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UNITED STATES

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

IVAX Diagnostics, Inc.

(Exact name of registrant as specified in its charter)

2140 North Miami Avenue, Miami, Florida 33127

(Address of principal executive offices, including zip code)

(305) 324-2300

(Registrant’s telephone number, including area code)

Securities Registered Pursuant to Section 12(b) of the Act:

Securities Registered Pursuant to Section 12(g) of the Act: None

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

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  ¨

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act).  ¨

The aggregate market value of the voting common stock held by non-affiliates of the registrant on June 30, 2003, was approximately $37,936,125.

As of March 22, 2004, there were 27,673,204 shares of common stock outstanding.

Documents Incorporated by Reference: None

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IVAX Diagnostics, Inc.

Annual Report on Form 10-K

for the year ended December 31, 2003

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PART I

ITEM 1. BUSINESS

CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS

We have made forward-looking statements, which are subject to risks and uncertainties, in this Annual Report on Form 10-K. These statements are based on the beliefs and assumptions of our management and on the information currently available to it. Forward-looking statements may be preceded by, followed by, or otherwise include the words “may,” “will,” “believes,” “expects,” “anticipates,” “intends,” “plans,” “estimates,” “projects,” “could,” “would,” “should,” or similar expressions or statements that certain events or conditions may occur. Actual results, performance or achievements could differ materially from those contemplated, expressed or implied by these forward-looking statements. These forward-looking statements are based largely on our expectations and the beliefs and assumptions of our management and on the information currently available to it and are subject to a number of risks and uncertainties, including, but not limited to, the risks and uncertainties associated with: economic, competitive, political, governmental and other factors affecting us and our operations, markets and products; the success of technological, strategic and business initiatives, including our automation strategy and our development and commercial release of our new proprietary instrument system, named the PARSEC^™ System; our ability to receive regulatory approval for the PARSEC^™ System; the performance of the PARSEC^™ System; the ability of the PARSEC^™ System to be a factor in our growth; the ability of the PARSEC^™ System to expand the menu of test kits we offer; making the PARSEC^™ System our primary product; our ability to market the PARSEC^™ System; our customers’ integration of the PARSEC^™ System into their operations; constantly changing, and our compliance with, governmental regulation, including “European Conformity” marking on our products sold throughout the European Union; our limited operating revenues and history of operational losses; our ability to achieve cost advantages from our own manufacture of instrument systems, reagents and test kits; our ability to grow beyond the autoimmune and infectious disease markets and to expand into additional diagnostic test sectors; our agreements with IVAX Corporation, or IVAX, third party distributors and key personnel; consolidation of our customers affecting our operations, markets and products; reimbursement policies of governmental and private third parties affecting our operations, markets and products; price constraints imposed by our customers and governmental and private third parties; our ability to replace our largest customer; our ability to consummate potential acquisitions of businesses or products; our ability to integrate acquired businesses or products, including the acquisition described below; protecting our intellectual property; political and economic instability and foreign currency fluctuation affecting our foreign operations; the holding of substantially all of our cash and cash equivalents at a single brokerage firm, including risks relating to the bankruptcy or insolvency of such brokerage firm; litigation regarding products, distribution rights, intellectual property rights and product liability; voting control of our common stock by IVAX; conflicts of interest with IVAX and with our officers, directors and employees; and other factors discussed elsewhere in this Annual Report on Form 10-K. Many of these factors are beyond our control.

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BUSINESS

General. We are the parent corporation of the following three subsidiaries:

Through these subsidiaries, we develop, manufacture, and market diagnostic test kits, or assays, and automated systems that are used to aid in the detection of disease markers primarily in the areas of autoimmune and infectious diseases. These tests, which are designed to aid in the identification of the causes of illness and disease, assist physicians in selecting appropriate patient treatment. Most of our tests are based on Enzyme Linked ImmunoSorbent Assay, or ELISA, technology, a clinical testing methodology used worldwide. Specific tests are prepared using a 96 well microplate format whereby specific antigens are typically coated on the wells of a microplate during the manufacturing process. A test using ELISA technology involves a series of reagent additions to the microplate causing a reaction that results in a visible color in the wells. The amount of color is directly proportionate to the amount of the specific analyte in the patient sample. Our kits are designed to be performed either manually or in an automated format. In addition to our line of diagnostic kits, we also design and manufacture laboratory instruments that perform the tests and provide fast and accurate results, while reducing labor costs. Our existing proprietary instruments, named the Mago^® Plus and Aptus^™ systems, include a fully-automated ELISA processor operating with our own user-friendly software, allowing customers to perform tests in an automated mode. We have designed our new proprietary instrument system, named the PARSEC^™ System, in a modular format, which we believe should permit different detection technologies to be incorporated. We expect that this design should enable customers to utilize not only ELISA-based kits, but also other methods such as chemiluminescent-based assays in the future. We also believe that the PARSEC^™ System’s design is scalable, which we believe should give customers the ability to “customize” the configuration of the PARSEC^™ System to the testing and work flow requirements of their particular laboratories. We have not yet received regulatory approval for the PARSEC^™ System, nor is it yet available for commercial release. We also develop, manufacture, and market raw materials, such as antigens used in the production of diagnostic kits.

Our management reviews financial information, allocates resources and manages the business as two segments defined by geographic region. One segment - the domestic region - contains our subsidiaries located in the United States and corporate operations. Our other segment - the Italian region - contains our subsidiary located in Italy. For additional information about our two segments, see Note 9 to our Consolidated Financial Statements.

Delta, which IVAX acquired in 1991, was established in 1980. From its facility located in Pomezia, Italy, it develops and manufactures scientific and laboratory instruments, including its proprietary Mago^® Plus and Aptus^™ systems, which include hardware, reagents, and software.

