delay or omission on the part of Lender in
        exercising any right shall operate as a waiver of such right or any
        other right. A waiver by Lender of a provision of this Agreement shall
        not prejudice or constitute a waiver of Lender's right otherwise to
        demand strict compliance with that provision or any other provision of
        this Agreement. No prior waiver by Lender, nor any course of dealing
        between Lender and Creditor, shall constitute a waiver of any of
        Lender's rights or of any of Creditor's obligations as to any future
        transactions. Whenever the consent of Lender is required under this
        Agreement, the granting of such consent by Lender in any instance shall
        not constitute continuing consent to subsequent instances where such
        consent is required and in all cases such consent may be granted or
        withheld in the sole discretion of Lender.

        WAIVE JURY. ALL PARTIES TO THIS AGREEMENT HEREBY WAIVE THE RIGHT TO ANY
        JURY TRIAL IN ANY ACTION, PROCEEDING, OR COUNTERCLAIM BROUGHT BY ANY
        PARTY AGAINST ANY OTHER PARTY.


                            SUBORDINATION AGREEMENT
LOAN NO: 932900001-1                  (CONTINUED)                       PAGE 3
==============================================================================

DEFINITIONS. The following capitalized words and terms shall have the following
meanings when used in this Agreement. Unless specifically stated to the
contrary, all references to dollar amounts shall mean amounts in lawful money of
the United States of America. Words and terms used in the singular shall include
the plural, and the plural shall include the singular, as the context may
require. Words and terms not otherwise defined in this Agreement shall have the
meanings attributed to such terms in the Uniform Commercial Code:


     AGREEMENT.  The word "Agreement" means this Subordination Agreement, as
     this Subordination Agreement may be amended or modified from time to time,
     together with all exhibits and schedules attached to this Subordination
     Agreement from time to time.

     BORROWER. the word "Borrower" means International Remote Imaging Systems,
     Inc., and all other persons and entities signing the Note in whatever
     capacity.

     CREDITOR. The word "Creditor" means Digital Imaging Technologies, Inc.

     INDEBTEDNESS. The word "Indebtedness" means the Indebtedness evidenced by
     the Note or Related Documents, including all principal and interest
     together with all other indebtedness and costs and expenses for which
     Borrower is responsible under this Agreement or under any of the Related
     Documents.  The word note shall mean that certain Subordinated Note dated
     3/14/01 by and between Creditor and Borrower in the amount of
     $7,000,000.00.

     LENDER. The word "Lender" means California Bank & Trust, its successors and
     assigns.

     RELATED DOCUMENTS. The words "Related Documents" mean all promissory notes,
     credit agreements, loan agreements, environmental agreements, guaranties,
     security agreements, mortgages, deeds of trust, security deeds, collateral
     mortgages, and all other instruments, agreements and documents, whether now
     or hereafter existing, executed in connection with the Indebtedness.

     SECURITY INTEREST. The words "Security Interest" mean, without limitation,
     any and all types of collateral security, present and future, whether in
     the form of a lien, charge, encumbrance, mortgage, deed of trust, security
     deed, assignment, pledge, crop pledge, chattel mortgage, collateral chattel
     mortgage, chattel trust, factor's lien, equipment trust, conditional sale,
     trust receipt, lien or title retention contract, lease or consignment
     intended as a security device, or any other security or lien interest
     whatsoever whether created by law, contract, or otherwise.

     SUBORDINATED INDEBTEDNESS. The words "Subordinated Indebtedness" mean the
     indebtedness described in the section of this Agreement titled
     "Subordinated Indebtedness".

     SUPERIOR INDEBTEDNESS. The words "Superior Indebtedness" mean the
     indebtedness described in the section of this Agreement titled "Superior
     Indebtedness".

BORROWER AND CREDITOR EACH ACKNOWLEDGE HAVING READ ALL THE PROVISIONS OF
THIS SUBORDINATION AGREEMENT, AND BORROWER AND CREDITOR EACH AGREE TO ITS TERMS.
THIS AGREEMENT IS DATED FEBRUARY 7, 2002.

BORROWER:

INTERNATIONAL REMOTE IMAGING SYSTEMS, INC.

BY: /s/ John A. O'Malley                  BY: /s/ John Caloz
   ------------------------------------      ----------------------------------
   DR. JOHN A. O'MALLEY                      JOHN CALOZ
   CEO/CHAIRMAN OF INTERNATIONAL REMOTE      CFO/SECRETARY OF INTERNATIONAL
   IMAGING SYSTEMS, INC.                     REMOTE IMAGING SYSTEMS, INC.

CREDITOR:

DIGITAL IMAGING TECHNOLOGIES, INC.

BY: /s/ [SIGNATURE ILLEGIBLE]
   ------------------------------------
   AUTHORIZED SIGNER FOR DIGITAL IMAGING
   TECHNOLOGIES, INC.


BY:
   ------------------------------------
   AUTHORIZED SIGNER FOR DIGITAL IMAGING
   TECHNOLOGIES, INC.

EX-11.1(F)

                                                                 EXHIBIT 11.1(f)
                               COMMERCIAL GUARANTY





- ------------------------------------------------------------------------------------------------------------------------------
  PRINCIPAL       LOAN DATE      MATURITY         LOAN NO       CALL/COLL       ACCOUNT       OFFICER     INTIALS
                                                                                     
                                                                                               22163      [INITIALS ILLEGIBLE]
- ------------------------------------------------------------------------------------------------------------------------------
References in the shaded area are for Lender's use only and do not limit the applicability of this document to any particular
loan or item. Any item above containing "***" has been omitted due to text length limitations.
- ------------------------------------------------------------------------------------------------------------------------------



BORROWER:   INTERNATIONAL REMOTE              LENDER:    CALIFORNIA BANK & TRUST
            IMAGING SYSTEMS, INC.                        COMMERCIAL LOAN CENTER
            9162 ETON AVENUE                             550 SOUTH HOPE STREET,
            CHATSWORTH, CA 91311                         SUITE 300
                                                         LOS ANGELES, CA 90071

GRANTOR:    STATSPIN, INC.
            85 MORSE STREET
            NORWOOD, MA 02062

================================================================================

AMOUNT OF GUARANTY. THE PRINCIPAL AMOUNT OF THIS GUARANTY IS EIGHT MILLION &
00/100 DOLLARS ($8,000,000.00).

CONTINUING GUARANTY. FOR GOOD AND VALUABLE CONSIDERATION, STATSPIN, INC.
("GUARANTOR") ABSOLUTELY AND UNCONDITIONALLY GUARANTEES AND PROMISES TO PAY TO
CALIFORNIA BANK & TRUST ("LENDER") OR ITS ORDER, IN LEGAL TENDER OF THE UNITED
STATES OF AMERICA, THE INDEBTEDNESS (AS THAT TERM IS DEFINED BELOW) OF
INTERNATIONAL REMOTE IMAGING SYSTEMS, INC. ("BORROWER") TO LENDER ON THE TERMS
AND CONDITIONS SET FORTH IN THIS GUARANTY. THE OBLIGATIONS OF GUARANTOR UNDER
THIS GUARANTY ARE CONTINUING.

MAXIMUM LIABILITY. The maximum liability of Guarantor under this Guaranty shall
not exceed at any one time the sum of the principal amount of $8,000,000.00,
plus all interest thereon, plus all of Lender's costs, expenses, and attorneys'
fees incurred in connection with or relating to (A) the collection of the
Indebtedness, (B) the collection and sale of any collateral for the Indebtedness
or this Guaranty, or (C) the enforcement of this Guaranty. Attorneys' fees
include, without limitation, attorneys' fees whether or not there is a lawsuit,
and if there is a lawsuit, any fees and costs for trial and appeals.

The above limitation on liability is not a restriction on the amount of the
Indebtedness of Borrower to Lender either in the aggregate or at any one time.
If Lender presently holds one or more guaranties, or hereafter receives
additional guaranties from Guarantor, Lender's rights under all guaranties shall
be cumulative. This Guaranty shall not (unless specifically provided below to
the contrary) affect or invalidate any such other guaranties. Guarantor's
liability will be Guarantor's aggregate liability under the terms of this
Guaranty and any such other unterminated guaranties.

INDEBTEDNESS GUARANTEED. The Indebtedness guaranteed by this Guaranty includes
any and all of Borrower's indebtedness to Lender and is used in the most
comprehensive sense and means and includes any and all of Borrower's
liabilities, obligations and debts to Lender, now existing or hereinafter
incurred or created, including, without limitation, all loans, advances,
interest, costs, debts, overdraft indebtedness, credit card indebtedness, lease
obligations, other obligations, and liabilities of Borrower, or any of them, and
any present or future judgments against Borrower, or any of them; and whether
any such Indebtedness is voluntarily or involuntarily incurred, due or not due,
absolute or contingent, liquidated or unliquidated, determined or undetermined;
whether Borrower may be liable individually or jointly with others, or primarily
or secondarily, or as guarantor or surety; whether recovery on the Indebtedness
may be or may become barred or unenforceable against Borrower for any reason
whatsoever; and whether the Indebtedness arises from transactions which may be
voidable on account of infancy, insanity, ultra vires, or otherwise.