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The Mago^® Plus and Aptus^™ systems, in association with 82 specific assays acquired from Diamedix and third parties, as well as a complete line of allergy products, are sold directly in Italy through Delta’s independent sales force and sales representatives, most of whom work exclusively for Delta. Delta also sells in Italy other diagnostic products manufactured by third parties. Approximately 90% of Delta’s customers in Italy are government owned hospitals and the remaining 10% are private laboratories. Thus, sales in Italy are heavily concentrated in the public sector. Delta also serves as the distribution center for selling these same products to customers located in other European and international markets outside Italy. Some of these sales, such as in Spain and Portugal, are made through distributors while others are made on a direct basis. The sales made on a direct basis occur primarily in the United Kingdom, France and Germany. These sales are supported by our employees or sales agents based in England, France and Italy.

Diamedix was established in 1986 after it acquired all of the assets and retained substantially all of the personnel of Cordis Laboratories, Inc., a company that had developed, manufactured, and marketed diagnostic equipment since 1962. IVAX acquired Diamedix in 1987. Diamedix’ products are sold in the United States through Diamedix’ sales force. Diamedix manufactures 49 assays that the United States Food and Drug Administration, or FDA, has cleared and that are available to be run in conjunction with the Mago^® Plus and Aptus^™ systems. These assays are sold under the trade name immunosimplicity^®. Diamedix is located in Miami, Florida.

Since 1985, ImmunoVision has been developing, manufacturing, and marketing autoimmune reagents and research products for use by research laboratories and commercial diagnostic manufacturers. These manufacturers (including Diamedix) use these antigens to produce autoimmune diagnostic kits. IVAX acquired ImmunoVision in 1995. ImmunoVision is located in Springdale, Arkansas.

Merger. On November 21, 2000, IVAX and the pre-merger IVAX Diagnostics, Inc., then a wholly-owned subsidiary of IVAX which was incorporated in 1996 by IVAX to be the parent corporation of Diamedix, Delta and ImmunoVision, entered into a definitive merger agreement with us, pursuant to which the pre-merger Diagnostics would merge with and into us, with us as the surviving corporation. The merger was consummated on March 14, 2001, and our name was changed from “b2bstores.com Inc.” to “IVAX Diagnostics, Inc.” As a result of the merger, approximately 70% of the issued and outstanding shares of our common stock became owned by IVAX and our business became that of the pre-merger Diagnostics.

We were incorporated on June 28, 1999 under the laws of the State of Delaware. Prior to the merger, we operated an Internet web site that was specifically designed to assist business customers in the operation and development of their businesses. The web site was designed to provide business customers with access to products and supplies, a network of business services and business content. On December 1, 2000, we ceased all web site related operations and permanently shut down our web site.

Acquisition. On May 15, 2002, we consummated the acquisition of certain of the assets of the global enzyme immunoassay product line of Sigma Diagnostics, Inc., a wholly-owned subsidiary of Sigma-Aldrich Corporation, for approximately $2,212,000 and the assumption of certain

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liabilities. As a result of the consummation of the transaction with Sigma Diagnostics, we no longer sell reagents or instrumentation to Sigma Diagnostics, which had been our largest customer during 2001 and 2000 and which had marketed such reagents and instrumentation throughout the world under previous agreements with us. Instead, we sell enzyme immunoassay instrumentation and reagents directly to Sigma Diagnostics’ former customer base. Selected employees previously affiliated with Sigma Diagnostics, primarily in the field sales, instrument service and technical support areas, joined us. As a result of the consummation of the transaction with Sigma Diagnostics, our previous agreements with Sigma Diagnostics have been terminated.

Market. Our products are primarily associated with the in vitro diagnostics market. In vitro diagnostic assays are tests that are used to detect specific substances, usually either antigens or antibodies, outside the body. This usually involves using a blood sample or other bodily fluid sample for testing. The market for in vitro diagnostic products consists of reference laboratory and hospital laboratory testing, testing in physician offices, and over the counter testing, in which testing can be performed at home by the consumer. Industry analysts have stated that the world market for in vitro diagnostics was estimated to be $22.9 billion in 2002 and estimated to grow at a rate of 4% to 5% annually. Of this total $22.9 billion market, the immunoassay world market in which we operate is estimated by industry analysts to be $6.6 billion. We have focused our efforts on the niche market for autoimmune and infectious disease immunoassay products. Our ELISA autoimmune product line consists of 21 test kits that the FDA has cleared. These include test kits for screening antinuclear antibodies and specific tests to measure antibodies to dsDNA, SSA, SSB, Sm, Sm/RNP, Scl 70, Jo-1, Rheumatoid Factor, MPO, PR-3, TPO, TG, and others. These products are used for the diagnosis and monitoring of autoimmune diseases, including Systemic Lupus Erythematosus, or SLE, Rheumatoid Arthritis, Mixed Connective Tissue Disease, Sjogren’s Syndrome, Scleroderma, and Dermatopolymyositis. Our infectious disease product line includes 28 kits that the FDA has cleared, including Toxoplasma IgG, Toxoplasma IgM, Rubella IgG, Rubella IgM, Cytomegalovirus, or CMV, IgG, CMV IgM, Herpes Simplex Virus, or HSV, IgG, HSV IgM, Measles, Varicella Zoster Virus, or VZV, Lyme Disease, H. pylori, Mumps, six different Epstein-Barr Virus, or EBV, kits and others.

We believe that the market trend for in vitro diagnostic products is towards increased laboratory automation that would allow laboratories to lower their overall costs. We believe that our proprietary Mago^® Plus and Aptus^™ systems and PARSEC^™ System should enable laboratories to achieve more automation in the test sectors in which we compete.

We are seeking to differentiate ourselves from our competitors through our proprietary instrument systems. While some of our competitors offer proprietary instruments, other competitors use third parties to manufacture these instruments for them. We believe that the cost advantage we enjoy from our own manufacture of the Mago^® Plus and Aptus^™ systems and the PARSEC^™ System, coupled with our production of certain autoimmune reagents at ImmunoVision and our production of diagnostic test kits at Diamedix, should position us to target new product markets for growth beyond the niche market for autoimmune and infectious disease immunoassay products in which we currently compete. We expect that our new proprietary PARSEC^™ System should enable us to expand the menu of test kits that we currently offer and that we should be able to expand into testing sectors beyond the autoimmune and infectious disease products. We expect that the PARSEC^™ System will be marketed to

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hospitals, reference testing laboratories, clinics and pharmaceutical, and biotechnology research companies. We presented the PARSEC^™ System at the Medica Exhibition in Dusseldorf, Germany in November 2003. We have not yet received regulatory approval for the PARSEC^™ System, nor is it yet available for commercial release.