DURATION OF GUARANTY. This Guaranty will take effect when received by Lender
without the necessity of any acceptance by Lender, or any notice to Guarantor or
to Borrower, and will continue in full force until all Indebtedness incurred or
contracted before receipt by Lender of any notice of revocation shall have been
fully and finally paid and satisfied and all of Guarantor's other obligations
under this Guaranty shall have been performed in full. If Guarantor elects to
revoke this Guaranty, Guarantor may only do so in writing. Guarantor's written
notice of revocation must be mailed to Lender, by certified mail, at Lender's
address listed above or such other place as Lender may designate in writing.
Written revocation of this Guaranty will apply only to advances or new
Indebtedness created after actual receipt by Lender of Guarantor's written
revocation. For this purpose and without limitation, the term "new Indebtedness"
does not include Indebtedness which at the time of notice of revocation is
contingent, unliquidated, undetermined or not due and which later becomes
absolute, liquidated, determined or due. This Guaranty will continue to bind
Guarantor for all Indebtedness incurred by Borrower or committed by Lender prior
to receipt of Guarantor's written notice of revocation, including any
extensions, renewals, substitutions or modifications of the Indebtedness. All
renewals, extensions, substitutions, and modifications of the Indebtedness
granted - after Guarantor's revocation, are contemplated under this Guaranty
and, specifically will not be considered to be new Indebtedness. This Guaranty
shall bind Guarantor's estate as to Indebtedness created both before and after
Guarantor's death or incapacity, regardless of Lender's actual notice of
Guarantor's death. Subject to the foregoing, Guarantor's executor or
administrator or other legal representative may terminate this Guaranty in the
same manner in which Guarantor might have terminated it and with the same
effect. Release of any other guarantor or termination of any other guaranty of
the Indebtedness shall not affect the liability of Guarantor under this
Guaranty. A revocation Lender receives from any one or more Guarantors shall not
affect the liability of any remaining Guarantors under this Guaranty. IT IS
ANTICIPATED THAT FLUCTUATIONS MAY OCCUR IN THE AGGREGATE AMOUNT OF INDEBTEDNESS
COVERED BY THIS GUARANTY, AND GUARANTOR SPECIFICALLY ACKNOWLEDGES AND AGREES
THAT REDUCTIONS IN THE AMOUNT OF INDEBTEDNESS, EVEN TO ZERO DOLLARS ($0.00),
PRIOR TO GUARANTOR'S WRITTEN REVOCATION OF THIS GUARANTY SHALL NOT CONSTITUTE A
TERMINATION OF THIS GUARANTY. THIS GUARANTY IS BINDING UPON GUARANTOR AND
GUARANTOR'S HEIRS, SUCCESSORS AND ASSIGNS SO LONG AS ANY OF THE GUARANTEED
INDEBTEDNESS REMAINS UNPAID AND EVEN THOUGH THE INDEBTEDNESS GUARANTEED MAY FROM
TIME TO TIME BE ZERO DOLLARS ($0.00).

GUARANTOR'S AUTHORIZATION TO LENDER. Guarantor authorizes Lender, either before
or after any revocation hereof, WITHOUT NOTICE OR DEMAND AND WITHOUT LESSENING
GUARANTOR'S LIABILITY UNDER THIS GUARANTY, FROM TIME TO TIME: (A) prior to
revocation as set forth above, to make one or more additional secured or
unsecured loans to Borrower, to lease equipment or other goods to Borrower, or
otherwise to extend additional credit to Borrower; (B) to alter, compromise,
renew, extend, accelerate, or otherwise change one or more times the time for
payment or other terms of the Indebtedness or any part of the Indebtedness,
including increases and decreases of the rate of interest on the Indebtedness;
extensions may be repeated and may be for longer than the original loan term;
(C) to take and hold security for the payment of this Guaranty or the
Indebtedness, and exchange, enforce, waive, subordinate, fail or decide not to
perfect, and release any such security, with or without the substitution of new
collateral; (D) to release, substitute, agree not to sue, or deal with any one
or more of Borrower's sureties, endorsers, or other guarantors on any terms or
in any manner Lender may choose; (E) to determine how, when and what application
of payments and credits shall be made on the Indebtedness (F) to apply such
security and direct the order or manner of sale thereof, including without
limitation, any nonjudicial sale permitted by the terms of the controlling
security agreement or deed of trust, as Lender in its discretion may determine;
(G) to sell, transfer, assign or grant participations in all or any part of
the Indebtedness; and (H) to assign or transfer this Guaranty in whole or in
part.

GUARANTOR'S REPRESENTATIONS AND WARRANTIES. Guarantor represents and warrants to
Lender that (A) no representations or agreements of any kind have been made to
Guarantor which would limit or qualify in any way the terms of this Guaranty;
(B) this Guaranty is executed at Borrower's request and not at the request of
Lender; (C) Guarantor has full power, right and authority to enter into this
Guaranty; (D) the provisions of this Guaranty do not conflict with or result in
a default under any agreement or other instrument binding upon Guarantor and do
not result in a violation of any law, regulation, court decree or order
applicable to Guarantor; (E) Guarantor has not and will not, without the prior
written consent of Lender, sell, lease, assign, encumber, hypothecate, transfer,
or otherwise dispose of all or substantially all of Guarantor's assets, or any
interest therein; (F) upon Lender's request, Guarantor will provide to Lender
financial and credit information in form acceptable to Lender, and all such
financial





                               COMMERCIAL GUARANTY

LOAN NO: 932900001-1                 (CONTINUED)                          PAGE 2
================================================================================


information which currently has been, and all future financial information which
will be provided to Lender is and will be true and correct in all material
respects and fairly present Guarantor's financial condition as of the dates the
financial information is provided; (G) no material adverse change has occurred
in Guarantor's financial condition since the date of the most recent financial
statements provided to Lender and no event has occurred which may materially
adversely affect Guarantor's financial condition; (H) no litigation, claim,
investigation, administrative proceeding or similar action (including those for
unpaid taxes) against Guarantor is pending or threatened; (I) Lender has made no
representation to Guarantor as to the creditworthiness of Borrower; and (J)
Guarantor has established adequate means of obtaining from Borrower on a
continuing basis information regarding Borrower's financial condition. Guarantor
agrees to keep adequately informed from such means of any facts, events, or
circumstances which might in any way affect Guarantor's risks under this
Guaranty, and Guarantor further agrees that, absent a request for information,
Lender shall have no obligation to disclose to Guarantor any information or
documents acquired by Lender in the course of its relationship with Borrower.

GUARANTOR'S WAIVERS. Except as prohibited by applicable law, Guarantor waives
any right to require Lender to (A) make any presentment, protest, demand, or
notice of any kind, including notice of change of any terms of repayment of the
Indebtedness, default by Borrower or any other guarantor or surety, any action
or nonaction taken by Borrower, Lender, or any other guarantor or surety of
Borrower, or the creation of new or additional Indebtedness; (B) proceed against
any person, including Borrower, before proceeding against Guarantor; (C) proceed
against any collateral for the Indebtedness, including Borrower's collateral,
before proceeding against Guarantor; (D) apply any payments or proceeds received
against the Indebtedness in any order; (E) give notice of the terms, time, and
place of any sale of the collateral pursuant to the Uniform Commercial Code or
any other law governing such sale; (F) disclose any information about the
Indebtedness, the Borrower, the collateral, or any other guarantor or surety, or
about any action or nonaction of Lender; or (G) pursue any remedy or course of
action in Lender's power whatsoever.

Guarantor also waives any and all rights or defenses arising by reason of (H)
any disability or other defense of Borrower, any other guarantor or surety or
any other person; (I) the cessation from any cause whatsoever, other than
payment in full, of the Indebtedness; (J) the application of proceeds of the
Indebtedness by Borrower for purposes other than the purposes understood and
intended by Guarantor and Lender; (K) any act of omission or commission by
Lender which directly or indirectly results in or contributes to the discharge
of Borrower or any other guarantor or surety, or the Indebtedness, or the loss
or release of any collateral by operation of law or otherwise; (L) any statute
of limitations in any action under this Guaranty or on the Indebtedness; or (M)
any modification or change in terms of the Indebtedness, whatsoever, including
without limitation, the renewal, extension, acceleration, or other change in the
time payment of the Indebtedness is due and any change in the interest rate, and
including any such modification or change in terms after revocation of this
Guaranty on Indebtedness incurred prior to such revocation.

Guarantor waives all rights and any defenses arising out of an election of
remedies by Lender even though that the election of remedies, such as a
non-judicial foreclosure with respect to security for a guaranteed obligation,
has destroyed Guarantor's rights of subrogation and reimbursement against
Borrower by operation of Section 580d of the California Code of Civil Procedure
or otherwise.

Guarantor waives all rights and defenses that Guarantor may have because
Borrower's obligation is secured by real property. This means among other
things: (1) Lender may collect from Guarantor without first foreclosing on any
real or personal property collateral pledged by Borrower. (2) If Lender
forecloses on any real property collateral pledged by Borrower: (a) the amount
of Borrower's obligation may be reduced only by the price for which the
collateral is sold at the foreclosure sale, even if the collateral is worth more
than the sale price. (b) Lender may collect from Guarantor even if Lender, by
forclosing on the real property collateral, has destroyed any right Guarantor
may have to collect from Borrower. This is an unconditional and irrevocable
waiver of any rights and defenses Guarantor may have because Borrower's
obligation is secured by real property. These rights and defenses include, but
are not limited to, any rights and defenses based upon Section 580a, 580b, 580d,
or 726 of the Code of Civil Procedure.

Guarantor understands and agrees that the foregoing waivers are unconditional
and irrevocable waivers of substantive rights and defenses to which Guarantor
might otherwise be entitled under state and federal law. Guarantor acknowledges
that Guarantor has provided these waivers of rights and defenses with the
intention that they be fully relied upon by Lender. Guarantor further
understands and agrees that this Guaranty is a separate and independent contract
between Guarantor and Lender, given for full and ample consideration, and is
enforceable on its own terms. Until all Indebtedness is paid in full, Guarantor
waives any right to enforce any remedy Guarantor may have against the Borrower
or any other guarantor, surety, or other person, and further, Guarantor waives
any right to participate in any collateral for the Indebtedness now or hereafter
held by Lender.

In addition to the waivers set forth herein, if now or hereafter Borrower is or
shall become insolvent and the Indebtedness shall not at all times until paid be
fully secured by collateral pledged by Borrower, Guarantor hereby forever waives
and gives up in favor of Lender and Borrower, and Lender's and Borrower's
respective successors, any claim or right to payment Guarantor may now have or
hereafter have or acquire against Borrower, by subrogation or otherwise, so that
at no time shall Guarantor be or become a "creditor" of Borrower within the
meaning of 11 U.S.C. section 547(b), or any successor provision of the Federal
bankruptcy laws.

GUARANTOR'S UNDERSTANDING WITH RESPECT TO WAIVERS. Guarantor warrants and agrees
that each of the waivers set forth above is made with Guarantor's full knowledge
of its significance and consequences and that, under the circumstances, the
waivers are reasonable and not contrary to public policy or law. If any such
waiver is determined to be contrary to any applicable law or public policy, such
waiver shall be effective only to the extent permitted by law or public policy.