Research and Development. We devote substantial resources for research and development. For the years ended December 31, 2003, 2002 and 2001, we spent $1.3 million, $1.4 million and $1.4 million, respectively, for research and development activities. There is no assurance that these expenditures will result in the development of new products or product enhancements, that we will successfully complete products currently under development, that we will obtain regulatory approval or that any approved product will be produced in commercial quantities, at reasonable costs, and be successfully marketed.

Our research and development efforts are targeted primarily towards the development of our new proprietary PARSEC^™ System. While there is no assurance that we will be successful, we are seeking to expand the test kits menu we offer in the autoimmune and infectious disease testing sectors and considering moving into additional diagnostic test sectors such as HIV, Hepatitis, and allergy detection.

Sales and Marketing. We currently market our products in the United States through our own sales force to hospitals, reference laboratories, clinical laboratories, and research laboratories, as well as to other commercial companies that manufacture diagnostic products. We also sell some of our products to pharmaceutical and biotechnology companies. We market our products in certain international markets through a network of independent distributors. We market and sell our products in Italy through a network of salespersons and sales agents, most of whom work on an exclusive basis for Delta. We also sell our products in other global markets through a number of independent distributors. Sales personnel are trained to demonstrate our products in the laboratory setting. Our marketing and technical service departments located in Miami, Florida, Springdale, Arkansas, and Pomezia, Italy support their efforts. We participate in a number of industry trade shows in the United States and Europe.

The products we market are purchased principally by healthcare providers that typically bill third party payors such as governmental programs (e.g., Medicare and Medicaid), private insurance plans, and managed care plans, for healthcare services provided to their patients. Governmental reimbursement policies are subject to rapid and significant changes in the United States at both the federal and state levels and in other countries. Private third party payors are increasingly negotiating the prices charged for medical products and services. There can be no assurance that healthcare providers will not respond to such pressures by substituting competitors’ products for our products. A third party payor may deny reimbursement if it determines that a device was not used in accordance with cost-effective treatment methods, was experimental, or for other reasons. There can be no assurance that our products will qualify for reimbursement by governmental programs in accordance with guidelines established by the Centers for Medicare and Medicaid Services, by state government payors, or by commercial insurance carriers, or that reimbursement will be available in other countries.

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On May 15, 2002, we consummated the acquisition of certain of the assets of the global enzyme immunoassay product line of Sigma Diagnostics for approximately $2,212,000 and the assumption of certain liabilities. As a result of the consummation of the transaction with Sigma Diagnostics, we no longer sell reagents or instrumentation to Sigma Diagnostics, which had been our largest customer during 2001 and 2000 and which had marketed such reagents and instrumentation throughout the world under previous agreements with us. Instead, we sell enzyme immunoassay instrumentation and reagents directly to Sigma Diagnostics’ former customer base. Selected employees previously affiliated with Sigma Diagnostics, primarily in the field sales, instrument service and technical support areas, joined us. As a result of the consummation of the transaction with Sigma Diagnostics, our previous agreements with Sigma Diagnostics have been terminated. During calendar years 2002 and 2001, our net revenues from such sales of instruments, replacement parts and diagnostic kits to Sigma Diagnostics represented 1.6% and 24.9%, respectively, of our total net revenues for such periods.

Our business is not considered seasonal in nature, but our Italian operations may be slightly affected by the general reduction in business activity in Europe during the traditional summer vacation months.

Our business is not materially affected by order backlog or working capital issues.

Competition. We compete on a worldwide basis and there are numerous competitors in the specific market sectors in which we offer our products. These competitors range from major pharmaceutical companies to development stage diagnostic companies. Many of these companies, such as Abbott Laboratories and Diagnostic Products Corporation, are much larger and have significantly greater financial, technical, manufacturing, sales, and marketing resources than us.

The diagnostics industry has experienced considerable consolidation through mergers and acquisitions in the past several years. At the same time, the competition in test sectors such as autoimmune is very fragmented as it is comprised of primarily small companies with no single company possessing a dominant market position. We compete in the marketplace on the basis of the quality of our products, price, instrument design and efficiency, as well as our relationships with customers. In addition to Abbott Laboratories and Diagnostic Products Corporation, our competitors include Bio-Rad Laboratories, DiaSorin, Meridian Bioscience, Inc., Wampole Laboratories, Hycor Biomedical, Inc. and Trinity Biotech plc.

The in vitro diagnostic market in which we sell many of our products is highly competitive. The market for our products is characterized by continual and rapid technological developments that have resulted in, and will likely continue to result in, substantial improvements in product function and performance. Our success will depend, in part, on our ability to anticipate changes in technology and industry requirements and to respond to technological developments on a timely basis either internally or through strategic alliances. Several companies have developed, or are developing, scientific instruments and assays that compete or will compete directly with products we market. Many existing and potential competitors have substantially greater financial, marketing, research, and technological resources, as well as established reputations for success in developing, manufacturing, selling, and servicing products, than us. Competitors that

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are more vertically integrated than us may have more flexibility to compete effectively on price. We expect that existing and new competitors will continue to introduce products or services that are, directly or indirectly, competitive with those that we sell. Such competitors may succeed in developing products that are more functional or less costly than those sold by us and may be more successful in marketing such products. These and other innovations in the rapidly changing medical technology market will negatively affect the sales of the products we market. There can be no assurance that we will be able to compete successfully in this market or that technology developments by our competitors will not render our products or technologies obsolete.

Personnel. As of December, 2003, we had approximately 113 full time employees, of whom 15 were managerial, 42 were technical and manufacturing, 13 were administrative, and 43 were sales and marketing.