SUBORDINATION OF BORROWER'S DEBTS TO GUARANTOR. Guarantor agrees that the
Indebtedness of Borrower to Lender, whether now existing or hereafter created,
shall be superior to any claim that Guarantor may now have or hereafter acquire
against Borrower, whether or not Borrower becomes insolvent. Guarantor hereby
expressly subordinates any claim Guarantor may have against Borrower, upon any
account whatsoever, to any claim that Lender may now or hereafter have against
Borrower. In the event of insolvency and consequent liquidation of the assets of
Borrower, through bankruptcy, by an assignment for the benefit of creditors, by
voluntary liquidation, or otherwise, the assets of Borrower applicable to the
payment of the claims of both Lender and Guarantor shall be paid to Lender and
shall be first applied by Lender to the Indebtedness of Borrower to Lender.
Guarantor does hereby assign to Lender all claims which it may have or acquire
against Borrower or against any assignee or trustee in bankruptcy of Borrower;
provided however, that such assignment shall be effective only for the purpose
of assuring to Lender full payment in legal tender of the Indebtedness. If
Lender so requests, any notes or credit agreements now or hereafter evidencing
any debts or obligations of Borrower to Guarantor shall be marked with a legend
that the same are subject to this Guaranty and shall be delivered to Lender.
Guarantor agrees, and Lender is hereby authorized, in the name of Guarantor,
from time to time to execute and file financing statements and continuation
statements and to execute such other documents and to take such other actions as
Lender deems necessary or appropriate to perfect, preserve and enforce its
rights under this Guaranty.

MISCELLANEOUS PROVISIONS. The following miscellaneous provisions are a part of
this Guaranty:

        AMENDMENTS. This Guaranty, together with any Related Documents,
        constitutes the entire understanding and agreement of the parties as to
        the matters set forth in this Guaranty. No alteration of or amendment to
        this Guaranty shall be effective unless given in writing and signed by
        the party or parties sought to be charged or bound by the alteration or
        amendment.

        ATTORNEYS' FEES; EXPENSES. Guarantor agrees to pay upon demand all of
        Lender's costs and expenses, including Lender's attorneys' fees and
        Lender's legal expenses, incurred in connection with the enforcement of
        this Guaranty. Lender may hire or pay someone else to help enforce this
        Guaranty, and Guarantor shall pay the costs and expenses of such
        enforcement. Costs and expenses include Lender's attorneys' fees and
        legal expenses whether or not there is a lawsuit, including attorneys'
        fees and legal expenses for bankruptcy proceedings (including efforts to
        modify or vacate any automatic stay or injunction), appeals, and any
        anticipated post-judgment collection services. Guarantor also shall pay
        all court costs and such additional fees as may be directed by the
        court.




                              COMMERCIAL GUARANTY

LOAN NO: 932900001-1                 (CONTINUED)                          PAGE 3

===============================================================================

        CAPTION HEADINGS. Caption headings in this Guaranty are for convenience
        purposes only and are not to be used to interpret or define the
        provisions of this Guaranty.

        GOVERNING LAW. THIS GUARANTY WILL BE GOVERNED BY, CONSTRUED AND ENFORCED
        IN ACCORDANCE WITH FEDERAL LAW AND THE LAWS OF THE STATE OF CALIFORNIA.
        THIS GUARANTY HAS BEEN ACCEPTED BY LENDER IN THE STATE OF CALIFORNIA.

        CHOICE OF VENUE. If there is a lawsuit, Guarantor agrees upon Lender's
        request to submit to the jurisdiction of the courts of Los Angeles
        County, State of California.

        INTEGRATION. Guarantor further agrees that Guarantor has read and fully
        understands the terms of this Guaranty; Guarantor has had the
        opportunity to be advised by Guarantor's attorney with respect to this
        Guaranty; the Guaranty fully reflects Guarantor's intentions and parol
        evidence is not required to interpret the terms of this Guaranty.
        Guarantor hereby indemnifies and holds Lender harmless from all losses,
        claims, damages, and costs (including Lender's attorneys' fees) suffered
        or incurred by Lender as a result of any breach by Guarantor of the
        warranties, representations and agreements of this paragraph.

        INTERPRETATION. In all cases where there is more than one Borrower or
        Guarantor, then all words used in this Guaranty in the singular shall be
        deemed to have been used in the plural where the context and
        construction so require; and where there is more than one Borrower named
        in this Guaranty or when this Guaranty is executed by more than one
        Guarantor, the words "Borrower" and "Guarantor" respectively shall mean
        all and any one or more of them. The words "Guarantor," "Borrower," and
        "Lender" include the heirs, successors, assigns, and transferees of each
        of them. If a court finds that any provision of this Guaranty is not
        valid or should not be enforced, that fact by itself will not mean that
        the rest of this Guaranty will not be valid or enforced. Therefore, a
        court will enforce the rest of the provisions of this Guaranty even if a
        provision of this Guaranty may be found to be invalid or unenforceable.
        If any one or more of Borrower or Guarantor are corporations,
        partnerships, limited liability companies, or similar entities, it is
        not necessary for Lender to inquire into the powers of Borrower or
        Guarantor or of the officers, directors, partners, managers, or other
        agents acting or purporting to act on their behalf, and any Loan
        indebtedness made or created in reliance upon the professed exercise of
        such powers shall be guaranteed under this Guaranty.

        NOTICES. Any notice required to be given under this Guaranty shall be
        given in writing, and, except for revocation notices by Guarantor, shall
        be effective when actually delivered, when actually received by
        telefacsimile (unless otherwise required by law), when deposited with a
        nationally recognized overnight courier, or, if mailed, when deposited
        in the United States mail, as first class, certified or registered mail
        postage prepaid, directed to the addresses shown near the beginning of
        this Guaranty. All revocation notices by Guarantor shall be in writing
        and shall be effective upon delivery to Lender as provided in the
        section of this Guaranty entitled "DURATION OF GUARANTY." Any party may
        change its address for notices under this Guaranty by giving formal
        written notice to the other parties, specifying that the purpose of the
        notice is to change the party's address. For notice purposes, Guarantor
        agrees to keep Lender informed at all times of Guarantor's current
        address. Unless otherwise provided or required by law, if there is more
        than one Guarantor, any notice given by Lender to any Guarantor is
        deemed to be notice given to all Guarantors.

        NO WAIVER BY LENDER. Lender shall not be deemed to have waived any
        rights under this Guaranty unless such waiver is given in writing and
        signed by Lender. No delay or omission on the part of Lender in
        exercising any right shall operate as a waiver of such right or any
        other right. A waiver by Lender of a provision of this Guaranty shall
        not prejudice or constitute a waiver of Lender's right otherwise to
        demand strict compliance with that provision or any other provision of
        this Guaranty. No prior waiver by Lender, nor any course of dealing
        between Lender and Guarantor, shall constitute a waiver of any of
        Lender's rights or of any of Guarantor's obligations as to any future
        transactions. Whenever the consent of Lender is required under this
        Guaranty, the granting of such consent by Lender in any instance shall
        not constitute continuing consent to subsequent instances where such
        consent is required and in all cases such consent may be granted or
        withheld in the sole discretion of Lender.

        SUCCESSORS AND ASSIGNS. Subject to any limitations stated in this
        Guaranty on transfer of Guarantor's interest, this Guaranty shall be
        binding upon and inure to the benefit of the parties, their successors
        and assigns.

        WAIVE JURY. LENDER AND GUARANTOR HEREBY WAIVE THE RIGHT TO ANY JURY
        TRIAL IN ANY ACTION, PROCEEDING, OR COUNTERCLAIM BROUGHT BY EITHER
        LENDER OR BORROWER AGAINST THE OTHER.

DEPOSIT AGREEMENT SECURITY. Guarantor hereby grants a security interest to
Lender in any and all deposit accounts (checking, savings, money market or time)
of Guarantor at Lender, now existing or hereinafter opened, to secure its
obligations hereunder. This includes all deposit accounts Guarantor holds
jointly with someone else.

FINANCIAL STATEMENT CERTIFICATIONS. The undersigned hereby certifies to
California Bank & Trust ("Bank") that all financial information ("Information")
submitted to Bank now and at all times during the terms of this loan does, and
will, fairly and accurately represent the financial condition of the
undersigned, all Borrowers and Guarantors. Financial Information includes, but
is not limited to all Business Financial Statements (including Interim and
Year-End financial statements that are company prepared and/or CPA-prepared),
Business Income Tax Returns, Borrowing Base Certificates, Accounts Receivable
and Accounts Payable Agings, Personal Financial Statements and Personal Income
Tax Returns. The undersigned understands that the Bank will rely on all
financial information, whenever provided, and that such information is a
material inducement to Bank to make, to continue to make, or otherwise extend
credit accommodations to the undersigned. The undersigned covenants and agrees
to notify Bank of any adverse material changes in her/his/its financial
condition in the future. The undersigned further understands and acknowledges
that there are criminal penalties for giving false financial information to
federally insured financial institutions.

DEFINITIONS. The following capitalized words and terms shall have the following
meanings when used in this Guaranty. Unless specifically stated to the contrary,
all references to dollar amounts shall mean amounts in lawful money of the
United States of America. Words and terms used in the singular shall include the
plural, and the plural shall include the singular, as the context may require.
Words and terms not otherwise defined in this Guaranty shall have the meanings
attributed to such terms in the Uniform Commercial Code:

        BORROWER. The word "Borrower" means International Remote Imaging
        Systems, Inc., and all other persons and entities signing the Note in
        whatever capacity.

        GUARANTOR. The word "Guarantor" means each and every person or entity
        signing this Guaranty, including without limitation Statspin, Inc..

        GUARANTY. The word "Guaranty" means the guaranty from Guarantor to
        Lender, including without limitation a guaranty of all or part of the
        Note.

        INDEBTEDNESS. The word "Indebtedness" means Borrower's indebtedness to
        Lender as more particularly described in this Guaranty.

        LENDER. The word "Lender" means California Bank & Trust, its successors
        and assigns.

        NOTE. The word "Note" means the promissory note dated February 7, 2002,
        IN THE ORIGINAL PRINCIPAL AMOUNT OF $6,500,000.00 from Borrower to
        Lender, together with all renewals of, extensions of, modifications of,
        refinancings of, consolidations of, and substitutions for the promissory
        note or agreement.