Intellectual Property. In December 1994, Diamedix entered into an intellectual property agreement with two inventors pursuant to which it acquired all rights, title, and interest in the Mago^® instrument, including all related software and technical information. During 2003, Diamedix completed its obligation to make payments under the intellectual property agreement. Separately, in December 1994, the pre-merger Diagnostics entered into consulting agreements with each of the inventors. Only one of these consulting agreements, which was amended in July 2003, currently remains in effect.

The technology associated with the design and manufacture of the Mago^® and Aptus^™ instruments is not protected by patent registrations or license restrictions. The Mago^® instrument has been our primary product. In the future, we expect that the PARSEC^™ System will become our primary product. We have filed several patent applications related to the new innovative features in the PARSEC^™ System. There can be no assurance that our competitors will not gain access to our trade secrets and proprietary and confidential technologies, or that they will not independently develop similar or competing trade secrets and technologies.

On March 14, 2001, we entered into a use of name license with IVAX whereby IVAX granted us a non-exclusive, royalty free license to use the name “IVAX.” IVAX may terminate this license at any time upon 90 days’ written notice. Upon termination of the agreement, we are required to take all steps reasonably necessary to change our name as soon as is practicable. The termination of this agreement by IVAX could have a material adverse effect on our ability to market our products and on us.

Governmental Regulation. The testing, manufacturing, and sale of our products are subject to regulation by numerous governmental authorities, principally the FDA. To comply with FDA requirements, we must, among other things, manufacture our products in conformance with the FDA’s medical device Quality System regulations. Diamedix is listed as a registered establishment with the FDA and Delta has received UNI ISO 9001 certification complemented by the requirements of UNI CEI EN ISO 13485 validating its quality system. The FDA classifies medical devices into three classes (Class I, II or III). Class I devices are subject to general controls, such as good manufacturing practices, and may or may not be subject to pre-market notification. Pre-market notifications must be submitted to the FDA before products can be commercially distributed. Some Class I devices have been deemed exempt from this requirement

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by the FDA. Class II devices are subject to the same general controls, pre-market notification and performance standards. Usually, Class III devices are those that must receive pre-market approval by the FDA to ensure their safety and effectiveness. Most of our products are classified as Class I or II devices. Generally, before a new test kit can be introduced to the market, it is necessary to obtain FDA clearance in the form of a pre-market 510(k) notification. A 510(k) notification provides data to show that the new device is substantially equivalent to other devices in the marketplace. Almost all of the products sold by us have received 510(k) clearance. In addition, customers using diagnostic tests for clinical purposes in the United States are also regulated under the Clinical Laboratory Improvement Amendments of 1988, or CLIA. CLIA is intended to ensure the quality and reliability of all medical testing in laboratories in the United States by requiring that any healthcare facility in which testing is performed meets specified standards in the areas of personnel qualification, administration, participation in proficiency testing, patient test management, quality control, quality assurance, and inspections.

Additionally, the products we sell are subject to extensive regulation by governmental authorities in the United States and other countries, including, among other things, the regulation of the testing, approval, manufacturing, labeling, marketing, and sale of diagnostic devices. As a general matter, foreign regulatory requirements for medical devices are becoming increasingly stringent. In the European Union, a single regulatory approval process has been created and approval is represented by the “CE Marking.” “CE” is an abbreviation for Conformite Europeene, or European Conformity, and the “CE Marking” when placed on a product indicates compliance with the requirements of the applicable regulatory directive. Medical devices properly bearing the “CE Marking” may be commercially distributed throughout the European Union. “CE Marking” must be obtained for all medical devices commercially distributed throughout the European Union even though the products may have received FDA clearance. In order to be commercially distributed throughout the European Union, certain of our products must bear the “CE Marking.” All of the products that we currently sell throughout the European Union are in conformity with the applicable “CE” regulations under the In Vitro Diagnostics Directive. We have also received an ISO 13485:1996 certificate, giving us approval for Europe and Canada. If in the future we lose the authorization to use the “CE Marking,” we may not be able to sell our products in the European Union, which could have a material adverse effect on our business, prospects, operating results and financial condition.

Failure to comply with any governmental regulation can result in fines, unanticipated compliance expenditures, interruptions of production, product recalls or suspensions, and criminal prosecution. The process of obtaining regulatory approval is rigorous, time consuming, and costly. There is no assurance that we will attain necessary approvals on a timely basis, if at all. In addition, product approvals can be withdrawn if we fail to comply with regulatory standards or if unforeseen problems occur following initial marketing. Domestic and foreign regulations are subject to change and extensive changes in regulation may increase our operating expenses. There can be no assurance that we will not encounter delays in obtaining necessary domestic or foreign regulatory approvals, if at all, or failures to comply with applicable regulatory requirements, or extensive changes in regulation.

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We are also subject to numerous federal, state, and local laws relating to such matters as safe working conditions, manufacturing practices, environmental protection, fire hazard control, and disposal of hazardous or potentially hazardous substances.

Our employment relations in Italy are governed by numerous regulatory and contractual requirements, including national collective labor agreements and individual employer labor agreements. These arrangements address a number of specific issues affecting our working conditions including hiring, work time, wages and benefits, and termination of employment. We must make significant payments in order to comply with these requirements.

The evolving and complex nature of regulatory requirements, the broad authority and discretion of the FDA and the high level of regulatory oversight in our industry result in a continuing possibility that our business and results of operations may be adversely affected by regulatory issues despite our efforts to maintain compliance with regulatory requirements.

Available Information. Our Internet web site is www.ivaxdiagnostics.com. We make available, free of charge, through our web site, our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed pursuant to Section 13(d) or 15(d) of the Securities Exchange Act of 1934 as soon as reasonably practicable after such documents are electronically filed with or furnished to the Securities and Exchange Commission. Information contained in our web site is not part of this Annual Report on Form 10-K and shall not be incorporated by reference herein.

ITEM 2. PROPERTIES

Our corporate headquarters are located in Miami, Florida. Our corporate headquarters share facilities with Diamedix, which owns approximately 56,000 square feet of buildings at its facility in Miami, Florida. From this facility, Diamedix conducts research and development of in vitro diagnostic products, reagent kit manufacturing, marketing, and corporate management activities. Delta leases approximately 27,000 feet of industrial space in Pomezia, Italy. This facility is where our proprietary instrumentation is manufactured. ImmunoVision leases approximately 5,700 square feet of commercial space in Springdale, Arkansas.