        RELATED DOCUMENTS. The words "Related Documents" mean all promissory
        notes, credit agreements, loan agreements, environmental agreements,
        guaranties, security agreements, mortgages, deeds of trust, security
        deeds, collateral mortgages, and all other instruments, agreements and
        documents, whether now or hereafter existing, executed in connection
        with the Indebtedness.





                               COMMERCIAL GUARANTY

LOAN NO: 932900001-1               (CONTINUED)                            PAGE 4

================================================================================

EACH UNDERSIGNED GUARANTOR ACKNOWLEDGES HAVING READ ALL THE PROVISIONS OF THIS
GUARANTY AND AGREES TO ITS TERMS. IN ADDITION, EACH GUARANTOR UNDERSTANDS THAT
THIS GUARANTY IS EFFECTIVE UPON GUARANTOR'S EXECUTION AND DELIVERY OF THIS
GUARANTY TO LENDER AND THAT THE GUARANTY WILL CONTINUE UNTIL TERMINATED IN THE
MANNER SET FORTH IN THE SECTION TITLED "DURATION OF GUARANTY". NO FORMAL
ACCEPTANCE BY LENDER IS NECESSARY TO MAKE THIS GUARANTY EFFECTIVE. THIS GUARANTY
IS DATED FEBRUARY 7, 2002.

GUARANTOR:

STATSPIN, INC.

BY: /S/ DR. JOHN A. O'MALLEY,   (SEAL)    BY: /S/ DONALD HORACEK
    ---------------------------               ---------------------------
    DR. JOHN A. O'MALLEY,                     DONALD HORACEK
    CEO OF STATSPIN, INC.                     SECRETARY OF STATSPIN, INC.

EX-11.1(G)

                                                                 EXHIBIT 11.1(g)
                               COMMERCIAL GUARANTY




- -------------------------------------------------------------------------------------------------------------------
  PRINCIPAL       LOAN DATE      MATURITY         LOAN NO       CALL/COLL       ACCOUNT       OFFICER     INITIALS
                                                                                     
                                                                                             22163        [INITIAL ILLEGIBLE]
- -------------------------------------------------------------------------------------------------------------------
References in the shaded area are for Lender's use only and do not limit the applicability of this document to any
particular loan or Any item above containing "***" has been omitted due to text length limitations.
- -------------------------------------------------------------------------------------------------------------------





                                                               
BORROWER:    INTERNATIONAL REMOTE IMAGING SYSTEMS, INC.       LENDER:    CALIFORNIA BANK & TRUST
             9162 ETON AVENUE                                            COMMERCIAL LOAN CENTER
             CHATSWORTH, CA 91311                                        550 SOUTH HOPE STREET, SUITE 300
                                                                         LOS ANGELES, CA 90071

GUARANTOR:   ADVANCED DIGITAL IMAGING RESEARCH, LLC
             2525 SOUTH SHORE BOULEVARD, SUITE 100
             LEAGUE CITY, TX 77573




AMOUNT OF GUARANTY. THE PRINCIPAL AMOUNT OF THIS GUARANTY IS EIGHT MILLION &
00/100 DOLLARS ($8,000,000.00).

CONTINUING GUARANTY. FOR GOOD AND VALUABLE CONSIDERATION, ADVANCED DIGITAL
IMAGING RESEARCH, LLC ("GUARANTOR") ABSOLUTELY AND UNCONDITIONALLY GUARANTEES
AND PROMISES TO PAY TO CALIFORNIA BANK & TRUST ("LENDER") OR ITS ORDER, IN LEGAL
TENDER OF THE UNITED STATES OF AMERICA, THE INDEBTEDNESS (AS THAT TERM IS
DEFINED BELOW) OF INTERNATIONAL REMOTE IMAGING SYSTEMS, INC. ("BORROWER") TO
LENDER ON THE TERMS AND CONDITIONS SET FORTH IN THIS GUARANTY. THE OBLIGATIONS
OF GUARANTOR UNDER THIS GUARANTY ARE CONTINUING.

MAXIMUM LIABILITY. The maximum liability of Guarantor under this Guaranty shall
not exceed at any one time the sum of the principal amount of $8,000,000.00,
plus all interest thereon, plus all of Lender's costs, expenses, and attorneys'
fees incurred in connection with or relating to (A) the collection of the
Indebtedness, (B) the collection and sale of any collateral for the Indebtedness
or this Guaranty, or (C) the enforcement of this Guaranty. Attorneys' fees
include, without limitation, attorneys' fees whether or not there is a lawsuit,
and if there is a lawsuit, any fees and costs for trial and appeals.

The above limitation on liability is not a restriction on the amount of the
Indebtedness of Borrower to Lender either in the aggregate or at any one time.
If Lender presently holds one or more guaranties, or hereafter receives
additional guaranties from Guarantor, Lender's rights under all guaranties shall
be cumulative. This Guaranty shall not (unless specifically provided below to
the contrary) affect or invalidate any such other guaranties. Guarantor's
liability will be Guarantor's aggregate liability under the terms of this
Guaranty and any such other unterminated guaranties.

INDEBTEDNESS GUARANTEED. The Indebtedness guaranteed by this Guaranty includes
any and all of Borrower's indebtedness to Lender and is used in the most
comprehensive sense and means and includes any and all of Borrower's
liabilities, obligations and debts to Lender, now existing or hereinafter
incurred or created, including, without limitation, all loans, advances,
interest, costs, debts, overdraft indebtedness, credit card indebtedness, lease
obligations, other obligations, and liabilities of Borrower, or any of them, and
any present or future judgments against Borrower, or any of them; and whether
any such Indebtedness is voluntarily or involuntarily incurred, due or not due,
absolute or contingent, liquidated or unliquidated, determined or undetermined;
whether Borrower may be liable individually or jointly with others, or primarily
or secondarily, or as guarantor or surety; whether recovery on the Indebtedness
may be or may become barred or unenforceable against Borrower for any reason
whatsoever; and whether the Indebtedness arises from transactions which may be
voidable on account of infancy, insanity, ultra vires, or otherwise.

DURATION OF GUARANTY. This Guaranty will take effect when received by Lender
without the necessity of any acceptance by Lender, or any notice to Guarantor or
to Borrower, and will continue in full force until all Indebtedness incurred or
contracted before receipt by Lender of any notice of revocation shall have been
fully and finally paid and satisfied and all of Guarantor's other obligations
under this Guaranty shall have been performed in full. If Guarantor elects to
revoke this Guaranty, Guarantor may only do so in writing. Guarantor's written
notice of revocation must be mailed to Lender, by certified mail, at Lender's
address listed above or such other place as Lender may designate in writing.
Written revocation of this Guaranty will apply only to advances or new
Indebtedness created after actual receipt by Lender of Guarantor's written
revocation. For this purpose and without limitation, the term "new Indebtedness"
does not include Indebtedness which at the time of notice of revocation is
contingent, unliquidated, undetermined or not due and which later becomes
absolute, liquidated, determined or due. This Guaranty will continue to bind
Guarantor for all Indebtedness incurred by Borrower or committed by Lender prior
to receipt of Guarantor's written notice of revocation, including any
extensions, renewals, substitutions or modifications of the Indebtedness. All
renewals, extensions, substitutions, and modifications of the Indebtedness
granted after Guarantor's revocation, are contemplated under this Guaranty and,
specifically will not be considered to be new Indebtedness. This Guaranty shall
bind Guarantor's estate as to Indebtedness created both before and after
Guarantor's death or incapacity, regardless of Lender's actual notice of
Guarantor's death. Subject to the foregoing, Guarantor's executor or
administrator or other legal representative may terminate this Guaranty in the
same manner in which Guarantor might have terminated it and with the same
effect. Release of any other guarantor or termination of any other guaranty of
the Indebtedness shall not affect the liability of Guarantor under this
Guaranty. A revocation Lender receives from any one or more Guarantors shall not
affect the liability of any remaining Guarantors under this Guaranty. IT IS
ANTICIPATED THAT FLUCTUATIONS MAY OCCUR IN THE AGGREGATE AMOUNT OF INDEBTEDNESS
COVERED BY THIS GUARANTY, AND GUARANTOR SPECIFICALLY ACKNOWLEDGES AND AGREES
THAT REDUCTIONS IN THE AMOUNT OF INDEBTEDNESS, EVEN TO ZERO DOLLARS ($0.00),
PRIOR TO GUARANTOR'S WRITTEN REVOCATION OF THIS GUARANTY SHALL NOT CONSTITUTE A
TERMINATION OF THIS GUARANTY. THIS GUARANTY IS BINDING UPON GUARANTOR AND
GUARANTOR'S HEIRS, SUCCESSORS AND ASSIGNS SO LONG AS ANY OF THE GUARANTEED
INDEBTEDNESS REMAINS UNPAID AND EVEN THOUGH THE INDEBTEDNESS GUARANTEED MAY FROM
TIME TO TIME BE ZERO DOLLARS ($0.00).

GUARANTOR'S AUTHORIZATION TO LENDER. Guarantor authorizes Lender, either before
or after any revocation hereof, WITHOUT NOTICE OR DEMAND AND WITHOUT LESSENING
GUARANTOR'S LIABILITY UNDER THIS GUARANTY, FROM TIME TO TIME: (A) prior to
revocation as set forth above, to make one or more additional secured or
unsecured loans to Borrower, to lease equipment or other goods to Borrower, or
otherwise to extend additional credit to Borrower; (B) to alter, compromise,
renew, extend, accelerate, or otherwise change one or more times the time for
payment or other terms of the Indebtedness or any part of the Indebtedness,
including increases and decreases of the rate of interest on the Indebtedness;
extensions may be repeated and may be for longer than the original loan term;
(C) to take and hold security for the payment of this Guaranty or the
Indebtedness, and exchange, enforce, waive, subordinate, fail or decide not to
perfect, and release any such security, with or without the substitution of new
collateral; (D) to release, substitute, agree not to sue, or deal with any
one or more of Borrower's sureties, endorsers, or other guarantors on any terms
or in any manner Lender may choose; (E) to determine how, when and what
application of payments and credits shall be made on the Indebtedness (F) to
apply such security and direct the order or manner of sale thereof, including
without limitation, any nonjudicial sale permitted by the terms of the
controlling security agreement or deed of trust, as Lender in its discretion may
determine; (G) to sell, transfer, assign or grant participations in all or any
part of the Indebtedness; and (H) to assign or transfer this Guaranty in whole
or in part.