We believe our facilities are in satisfactory condition, are suitable for their intended use and, in the aggregate, have capacities in excess of those necessary to meet our present needs. A portion of our facilities, as well as our corporate headquarters and other critical business functions are located in areas subject to hurricane casualty risk. Although we have certain limited protection afforded by insurance, our business and our earnings could be materially adversely affected in the event of a major windstorm.

ITEM 3. LEGAL PROCEEDINGS

On March 2, 2001, b2bstores received notice that a shareholder of b2bstores filed a lawsuit against b2bstores and two of its directors in the United States District Court for the Western District of Texas, San Antonio Division. The lawsuit alleged that b2bstores violated certain aspects of Section 14(a) of the Securities Exchange Act of 1934, as amended, and that two

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former directors/officers breached their fiduciary duties in connection with the merger. The suit sought damages, including punitive damages against the two former directors/officers. All of the parties to this lawsuit entered into a full and final settlement agreement pursuant to which we were required to make a nominal payment. On November 12, 2003, the court dismissed this lawsuit with prejudice pursuant to an Agreed Order of Dismissal with Prejudice which was filed by all of the parties to this lawsuit.

On February 19, 2003, we filed a Complaint in Arbitration with the International Center for Dispute Resolution at the American Arbitration Association against Phoenix Bio-Tech Corporation, or Phoenix, for breach of contract, specific performance and injunctive relief arising out of Phoenix’s alleged failure to honor its obligations under an exclusive marketing agreement, which we had assumed in our transaction with Sigma Diagnostics. Phoenix purports to have terminated the exclusive marketing agreement. Under the Complaint in Arbitration, we are seeking (a) damages from Phoenix for Phoenix’s breach of the exclusive marketing agreement, (b) temporary and permanent injunctive relief requiring Phoenix to not breach the exclusive marketing agreement, (c) specific performance requiring Phoenix to perform its obligations under the exclusive marketing agreement, and (d) payment by Phoenix of our attorneys’ fees and costs incurred in bringing this action. On March 7, 2003, we received notice that Phoenix filed an Answering Statement to Complaint in Arbitration and a Counterclaim against us. Under the Answer and Counterclaim, Phoenix is seeking (y) damages from us currently estimated by Phoenix to be approximately $225,000 for our alleged breach of the exclusive marketing agreement and (z) a determination of whether the exclusive marketing agreement (i) is unenforceable as a result of misrepresentations, (ii) has been breached by us, and (iii) has been properly terminated by Phoenix. Our management denies the allegations in the Answer and Counterclaim and intends to vigorously defend such claims, but the ultimate outcome of any such arbitral proceeding cannot be determined and our ultimate liability cannot presently be determined. If we are not successful on the claims in our Complaint in Arbitration or if we are not successful in our defense of the claims in the Answer and Counterclaim, then our business, operating results and financial condition could be materially adversely affected.

We are also involved in various legal claims and actions and regulatory matters and other notices and demand proceedings arising in the ordinary course of business. While it is not feasible to predict or determine the outcome of these proceedings, in the opinion of management, based on a review with legal counsel, any losses resulting from such legal proceedings would not have a material adverse impact on our financial position, results of operations or cash flows.

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

No matters were submitted to a vote of security holders during the quarter ended December 31, 2003.

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PART II

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

Our common stock is listed on the American Stock Exchange and trades under the symbol IVD.

As of the close of business on March 22, 2004, there were approximately 49 holders of record of our common stock.

The following table sets forth the high and low sales price of a share of our common stock for each quarter in 2003 and 2002, as reported by the American Stock Exchange:

We did not pay cash dividends on our common stock during 2003 or 2002 and we do not intend to pay any cash dividends in the foreseeable future.

ITEM 6. SELECTED FINANCIAL DATA

The following table sets forth selected historical financial data as of and for the fiscal years ended December 31, 2003, 2002, 2001, 2000 and 1999 that has been derived from, and is qualified by reference to, our Consolidated Financial Statements. The information set forth below should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operation” and the Consolidated Financial Statements and related Notes to Consolidated Financial Statements included elsewhere in this Annual Report on Form 10-K. The historical selected financial data prior to consummation of the merger are those of the pre-merger Diagnostics with retroactive restatement of equity and earnings per share.

(In thousands except per share data)

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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION

The following discussion and analysis should be read in conjunction with our Consolidated Financial Statements and the related Notes to Consolidated Financial Statements on pages 25 to 49 of this Annual Report on Form 10-K.

OVERVIEW

We are the parent corporation of the following three subsidiaries:

Through these subsidiaries, we develop, manufacture, and market diagnostic test kits, or assays, and automated systems that are used to aid in the detection of disease markers primarily in the areas of autoimmune and infectious diseases. In addition to diagnostic kits, we also design and manufacture laboratory instruments that perform the tests and provide fast and accurate results, while reducing labor costs. We also develop, manufacture, and market raw materials, such as antigens used in the production of diagnostic kits.

Our management reviews financial information, allocates resources and manages the business as two segments defined by geographic region. One segment—the domestic region—contains our subsidiaries located in the United States and corporate operations. Our other segment—the Italian region—contains our subsidiary located in Italy.

From its facility located in Pomezia, Italy, Delta develops and manufactures scientific and laboratory instruments, including its proprietary Mago^® Plus and Aptus^™ systems, which include hardware, reagents, and software. The Mago^® Plus and Aptus^™ systems, in association with 82 specific assays acquired from Diamedix and third parties, as well as a complete line of allergy products, are sold directly in Italy through Delta’s independent sales representatives, most

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of whom work exclusively for Delta. Delta also sells in Italy other diagnostic products manufactured by third parties. Approximately 90% of Delta’s customers in Italy are government owned hospitals and the remaining 10% are private laboratories. Thus, sales in Italy are heavily concentrated in the public sector.