GUARANTOR'S REPRESENTATIONS AND WARRANTIES. Guarantor represents and warrants to
Lender that (A) no representations or agreements of any kind have been made to
Guarantor which would limit or qualify in any way the terms of this Guaranty;
(B) this Guaranty is executed at Borrower's request and not at the request of
Lender; (C) Guarantor has full power, right and authority to enter into this
Guaranty; (D) the provisions of this Guaranty do not conflict with or result in
a default under any agreement or other instrument binding upon Guarantor and do
not result in a violation of any law, regulation, court decree or order
applicable to Guarantor; (E) Guarantor has not and will not, without the prior
written consent of Lender, sell, lease, assign, encumber, hypothecate, transfer,
or otherwise dispose of all or substantially all of Guarantor's assets, or any
interest therein; (F) upon Lender's request, Guarantor will provide to Lender
financial and credit information in form acceptable to Lender, and all such
financial




                               COMMERCIAL GUARANTY
LOAN NO: 932900001-1                (CONTINUED)                           PAGE 2
================================================================================

information which currently has been, and all future financial information which
will be provided to Lender is and will be true and correct in all material
respects and fairly present Guarantor's financial condition as of the dates the
financial information is provided; (G) no material adverse change has occurred
in Guarantor's financial condition since the date of the most recent financial
statements provided to Lender and no event has occurred which may materially
adversely affect Guarantor's financial condition; (H) no litigation, claim,
investigation, administrative proceeding or similar action (including those for
unpaid taxes) against Guarantor is pending or threatened; (I) Lender has made no
representation to Guarantor as to the creditworthiness of Borrower; and (J)
Guarantor has established adequate means of obtaining from Borrower on a
continuing basis information regarding Borrower's financial condition. Guarantor
agrees to keep adequately informed from such means of any facts, events, or
circumstances which might in any way affect Guarantor's risks under this
Guaranty, and Guarantor further agrees that, absent a request for information,
Lender shall have no obligation to disclose to Guarantor any information or
documents acquired by Lender in the course of its relationship with Borrower.

GUARANTOR'S WAIVERS. Except as prohibited by applicable law, Guarantor waives
any right to require Lender to (A) make any presentment, protest, demand, or
notice of any kind, including notice of change of any terms of repayment of the
Indebtedness, default by Borrower or any other guarantor or surety, any action
or nonaction taken by Borrower, Lender, or any other guarantor or surety of
Borrower, or the creation of new or additional Indebtedness; (B) proceed against
any person, including Borrower, before proceeding against Guarantor; (C) proceed
against any collateral for the Indebtedness, including Borrower's collateral,
before proceeding against Guarantor; (D) apply any payments or proceeds received
against the Indebtedness in any order; (E) give notice of the terms, time, and
place of any sale of the collateral pursuant to the Uniform Commercial Code or
any other law governing such sale; (F) disclose any information about the
Indebtedness, the Borrower, the collateral, or any other guarantor or surety, or
about any action or nonaction of Lender; or (G) pursue any remedy or course of
action in Lender's power whatsoever.

Guarantor also waives any and all rights or defenses arising by reason of (H)
any disability or other defense of Borrower, any other guarantor or surety or
any other person; (I) the cessation from any cause whatsoever, other than
payment in full, of the Indebtedness; (J) the application of proceeds of the
Indebtedness by Borrower for purposes other than the purposes understood and
intended by Guarantor and Lender; (K) any act of omission or commission by
Lender which directly or indirectly results in or contributes to the discharge
of Borrower or any other guarantor or surety, or the Indebtedness, or the loss
or release of any collateral by operation of law or otherwise; (L) any statute
of limitations in any action under this Guaranty or on the Indebtedness; or (M)
any modification or change in terms of the Indebtedness, whatsoever, including
without limitation, the renewal, extension, acceleration, or other change in the
time payment of the Indebtedness is due and any change in the interest rate, and
including any such modification or change in terms after revocation of this
Guaranty on Indebtedness incurred prior to such revocation.

Guarantor waives all rights and any defenses arising out of an election of
remedies by Lender even though that the election of remedies, such as a
non-judicial foreclosure with respect to security for a guaranteed obligation,
has destroyed Guarantor's rights of subrogation and reimbursement against
Borrower by operation of Section 580d of the California Code of Civil Procedure
or otherwise.

Guarantor waives all rights and defenses that Guarantor may have because
Borrower's obligation is secured by real property. This means among other
things: (1) Lender may collect from Guarantor without first foreclosing on any
real or personal property collateral pledged by Borrower. (2) If Lender
forecloses on any real property collateral pledged by Borrower: (a) the amount
of Borrower's obligation may be reduced only by the price for which the
collateral is sold at the foreclosure sale, even if the collateral is worth more
than the sale price. (b) Lender may collect from Guarantor even if Lender, by
foreclosing on the real property collateral, has destroyed any right Guarantor
may have to collect from Borrower. This is an unconditional and irrevocable
waiver of any rights and defenses Guarantor may have because Borrower's
obligation is secured by real property. These rights and defenses include, but
are not limited to, any rights and defenses based upon Section 580a, 580b, 580d,
or 726 of the Code of Civil Procedure.

Guarantor understands and agrees that the foregoing waivers are unconditional
and irrevocable waivers of substantive rights and defenses to which Guarantor
might otherwise be entitled under state and federal law. Guarantor acknowledges
that Guarantor has provided these waivers of rights and defenses with the
intention that they be fully relied upon by Lender. Guarantor further
understands and agrees that this Guaranty is a separate and independent contract
between Guarantor and Lender, given for full and ample consideration, and is
enforceable on its own terms. Until all Indebtedness is paid in full, Guarantor
waives any right to enforce any remedy Guarantor may have against the Borrower
or any other guarantor, surety, or other person, and further, Guarantor waives
any right to participate in any collateral for the Indebtedness now or hereafter
held by Lender.

In addition to the waivers set forth herein, if now or hereafter Borrower is or
shall become insolvent and the Indebtedness shall not at all times until paid be
fully secured by collateral pledged by Borrower, Guarantor hereby forever waives
and gives up in favor of Lender and Borrower, and Lender's and Borrower's
respective successors, any claim or right to payment Guarantor may now have or
hereafter have or acquire against Borrower, by subrogation or otherwise, so that
at no time shall Guarantor be or become a "creditor" of Borrower within the
meaning of 11 U.S.C. section 547(b), or any successor provision of the Federal
bankruptcy laws.

GUARANTOR'S UNDERSTANDING WITH RESPECT TO WAIVERS. Guarantor warrants and agrees
that each of the waivers set forth above is made with Guarantor's full knowledge
of its significance and consequences and that, under the circumstances, the
waivers are reasonable and not contrary to public policy or law. If any such
waiver is determined to be contrary to any applicable law or public policy, such
waiver shall be effective only to the extent permitted by law or public policy.

SUBORDINATION OF BORROWER'S DEBTS TO GUARANTOR. Guarantor agrees that the
Indebtedness of Borrower to Lender, whether now existing or hereafter created,
shall be superior to any claim that Guarantor may now have or hereafter acquire
against Borrower, whether or not Borrower becomes insolvent. Guarantor hereby
expressly subordinates any claim Guarantor may have against Borrower, upon any
account whatsoever, to any claim that Lender may now or hereafter have against
Borrower. In the event of insolvency and consequent liquidation of the assets of
Borrower, through bankruptcy, by an assignment for the benefit of creditors, by
voluntary liquidation, or otherwise, the assets of Borrower applicable to the
payment of the claims of both Lender and Guarantor shall be paid to Lender and
shall be first applied by Lender to the Indebtedness of Borrower to Lender.
Guarantor does hereby assign to Lender all claims which it may have or acquire
against Borrower or against any assignee or trustee in bankruptcy of Borrower;
provided however, that such assignment shall be effective only for the purpose
of assuring to Lender full payment in legal tender of the Indebtedness. If
Lender so requests, any notes or credit agreements now or hereafter evidencing
any debts or obligations of Borrower to Guarantor shall be marked with a legend
that the same are subject to this Guaranty and shall be delivered to Lender.
Guarantor agrees, and Lender is hereby authorized, in the name of Guarantor,
from time to time to execute and file financing statements and continuation
statements and to execute such other documents and to take such other actions as
Lender deems necessary or appropriate to perfect, preserve and enforce its
rights under this Guaranty.

MISCELLANEOUS PROVISIONS. The following miscellaneous provisions are a part of
this Guaranty:

        AMENDMENTS. This Guaranty, together with any Related Documents,
        constitutes the entire understanding and agreement of the parties as to
        the matters set forth in this Guaranty. No alteration of or amendment to
        this Guaranty shall be effective unless given in writing and signed by
        the party or parties sought to be charged or bound by the alteration or
        amendment.

        ATTORNEYS' FEES; EXPENSES. Guarantor agrees to pay upon demand all of
        Lender's costs and expenses, including Lender's attorneys' fees and
        Lender's legal expenses, incurred in connection with the enforcement of
        this Guaranty. Lender may hire or pay someone else to help enforce this
        Guaranty, and Guarantor shall pay the costs and expenses of such
        enforcement. Costs and expenses include Lender's attorneys' fees and
        legal expenses whether or not there is a lawsuit, including attorneys'
        fees and legal expenses for bankruptcy proceedings (including efforts to
        modify or vacate any automatic stay or injunction), appeals, and any
        anticipated post-judgment collection services. Guarantor also shall pay
        all court costs and such additional fees as may be directed by the
        court.




                                  COMMERCIAL GUARANTY
LOAN NO: 932900001-1                 (CONTINUED)                          PAGE 3
================================================================================

        CAPTION HEADINGS. Caption headings in this Guaranty are for convenience
        purposes only and are not to be used to interpret or define the
        provisions of this Guaranty.

        GOVERNING LAW. THIS GUARANTY WILL BE GOVERNED BY, CONSTRUED AND ENFORCED
        IN ACCORDANCE WITH FEDERAL LAW AND THE LAWS OF THE STATE OF CALIFORNIA.
        This GUARANTY HAS BEEN ACCEPTED BY LENDER IN THE STATE OF CALIFORNIA.