Diamedix’ products are sold in the United States through Diamedix’ sales force. Diamedix manufactures 49 assays that the FDA has cleared and that are available to be run in conjunction with the Mago^® Plus and Aptus^™ systems. These assays are sold under the trade name immunosimplicity^®.

ImmunoVision develops, manufactures, and markets autoimmune reagents and research products for use by research laboratories and commercial diagnostic manufacturers. These manufacturers (including Diamedix) use these antigens to produce autoimmune diagnostic kits.

The historical financial statements prior to the merger of us and the pre-merger Diagnostics are those of the pre-merger Diagnostics with no adjustments except for retroactive restatement, as if a stock split occurred, to reflect the 20,000,000 shares of common stock that IVAX received in the merger as outstanding for all periods presented.

RESULTS OF OPERATIONS

YEAR ENDED DECEMBER 31, 2003 COMPARED TO THE YEAR ENDED DECEMBER 31, 2002

NET REVENUES AND GROSS PROFIT

Net revenues for the year ended December 31, 2003 totaled $17,673,000, an increase of $3,832,000, or 27.7%, from the $13,841,000 reported in the prior year comparable period. This increase was comprised of an increase of $2,700,000 in external net revenues from domestic operations and an increase of $1,133,000 in external net revenues from Italian operations. Domestic operations generated external net revenues of $11,700,000 for the year ended December 31, 2003, compared to $9,000,000 for the year ended December 31, 2002. This 30.0% increase in domestic external revenues was primarily due to revenue from reagents sold to customers obtained as a result of our transaction with Sigma Diagnostics (as discussed in Note 4, Concentration of Credit Risk, in the Notes to Consolidated Financial Statements) as well as volume increases in reagent revenue generated from new instrumentation placements. External net revenues from Italian operations totaled $5,974,000 for the year ended December 31, 2003, compared to $4,841,000 for the year ended December 31, 2002. This 23.4% increase was primarily attributable to an increase in revenue due to fluctuations of the United States dollar relative to the Euro, as further discussed in “Currency Fluctuations” below. As measured in Euros, the increase in Italian revenue was primarily due to increased reagent sales outside of Italy to customers obtained as a result of our transaction with Sigma Diagnostics as well as increased international sales efforts. Gross profit for the year ended December 31, 2003 increased $3,613,000, or 54.9%, to $10,189,000 (57.7% of net revenues) from $6,576,000 (47.5% of net revenues) for the year ended December 31, 2002. The increase in gross profit and gross profit as a percentage of net revenues was primarily attributable to increased domestic

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revenue, the conversion of former Sigma Diagnostics customers to reagent kits manufactured by us rather than versions of reagent kits formerly sold by Sigma Diagnostics that were obtained from third-party manufacturers, and the manufacturing efficiencies generated by the resulting increases in the volume of our reagent kits.

OPERATING EXPENSES

Selling expenses of $5,336,000 (30.2% of net revenues) for the year ended December 31, 2003 were composed of expenses of $3,470,000 from domestic operations and $1,866,000 from Italian operations. For the year ended December 31, 2002, domestic selling expenses were $3,141,000 while $1,496,000 was incurred in Italy, totaling $4,637,000 (33.5% of net revenues). The domestic portion of the total increase in selling expenses of $699,000 was primarily due to greater domestic payroll costs related to both the increase in sales personnel obtained as a result of our transaction with Sigma Diagnostics as well as increased domestic sales efforts. The increase in expenses incurred in Italy was primarily due to the effect of exchange rate fluctuations. General and administrative expenses totaled $4,588,000 (26.0% of net revenues) for the year ended December 31, 2003, an increase of $577,000, from $4,011,000 (29.0% of net revenues) for the year ended December 31, 2002. General and administrative expenses increased primarily due to increased insurance and legal costs as well as expenses related to the integration of the certain assets acquired from Sigma Diagnostics. Partially offsetting this increase was a decrease in compensation expense due to the completion on June 30, 2003 of the amortization of noncash stock option compensation costs recorded as a result of the merger between b2bstores.com and the pre-merger Diagnostics. Research and development expenses totaled $1,297,000 for the year ended December 31, 2003 compared to $1,427,000 for the year ended December 31, 2002, representing 7.3% and 10.3% of net revenues, respectively. The decrease of $130,000 primarily consisted of a decrease in domestic research and development expenses to $825,000 in the year ended December 31, 2003 from $953,000 in the year ended December 31, 2002, primarily due to reductions in labor and supply and consumables costs. Additionally, Italian research and development expenses decreased to $472,000 in the year ended December 31, 2003 from $473,000 in the year ended December 31, 2002. Exclusive of the effect of exchange rate fluctuations, Italian research and development expenses decreased due to reduced instrumentation development costs, primarily as a result of a reduction in consulting expenses. The future level of research and development expenditures will depend on, among other things, the outcome of ongoing testing of products and instrumentation under development, delays or changes in government required testing and approval procedures, technological and competitive developments, strategic marketing decisions and liquidity.

OPERATING LOSS

Operating losses were $1,031,000 and $3,498,000 during the year ended December 31, 2003 and 2002, respectively. Exclusive of intersegment elimination adjustments, which increased the consolidated operating loss by $10,000, operating loss in the year ended December 31, 2003 was composed of an operating loss of $944,000 from domestic operations and an operating loss of $77,000 from Italian operations. Excluding intersegment elimination adjustments, which increased consolidated operating loss by $21,000 in the year ended December 31, 2002, domestic operations incurred an operating loss of $3,142,000 and Italian operations generated an operating loss of $335,000.

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OTHER INCOME

Interest income decreased to $226,000 for the year ended December 31, 2003 from $465,000 for the year ended December 31, 2002. The decrease of $239,000 was primarily due to lower interest rates in 2003 as well as a reduction in cash and cash equivalents. Other income, net, totaled $211,000 during the year ended December 31, 2003, compared to $77,000 during the year ended December 31, 2002, an increase of $134,000. This increase was due to larger net foreign currency gains recognized in 2003 by our Italian subsidiary on transactions which were denominated in currencies other than its functional currency.

YEAR ENDED DECEMBER 31, 2002 COMPARED TO THE YEAR ENDED DECEMBER 31, 2001

NET REVENUES AND GROSS PROFIT

Net revenues for the year ended December 31, 2002 totaled $13,841,000, an increase of $3,542,000, or 34.4%, from the $10,299,000 reported in the prior year comparable period. This increase was comprised of an increase of $4,384,000 in external net revenues from domestic operations partially offset by a decrease in external net revenues of $842,000 from Italian operations. Domestic operations generated external net revenues of $9,000,000 for the year ended December 31, 2002, compared to $4,616,000 for the year ended December 31, 2001. This 95.0% increase in domestic external revenues was primarily due to revenue from reagents sold to customers obtained as a result of our transaction with Sigma Diagnostics, as well as volume increases in reagent revenue generated from new instrumentation placements. External net revenues from Italian operations totaled $4,841,000 for the year ended December 31, 2002, compared to $5,683,000 for the year ended December 31, 2001. This 14.8% decrease was primarily attributable to decreased sales volume of instrumentation products to our former largest customer, Sigma Diagnostics, as further discussed in Note 4, Concentration of Credit Risk, in the Notes to Consolidated Financial Statements. Gross profit for the year ended December 31, 2002 increased $1,131,000, or 20.8%, to $6,576,000 (47.5% of net revenues) from $5,445,000 (52.9% of net revenues) for the year ended December 31, 2001. The increase in gross profit was primarily attributable to increased revenue from both reagents sold to customers obtained as a result of our transaction with Sigma Diagnostics and new domestic instrumentation placements from sales of instrumentation products. This increase in gross profit was partially offset by the decreased sales volume of instrumentation products. The decrease in gross profit as a percentage of net revenues of 5.4% was principally due to lower sales volume of instrumentation products, which are generally sold at a higher gross margin.

OPERATING EXPENSES

Selling expenses of $4,637,000 (33.5% of net revenues) for the year ended December 31, 2002 were composed of expenses of $3,141,000 from domestic operations and $1,496,000 from Italian operations. For the year ended December 31, 2001, domestic selling expenses were $1,772,000

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while $1,419,000 was incurred in Italy, totaling $3,191,000 (31.0% of net revenues). This increase in selling expenses of $1,446,000 was primarily due to greater payroll and travel costs related to the increase in sales personnel obtained as a result of our transaction with Sigma Diagnostics as well as increased domestic sales efforts. General and administrative expenses totaled $4,011,000 (29.0% of net revenues) for the year ended December 31, 2002, a decrease of $444,000, from $4,455,000 (43.3% of net revenues) for the year ended December 31, 2001. This decrease was primarily the result of a decrease of $892,000 in stock option compensation expense recognized in accordance with Accounting Principles Board, or APB, Opinion No. 25, Accounting for Stock Issued to Employees, from the conversion of outstanding options under our 1999 Stock Option Plan to non-qualified stock options as a result of the merger. The remaining $297,000 of unamortized non-cash compensation cost resulting from such conversion will be expensed over the remaining vesting term of the options through June 30, 2003. Excluding the effect of stock option compensation expense, general and administrative expenses increased primarily due to certain expenses related to the consummation of our transaction with Sigma Diagnostics as well as expenses necessary due to a full year of activity as an independent public company, partially offset by professional fees incurred in 2001 associated with the completion of the merger. Research and development expenses totaled $1,427,000 for the year ended December 31, 2002 compared to $1,418,000 for the year ended December 31, 2001, representing 10.3% and 13.8% of net revenues, respectively. The increase of $9,000 was the result of an increase in Italian research and development expenses to $473,000 in the year ended December 31, 2002 from $257,000 in the year ended December 31, 2001, as a result of increased research related to instrumentation products, offset by a decrease in domestic research and development expenses from $1,161,000 in the year ended December 31, 2001 to $953,000 in the year ended December 31, 2002. This decrease in domestic research and development expenses was primarily the result of a reduced emphasis on reagent kit development. The future level of research and development expenditures will depend on, among other things, the outcome of ongoing testing of products and instrumentation under development, delays or changes in government required testing and approval procedures, technological and competitive developments, strategic marketing decisions and liquidity. Goodwill amortization, which totaled $255,000 in the year ended December 31, 2001, was not recorded in the year ended December 31, 2002 due to the adoption of Statement of Financial Accounting Standards, or SFAS, No. 142, Goodwill and Other Intangible Assets (See Note 2, Summary of Significant Accounting Policies - Recently Issued Accounting Standards, in the Notes to Consolidated Financial Statements).

OPERATING LOSS

Operating losses were $3,498,000 and $3,874,000 during the year ended December 31, 2002 and 2001, respectively. Exclusive of intersegment elimination adjustments, which increased consolidated operating loss by $21,000, operating loss in the year ended December 31, 2002 was composed of operating losses of $3,142,000 from domestic operations and $335,000 from Italian operations. Excluding intersegment elimination adjustments, which increased consolidated operating loss by $125,000 in the year ended December 31, 2001, domestic operations incurred an operating loss of $4,417,000 while Italian operations generated operating income of $667,000.

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OTHER INCOME

Interest income decreased to $465,000 for the year ended December 31, 2002 from $743,000 for the year ended December 31, 2001. The decrease was primarily due to lower interest rates in 2002 as well as a reduction in cash, cash equivalents and marketable securities, partially offset by interest earned on cash received in the merger for the year ended December 31, 2002 compared to the prior year period that began with the date of the merger and ended December 31, 2001. Related party interest expense was $93,000 for the year ended December 31, 2001. The related party interest expense was incurred on intercompany advances from IVAX. As a result of the merger, intercompany advances from IVAX were contributed to capital. Other income, net, totaled $77,000 during the year ended December 31, 2002, compared to $58,000 during the year ended December 31, 2001, an increase of $19,000. This increase was due to larger net foreign currency gains recognized in 2002 on transactions by our Italian subsidiary, which were denominated in currencies other than its functional currency.