        CHOICE OF VENUE. If there is a lawsuit, Guarantor agrees upon Lender's
        request to submit to the jurisdiction of the courts of Los Angeles
        County, State of California.

        INTEGRATION. Guarantor further agrees that Guarantor has read and fully
        understands the terms of this Guaranty; Guarantor has had the
        opportunity to be advised by Guarantor's attorney with respect to this
        Guaranty; the Guaranty fully reflects Guarantor's intentions and parol
        evidence is not required to interpret the terms of this Guaranty.
        Guarantor hereby indemnifies and holds Lender harmless from all losses,
        claims, damages, and costs (including Lender's attorneys' fees) suffered
        or incurred by Lender as a result of any breach by Guarantor of the
        warranties, representations and agreements of this paragraph.

        INTERPRETATION. In all cases where there is more than one Borrower or
        Guarantor, then all words used in this Guaranty in the singular shall be
        deemed to have been used in the plural where the context and
        construction so require; and where there is more than one Borrower named
        in this Guaranty or when this Guaranty is executed by more than one
        Guarantor, the words "Borrower" and "Guarantor" respectively shall mean
        all and any one or more of them. The words "Guarantor," "Borrower," and
        "Lender" include the heirs, successors, assigns, and transferees of each
        of them. If a court finds that any provision of this Guaranty is not
        valid or should not be enforced, that fact by itself will not mean that
        the rest of this Guaranty will not be valid or enforced. Therefore, a
        court will enforce the rest of the provisions of this Guaranty even if a
        provision of this Guaranty may be found to be invalid or unenforceable.
        If any one or more of Borrower or Guarantor are corporations,
        partnerships, limited liability companies, or similar entities, it is
        not necessary for Lender to inquire into the powers of Borrower or
        Guarantor or of the officers, directors, partners, managers, or other
        agents acting or purporting to act on their behalf, and any Loan
        indebtedness made or created in reliance upon the professed exercise of
        such powers shall be guaranteed under this Guaranty.

        NOTICES. Any notice required to be given under this Guaranty shall be
        given in writing, and, except for revocation notices by Guarantor, shall
        be effective when actually delivered, when actually received by
        telefacsimile (unless otherwise required by law), when deposited with a
        nationally recognized overnight courier, or, if mailed, when deposited
        in the United States mail, as first class, certified or registered mail
        postage prepaid, directed to the addresses shown near the beginning of
        this Guaranty. All revocation notices by Guarantor shall be in writing
        and shall be effective upon delivery to Lender as provided in the
        section of this Guaranty entitled "DURATION OF GUARANTY." Any party may
        change its address for notices under this Guaranty by giving formal
        written notice to the other parties, specifying that the purpose of the
        notice is to change the party's address. For notice purposes, Guarantor
        agrees to keep Lender informed at all times of Guarantor's current
        address. Unless otherwise provided or required by law, if there is more
        than one Guarantor, any notice given by Lender to any Guarantor is
        deemed to be notice given to all Guarantors.

        NO WAIVER BY LENDER. Lender shall not be deemed to have waived any
        rights under this Guaranty unless such waiver is given in writing and
        signed by Lender. No delay or omission on the part of Lender in
        exercising any right shall operate as a waiver of such right or any
        other right. A waiver by Lender of a provision of this Guaranty shall
        not prejudice or constitute a waiver of Lender's right otherwise to
        demand strict compliance with that provision or any other provision of
        this Guaranty. No prior waiver by Lender, nor any course of dealing
        between Lender and Guarantor, shall constitute a waiver of any of
        Lender's rights or of any of Guarantor's obligations as to any future
        transactions. Whenever the consent of Lender is required under this
        Guaranty, the granting of such consent by Lender in any instance shall
        not constitute continuing consent to subsequent instances where such
        consent is required and in all cases such consent may be granted or
        withheld in the sole discretion of Lender.

        SUCCESSORS AND ASSIGNS. Subject to any limitations stated in this
        Guaranty on transfer of Guarantor's interest, this Guaranty shall be
        binding upon and inure to the benefit of the parties, their successors
        and assigns.

        WAIVE JURY. LENDER AND GUARANTOR HEREBY WAIVE THE RIGHT TO ANY JURY
        TRIAL IN ANY ACTION, PROCEEDING, OR COUNTERCLAIM BROUGHT BY EITHER
        LENDER OR BORROWER AGAINST THE OTHER.

DEPOSIT AGREEMENT SECURITY. Guarantor hereby grants a security interest to
Lender in any and all deposit accounts (checking, savings, money market or time)
of Guarantor at Lender, now existing or hereinafter opened, to secure its
obligations hereunder, This includes all deposit accounts Guarantor holds
jointly with someone else.

FINANCIAL STATEMENT CERTIFICATIONS. The undersigned hereby certifies to
California Bank & Trust ("Bank") that all financial information ("Information")
submitted to Bank now and at all times during the terms of this loan does, and
will, fairly and accurately represent the financial condition of the
undersigned, all Borrowers and Guarantors. Financial Information includes, but
is not limited to all Business Financial Statements (including Interim and
Year-End financial statements that are company prepared and/or CPA-prepared),
Business Income Tax Returns, Borrowing Base Certificates, Accounts Receivable
and Accounts Payable Agings, Personal Financial Statements and Personal Income
Tax Returns. The undersigned understands that the Bank will rely on all
financial information, whenever provided, and that such information is a
material inducement to Bank to make, to continue to make, or otherwise extend
credit accommodations to the undersigned. The undersigned covenants and agrees
to notify Bank of any adverse material changes in her/his/its financial
condition in the future. The undersigned further understands and acknowledges
that there are criminal penalties for giving false financial information to
federally insured financial institutions.

DEFINITIONS. The following capitalized words and terms shall have the following
meanings when used in this Guaranty. Unless specifically stated to the contrary,
all references to dollar amounts shall mean amounts in lawful money of the
United States of America. Words and terms used in the singular shall include the
plural, and the plural shall include the singular, as the context may require.
Words and terms not otherwise defined in this Guaranty shall have the meanings
attributed to such terms in the Uniform Commercial Code:

        BORROWER. The word "Borrower" means International Remote Imaging
        Systems, Inc., and all other persons and entities signing the Note in
        whatever capacity.

        GUARANTOR. The word "Guarantor" means each and every person or entity
        signing this Guaranty, including without limitation Advanced Digital
        Imaging Research, LLC.

        GUARANTY. The word "Guaranty" means the guaranty from Guarantor to
        Lender, including without limitation a guaranty of all or part of the
        Note.

        INDEBTEDNESS. The word "Indebtedness" means Borrower's indebtedness to
        Lender as more particularly described in this Guaranty.

        LENDER. The word "Lender" means California Bank & Trust, its successors
        and assigns.

        NOTE. The word "Note" means the promissory note dated February 7, 2002,
        IN THE ORIGINAL PRINCIPAL AMOUNT OF $6,500,000.00 from Borrower to
        Lender, together with all renewals of, extensions of, modifications of,
        refinancings of, consolidations of, and substitutions for the promissory
        note or agreement.

        RELATED DOCUMENTS. The words "Related Documents" mean all promissory
        notes, credit agreements, loan agreements, environmental agreements,
        guaranties, security agreements, mortgages, deeds of trust, security
        deeds, collateral mortgages, and all other instruments.




                                  COMMERCIAL GUARANTY
LOAN NO: 932900001-1                 (CONTINUED)                          PAGE 4

================================================================================

        agreements and documents, whether now or hereafter existing, executed in
        connection with the Indebtedness.

EACH UNDERSIGNED GUARANTOR ACKNOWLEDGES HAVING READ ALL THE PROVISIONS OF THIS
GUARANTY AND AGREES TO ITS TERMS. IN ADDITION, EACH GUARANTOR UNDERSTANDS THAT
THIS GUARANTY IS EFFECTIVE UPON GUARANTOR'S EXECUTION AND DELIVERY OF THIS
GUARANTY TO LENDER AND THAT THE GUARANTY WILL CONTINUE UNTIL TERMINATED IN THE
MANNER SET FORTH IN THE SECTION TITLED "DURATION OF GUARANTY". NO FORMAL
ACCEPTANCE BY LENDER IS NECESSARY TO MAKE THIS GUARANTY EFFECTIVE. THIS GUARANTY
IS DATED FEBRUARY 7, 2002.


GUARANTOR:



ADVANCED DIGITAL IMAGING RESEARCH, LLC



BY: /S/ DR. JOHN A. O'MALLEY   (SEAL)     BY: /S/ DONALD HORACEK         (SEAL)
    ---------------------------               ---------------------------
    DR. JOHN A. O'MALLEY,                     DONALD HORACEK,
    MANAGER OF ADVANCED DIGITAL               MANAGER OF ADVANCED DIGITAL
    IMAGING RESEARCH, LLC                     IMAGING RESEARCH, LLC


           LIMITED LIABILITY COMPANY RESOLUTION TO GRANT COLLATERAL /
                                    GUARANTEE



- ------------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL         LOAN DATE        MATURITY          LOAN NO         CALL/COLL      ACCOUNT       OFFICER      INITIALS
                                                                                          
$6,500,000.00     02-07-2002      06-30-2004       932900001-1                                      22163      [INITIALS  ILLEGIBLE]

- ------------------------------------------------------------------------------------------------------------------------------------
References in the shaded area are for Lender's use only and do not limit the applicability of this document to any particular loan
or item. Any item above containing "***" has been omitted due to text length limitations.
- ------------------------------------------------------------------------------------------------------------------------------------





                                                         
BORROWER:  INTERNATIONAL REMOTE IMAGING SYSTEMS, INC.       LENDER:  CALIFORNIA BANK & TRUST
           9162 ETON AVENUE                                          COMMERCIAL LOAN CENTER
           CHATSWORTH, CA 91311                                      550 SOUTH HOPE STREET, SUITE 300
                                                                     LOS ANGELES, CA 90071

COMPANY:   ADVANCED DIGITAL IMAGING RESEARCH, LLC
           2525 SOUTH SHORE BOULEVARD, SUITE 100
           LEAGUE CITY, TX 77573


================================================================================

WE, THE UNDERSIGNED, DO HEREBY CERTIFY THAT:

THE COMPANY'S EXISTENCE. The complete and correct name of the Company is
Advanced Digital Imaging Research, LLC ("Company"). The Company is a limited
liability company which is, and at all times shall be, duly organized, validly
existing, and in standing under and by virtue of the laws of the State of
Delaware. The Company is duly authorized to transact business in the State of
Texas and all other states in which the Company is doing business, having
obtained all necessary filings, governmental licenses and approvals for each
state in which the Company is doing business. Specifically, the Company is, and
at all times shall be, duly qualified as a foreign limited liability company in
all states in which the failure to so qualify would have a material adverse
effect on its business or financial condition. The Company has the full power
and authority to own its properties and to transact the business in which it is
presently engaged or presently proposes to engage. The Company maintains an
office at 2525 South Shore Boulevard, Suite 100, League City, TX 77573. Unless
the Company has designated otherwise in writing, the principal office is the
office at which the Company keeps its books and records. The Company will notify
Lender prior to any change in the location of the Company's state of
organization or any change in the Company's name. The Company shall do all
things necessary to preserve and to keep in full force and effect its existence,
rights and privileges, and shall comply with all regulations, rules, ordinances,
statutes, orders and decrees of any governmental or quasi-governmental authority
or court applicable to the Company and the Company's business activities.

RESOLUTIONS ADOPTED. At a meeting of the members of the Company, duly called and
held on _________________, at which a quorum was present and voting, or by other
duly authorized action in lieu of a meeting, the resolutions set forth in this
Resolution were adopted.

MANAGERS. The following named persons are managers of Advanced Digital Imaging
Research, LLC:



          NAMES                          TITLES           AUTHORIZED             ACTUAL SIGNATURES
          -----                          ------           ----------             -----------------
                                                                  
          DR. JOHN A. O'MALLEY           MANAGER              Y            X  /s/ JOHN A. O'MALLEY
                                                                            -----------------------

          DONALD HORACEK                 MANAGER              Y            X  /s/ DONALD HORACEK
                                                                            -----------------------



ACTIONS AUTHORIZED. Any one (1) of the authorized persons listed above may enter
in o any agreements of any nature with Lender, and those agreements will bind
the Company. Specifically, but without limitation, any one (1) of such
authorized persons are authorized, empowered, and directed to do the following
for and on behalf of the Company:

      GUARANTY. To guarantee or act as surety for loans or other financial
      accommodations to Borrower from Lender on such guarantee or surety terms
      as may be agreed upon between the managers of the Company and Lender and
      in such sum or sums of money as in their judgment should be guaranteed or
      assured, (the "Guaranty").

      GRANT SECURITY. To mortgage, pledge, transfer, endorse, hypothecate, or
      otherwise encumber and deliver to Lender any property now or hereafter
      belonging to the Company or in which the Company now or hereafter may have
      an interest, including without limitation all real property and all
      personal property (tangible or intangible) of the Company, as security for
      the Guaranty, and as a security for the payment of any loans, any
      promissory notes, or any other or further indebtedness of International
      Remote Imaging Systems, Inc. to Lender at any time owing, however the same
      may be evidenced. Such property may be mortgaged, pledged, transferred,
      endorsed, hypothecated or encumbered at the time such loans are obtained
      or such indebtedness is incurred, or at any other time or times, and may
      be either in addition to or in lieu of any property theretofore mortgaged,
      pledged, transferred, endorsed, hypothecated or encumbered. The provisions
      of this Resolution authorizing or relating to the pledge, mortgage,
      transfer, endorsement, hypothecation, granting of a security interest in,
      or in any way encumbering, the assets of the Company shall include,
      without limitation, doing so in order to lend collateral security for the
      indebtedness, now or hereafter existing, and of any nature whatsoever, of
      International Remote Imaging Systems, Inc. to Lender. The Company has
      considered the value to itself of lending collateral in support of such
      indebtedness, and the Company represents to Lender that the Company is
      benefited by doing so.

      EXECUTE SECURITY DOCUMENTS. To execute and deliver to Lender the forms of
      mortgage, deed of trust, pledge agreement, hypothecation agreement, and
      other security agreements and financing statements which Lender may
      require and which shall evidence the terms and conditions under and
      pursuant to which such liens and encumbrances, or any of them, are given;
      and also to execute and deliver to Lender any other written instruments,
      any chattel paper, or any other collateral, of any kind or nature, which
      Lender may deem necessary or proper in connection with or pertaining to
      the giving of the liens and encumbrances. Notwithstanding the foregoing,
      any one of the above authorized persons may execute, deliver, or record
      financing statements.

      FURTHER ACTS. To do and perform such other acts and things and to execute
      and deliver such other documents and agreements, INCLUDING AGREEMENTS
      WAIVING THE RIGHT TO A TRIAL BY JURY, as the managers may in their
      discretion deem reasonably necessary or proper in order to carry into
      effect the provisions of this Resolution.

ASSUMED BUSINESS NAMES. The Company has filed or recorded all documents or
filings required by law relating to all assumed business names used by the
Company. Excluding the name of the Company, the following is a complete list of
all assumed business names under which the Company does business: NONE.

NOTICES TO LENDER. The Company will promptly notify Lender in writing at
Lender's address shown above (or such other addresses as Lender may designate
from time to time) prior to any (A) change in the Company's name; (B) change in
the Company's assumed business name(s); (C) change in the management or in the
Managers of the Company; (D) change in the authorized signer(s); (E) change in
the Company's principal office address; (F) change in the Company's state of
organization; (G) conversion of the Company to a new or different type of
business entity; or (H) change in any other aspect of the Company that directly
or indirectly relates to any agreements between the Company and Lender. No
change in the Company's name or state of organization will take effect until
after Lender has received notice

CERTIFICATION CONCERNING MANAGERS AND RESOLUTIONS. The managers named above are
duly elected, appointed, or employed by or for




      LIMITED LIABILITY COMPANY RESOLUTION TO GRANT COLLATERAL / GUARANTEE
LOAN NO: 932900001-1              (CONTINUED)                             PAGE 2

================================================================================

the Company, as the case may be, and occupy the positions set opposite their
respective names. This Resolution now stands of record on the books of the
Company, is in full force and effect, and has not been modified or revoked in
any manner whatsoever.

CONTINUING VALIDITY. Any and all acts authorized pursuant to this Resolution and
performed prior to the passage of this Resolution are hereby ratified and
approved. This Resolution shall be continuing, shall remain in full force and
effect and Lender may rely on it until written notice of its revocation shall
have been delivered to and received by Lender at Lender's address shown above
(or such addresses as Lender may designate from time to time). Any such notice
shall not affect any of the Company's agreements or commitments in effect at the
time notice is given.

IN TESTIMONY WHEREOF, WE HAVE HEREUNTO SET OUR HAND AND ATTEST THAT THE
SIGNATURES SET OPPOSITE THE NAMES LISTED ABOVE ARE THEIR GENUINE SIGNATURES.

WE EACH HAVE READ ALL THE PROVISIONS OF THIS RESOLUTION, AND WE EACH PERSONALLY
AND ON BEHALF OF THE COMPANY CERTIFY THAT ALL STATEMENTS AND REPRESENTATIONS
MADE IN THIS RESOLUTION ARE TRUE AND CORRECT. THIS LIMITED LIABILITY COMPANY
RESOLUTION TO GRANT COLLATERAL/GUARANTEE IS DATED _________________.

THIS RESOLUTION IS GIVEN UNDER SEAL AND IT IS INTENDED THAT THIS RESOLUTION IS
AND SHALL CONSTITUTE AND HAVE THE EFFECT OF A SEALED INSTRUMENT ACCORDING TO
LAW.

                                        CERTIFIED TO AND ATTESTED BY:

                                        BY:  /s/ DONALD HORACEK           (SEAL)
                                           -------------------------------
                                           AUTHORIZED SIGNER FOR ADVANCED
                                           DIGITAL IMAGING RESEARCH, LLC



NOTE: If the managers signing this Resolution are designated by the foregoing
document as one of the managers authorized to act on the Company's behalf, it is
advisable to have this Resolution signed by at least one non-authorized manager
of the Company.

================================================================================

LASER PRO Lending, Ver. 5.19.00.08 Capr. Harland Financial Solutions, Inc. 1997,
   2002. All Rights Reserved. - DE/CA M:\WINAPPS\CFI\LPL\C15.FC TR-5152 PR-5

EX-23

ex23

EX-24

EXHIBIT 24

CONSENT OF INDEPENDENT ACCOUNTANTS

      We hereby consent to the incorporation by reference in the Registration Statements on Forms S-8 (File Nos. 33-10631, 33-56772, 33-82560, 333-19265, 333-31391, 333-31393, 333-63304, 333-45348 and 333-65547) and Forms S-3 (File No’s. 333-27189, 333-37946, 333-86617 and 333-48097) of our report dated March 16, 2001, relating to International Remote Imaging Systems, Inc. as of December 31, 2000, and for each of the two years in the period ended December 31, 2000, which appears in this Form 10-K.

/s/ PRICEWATERHOUSECOOPERS, LLP

Los Angeles, California

March 27, 2002

EX-99

EXHIBIT 99

DISCLOSURE REGARDING RISK FACTORS AND FORWARD-LOOKING STATEMENTS

      This exhibit contains a discussion of various risk factors and other information that should be carefully considered. The risks and uncertainties described below are not the only ones that impact International Remote Imaging Systems, Inc. Additional risks and uncertainties not presently known to us or that we currently deem immaterial may also have an adverse impact on us. Among other things, this exhibit contains forward-looking statements that are based on certain assumptions about future risks and uncertainties. We believe that our assumptions are reasonable. Nonetheless, it is likely that at least some of these assumptions will not come true. Accordingly, our actual results will probably differ from the outcomes contained in any forward-looking statements. These differences could be material. Factors that could cause or contribute to such differences include, among other things, those discussed below, as well as those discussed elsewhere in our Annual Report on Form 10-K for the fiscal year ended December 31, 2001, of which this exhibit forms a part.

Our success depends largely on sales of high-priced laboratory instruments.

      Historically, we derived most of our revenues from the sale of high-priced urinalysis workstations. Relatively modest declines in unit sales or gross margins for this product line could diminish our revenues and profits.

We are in the process of introducing a significantly upgraded workstation later this year on a new operating platform.

      This transition is both in response to the changing market needs and to the technical obsolescence of key components in our current product design. We have made end of life buys for many of these components and have initiated sustaining engineering projects to identify alternative sources for others. Our ability to build new systems of the old design is finite. The failure to successfully and timely complete this transition to the new workstation would have an adverse affect on new system sales. As with any new platform introduction, the desirability of the older system will fall off and our ability to move the remaining inventory will become problematic.

We rely on some single-source suppliers for key components of our instruments, and if any of these suppliers discontinue production of these components, or we are unable to replace unavailable components, it could harm our business.

      Certain key components of our instruments are manufactured by single-source suppliers. For example, Roche Diagnostics is the sole source for our proprietary CHEMSTRIP/ IRIStrip urine test strips and related urine test strip readers, both used in certain models of our urinalysis workstations. Any of our single-source suppliers could encounter production problems. If any single-source supplier has an interruption in its production or discontinues a key component, the volume of our instrument sales could be diminished and could harm our business, financial condition and operating results.

      Roche Diagnostics has exercised their right to terminate in 2003 the contracts relating to the supply of CHEMSTRIP/ IRIStrip urine test strips and related urine test strip reader. Roche will continue to supply test strips and replacement readers to our installed base of workstations for six years after termination of these contracts, but they will not supply strips or readers for new workstation placements. We believe that we can successfully phase out their strips and readers without interruption in the sale of our workstations. However, the failure to successfully and timely complete this task would have a material adverse affect on our instrument sales and the revenue growth for system supplies and service. After termination, we will be permitted to modify our workstations to accommodate other test strip readers.

      In the past, single-source suppliers have discontinued their production of key components and we have successfully replaced those discontinued components with satisfactorily replacements components. However,

if we are unable to replace unavailable components in the future, we are likely to experience a decrease in instrument sales.

The intensifying competition we face from both established entities and new entries in the market may adversely affect our revenues and profitability.

      There are many companies with active research and development programs both in and outside of the clinical laboratory imaging systems field. Many of these companies have considerable experience in areas of competing interest to us. Additionally, we cannot determine if other firms are conducting potentially competitive research, which could result in the development and introduction of products that are either comparable or superior to the products we sell. Specifically, if a competitor introduces a new product that is comparable or superior to any model of our urinalysis workstation, then our unit sales or gross margins could be diminished. This in turn could have a material adverse effect on our overall financial condition and operations. Further, new product introductions, product enhancements and the use of other technologies by our competitors could lead to a loss of market acceptance and cause a decline in sales or gross margins.

Our success depends on our ability to attract, retain and motivate management and other skilled employees.

      Our success depends in significant part upon the continued services of key management and skilled personnel. Competition for qualified personnel is intense and there are a limited number of people with knowledge of, and experience in, our industry. We do not have employment agreements with most of our key employees. However, we generally enter into agreements with our employees regarding patents, confidentiality and related matters. We do not maintain life insurance polices on our employees. Our loss of key personnel, especially without advance notice, or our inability to hire or retain qualified personnel, could have a material adverse effect on our instrument sales and our ability to maintain our technological edge. We cannot guarantee that we will continue to retain our key management and skilled personnel, or that we will be able to attract, assimilate and retain other highly qualified personnel in the future.

Any failure to successfully introduce our future products and systems into the market could adversely affect our business.

      The commercial success of our future products and systems depends upon their acceptance by the medical community. Our future product plans include capital-intensive laboratory instruments. We believe that these products can significantly reduce labor costs, improve precision and offer other distinctive benefits to the medical research community. However, there is often market resistance to products that require significant capital expenditures or which eliminate jobs through automation. We can make no assurance that the market will accept our future products and systems, or that sales of our future products and systems will grow at the rates expected by our management.

If we fail to meet changing demands of technology, we may not continue to be able to compete successfully with our competitors.

      The market for our products and systems is characterized by rapid technological advances, changes in customer requirements, and frequent new product introductions and enhancements. Our future success depends upon our ability to introduce new products that keep pace with technological developments, enhance current product lines and respond to evolving customer requirements. Our failure to meet these demands could result in a loss of our market share and competitiveness and could harm our revenues and results of operations.

Any failure or inability to protect our technology and confidential information could adversely affect our business.

      Patents. Our commercial success depends in part on our ability to protect and maintain our automated intelligent microscopy (or AIM) and other proprietary technology. We have received patents with respect to

2

portions of the technologies of AIM. However, ownership of technology patents may not insulate us from potentially damaging competition. Patent litigation relating to clinical laboratory instrumentation patents (like the ones we own) often involves complex legal and factual questions. Therefore, we can make no assurance that claims under patents currently held by us, or our pending or future patent applications, will be sufficiently broad to adequately protect what we believe to be our proprietary rights. Additionally, one or more of our patents could be circumvented by a competitor. We believe that our proprietary rights do not infringe upon the proprietary rights of third parties. However, third parties may assert infringement claims against us in the future. If we are unsuccessful in our defense against any infringement claim our patents, or patents in which we have licensed rights, may be held invalid and unenforceable.

      Trade Secrets. We have trade secrets, unpatented technology and proprietary knowledge related to the sale, promotion, operation, development and manufacturing of our products. We generally enter into confidentiality agreements with our employees and consultants. However, we cannot guarantee that our trade secrets, unpatented technology or proprietary knowledge will not become known or be independently developed by competitors. If any of this proprietary information becomes know to third parties, we may have no practical recourse against these parties.

      Copyrights. We claim copyrights in our software and the ways in which it assembles and displays images. We also claim trademark rights in the United States and other foreign countries. However, we can make no assurance that we will be able to obtain enforceable copyright and trademark protection, nor that this protection will provide us a significant commercial advantage.

      Potential litigation expenses. Offensive or defensive litigation regarding patent and other intellectual property rights could be time-consuming and expensive. Additionally, litigation could demand significant attention from our technical and management personnel. Any change in our ability to protect and maintain our proprietary rights could materially and adversely affect our financial condition and results of operations.

We operate in a consolidating industry which creates barriers to our market penetration.

      The healthcare industry in recent years has been characterized by consolidation. Large hospital chains and groups of affiliated hospitals prefer to negotiate comprehensive supply contracts for all of their supply needs at once. Large suppliers can often equip an entire laboratory and offer these hospital chains and groups one-stop shopping for laboratory instruments, supplies and service. Larger suppliers also typically offer annual rebates to their customers based on the customer’s total volume of business with the supplier. The convenience and rebates offered by these large suppliers are administrative and financial incentives that we do not offer our customers. Our plans for further market penetration in the urinalysis market will depend in part on our ability to overcome these and any new barriers resulting from continued consolidation in the healthcare industry.

Since we operate in the medical technology industry, our products are subject to government regulation that could impair our operations.

      Most of our products are subject to stringent government regulation in the United States and other countries. These regulatory processes can be lengthy, expensive and uncertain. Additionally, securing necessary clearances or approvals may require the submission of extensive official data and other supporting information. Our failure to comply with applicable requirements could result in fines, recall or seizure of products, total or partial suspension of production, withdrawal of existing product approvals or clearances, refusal to approve or clear new applications or notices, or criminal prosecution. If any of these things occur, they could harm our business. Changes in existing federal, state or foreign laws or regulations, or in the interpretation or enforcement of these laws, could also materially and adversely affect our business.

Changes in government regulation of the healthcare industry could adversely affect our business.

      Federal and state legislative proposals are periodically introduced or proposed that would affect major changes in the healthcare system, nationally, at the state level or both. Future legislation, regulation or payment policies of Medicare, Medicaid, private health insurance plans, health maintenance organizations and other third-party payors could adversely affect the demand for our current or future products and our ability to

3

sell our products on a profitable basis. Moreover, healthcare legislation is an area of extensive and dynamic change, and we cannot predict future legislative changes in the healthcare field or their impact on our industry or our business.

We are subject to anti-takeover provisions in our charter that could delay or prevent an acquisition of our company, even if such an acquisition would be beneficial to our stockholders.

      Certain provisions of our certificate of incorporation, our bylaws and Delaware law could, together or separately, delay or prevent a third party from acquiring us, even if doing so might be beneficial to our stockholders. These provisions may also limit the price that investors might be willing to pay for shares of our common stock. Some of these provisions:

•  establish a classified board of directors;

•  authorize the issuance of preferred stock with rights and privileges which could be senior to the common stock, without prior stockholder approval;

•  limit the right of stockholders to call a special meeting of stockholders; and

•  prohibit stockholder action by written consent.

      Additionally, in December 1999, the Board of Directors of IRIS approved and adopted a shareholders rights plan. Under the terms of the plan, each shareholder of record at the close of business on February 7, 2000 will receive rights to purchase shares of a new Series C Preferred Stock. Each share of Series C Preferred Stock would be the economic equivalent of 1,000 shares of IRIS Common Stock. The Company currently has approximately 10.4 million outstanding shares of common stock. The rights will be exercisable only if a person or group acquires 20% or more of the IRIS Common Stock, or announces a tender offer for 20% or more of the IRIS Common Stock, without board approval. If the rights are triggered, all stockholders (except the hostile party) will be entitled to purchase shares of the Series C Preferred Stock at a price based on a substantial discount from the market price of the IRIS Common Stock. The Board of Directors may terminate the plan at any time or redeem the rights prior to their becoming exercisable.

      We also are subject to Section 203 of the Delaware General Corporation Law which, subject to certain exceptions, prohibits a Delaware corporation from engaging in any of a broad range of business combinations with any “interested stockholder” for a period of three years following the date that such stockholder became an interested stockholder.

Defective products may subject us to liability.

      Our products are used to gather information for medical decisions and diagnosis. Accordingly, the manufacture and sale of our products entails an inherent risk of product liability arising from an inaccurate, or allegedly inaccurate, test result. We currently maintain product liability insurance coverage for up to $1.0 million per incident and up to an aggregate of $2.0 million per year. We also currently maintain a commercial umbrella policy with an additional aggregate coverage of $5.0 million. Although management believes this liability coverage is sufficient protection against future claims, there can be no assurance of the sufficiency of these policies. We have not received any indication that our insurance carrier will not renew our product liability insurance at or near current premiums; however, we cannot guarantee that this will continue to be the case. In addition, any failure to comply with Federal Drug Administration regulations governing manufacturing practices could hamper our ability to defend against product liability lawsuits.

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