LIQUIDITY AND CAPITAL RESOURCES

At December 31, 2003, our working capital was $24,334,000 compared to $23,521,000 at December 31, 2002 and $27,812,000 at December 31, 2001. Cash and cash equivalents totaled $15,465,000 at December 31, 2003, as compared to $15,942,000 at December 31, 2002 and $23,282,000 at December 31, 2001. Substantially all cash and cash equivalents are presently held at one national securities brokerage firm. Accordingly, we are subject to credit risk if this brokerage firm is unable to repay the balance in the account or deliver our securities or if the brokerage firm should become bankrupt or otherwise insolvent. We only invest in select money market instruments, municipal securities and corporate issuers.

Net cash flows of $530,000 were provided by operating activities during the year ended December 31, 2003, compared to $2,251,000 that was used by operating activities during the year ended December 31, 2002 and $936,000 that was used in the year ended December 31, 2001. The increase in cash provided by operating activities during the year ended December 31, 2003 was primarily the result of improved operating results as well as an increase in cash received from accounts receivable collections. The increase in cash used during the year ended December 31, 2002 compared to the same period of the prior year was primarily the result of a decrease in cash received from accounts receivable collections, which include the effects of sales made to customers obtained as a result of our May 15, 2002 transaction with Sigma Diagnostics, as well the collection in January 2001 of account receivables from instrument sales generated in the later part of the year ended December 31, 2000.

Net cash flows of $1,098,000 were used in investing activities during the year ended December 31, 2003, as compared to $3,437,000 used during the same period of the prior year and $834,000 used during the year ended December 31, 2001. The decrease in cash used for investing activities during the year ended December 31, 2003 compared to the same period of the prior year, as well as the increase in cash used for investing activities for the year ended December 31, 2002 compared to the year ended December 31, 2001, was primarily the result of $2,212,000 used for our acquisition of certain assets of the enzyme immunoassay product line of Sigma Diagnostics in May 2002.

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Net cash of $266,000 was provided by financing activities during the year ended December 31, 2003, $1,959,000 was used in financing activities during the same period of 2002 and net cash of $24,108,000 was provided by financing activities during the year ended December 31, 2001. The increase in cash provided during the year ended December 31, 2003 compared to the year ended December 31, 2002 was due to our repurchase of $2,054,000 worth of common stock in the year ended December 31, 2002 as part of our share repurchase program. We did not make any common stock repurchases during the year ended December 31, 2003. The decrease in cash provided in the year ended December 31, 2002 compared to the year ended December 31, 2001 was primarily due to cash of $22,285,000 that was included in net assets acquired in the merger. Other differences in net cash flows provided by financing activities during the year ended December 31, 2002 compared to the prior year were primarily due to cash utilized to repurchase our common stock as part of our share purchase program as well as a decrease in funds received from IVAX.

Our product research and development expenditures are expected to be approximately $1,500,000 during 2004. Actual expenditures will depend on, among other things, the outcome of clinical testing of products under development, delays or changes in government required testing and approval procedures, technological and competitive developments, strategic marketing decisions and liquidity. There can be no assurance that these expenditures will result in the development of new products or product enhancements, that we will successfully complete products under development, that we will obtain regulatory approval or that any approved product will be produced in commercial quantities, at reasonable costs, and be successfully marketed. In addition, we estimate that cash of approximately $600,000 will be required in fiscal 2004 to improve and expand our facilities, equipment and information systems.

The following table summarizes our significant contractual obligations as of December 31, 2003, and the effect such obligations are expected to have on our liquidity and cash flows in future periods.

The expected timing of payment of the obligations described in the table above is estimated based on current information. Timing of payments and actual amounts paid may be different depending on a number of factors.

Our principal source of short term liquidity is existing cash and cash equivalents received as a result of the completion of the merger between b2bstores.com and the pre-merger Diagnostics,

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which we believe will be sufficient to meet our operating needs and anticipated capital expenditures over the short term. For the long term, we intend to utilize principally existing cash and cash equivalents as well as internally generated funds, which are anticipated to be derived primarily from the sale of existing diagnostic and instrumentation products and diagnostic and instrumentation products currently under development. To the extent that the aforementioned sources of liquidity are insufficient, we may consider issuing debt or equity securities or curtailing or reducing our operations.

We maintain allowances for doubtful accounts, particularly in Italy for the operations of our Italian subsidiary, for estimated losses resulting from the inability of our customers to make required or timely payments. Payment cycles are longer in Italy than in the United States. If we require additional allowances, our operating results could be materially adversely affected during the period in which the determination to increase the reserve is or was made.

On May 15, 2002, we consummated our acquisition of certain of the assets of the global enzyme immunoassay product line of Sigma Diagnostics for $2,211,747 and the assumption of certain liabilities. The fair value of assets acquired of $2,456,747 includes reagent and instrumentation inventory as well as enzyme immunoassay instrumentation placed at customer locations. As a result of the consummation of the transaction with Sigma Diagnostics, we no longer sell reagents or instrumentation to Sigma Diagnostics, which had been our largest customer during 2001 (See Note 4, Concentration of Credit Risk, in the Notes to Consolidated Financial Statements) and which had marketed such reagents and instrumentation throughout the world under previous agreements with us. Instead, we sell enzyme immunoassay instrumentation and reagents directly to Sigma Diagnostics’ former customer base. Accordingly, our net revenues from Sigma Diagnostics for sales of instruments, replacement parts and diagnostic kits have ceased. Net sales to Sigma Diagnostics represented 1.6% and 24.9% of our total net revenues during the years ended December 31, 2002 and 2001, respectively. Selected employees previously affiliated with Sigma Diagnostics, primarily in the field sales, instrument service and technical support areas, joined us. As a result of the consummation of the transaction with Sigma Diagnostics, our previous agreements with Sigma Diagnostics have been terminated.

We did not repurchase any of our common stock during the year ended December 31, 2003 as part of the common stock repurchase program approved by our Board of Directors in May 2002. During the year ended December 31, 2002, we repurchased a total of approximately 1,135,000 shares of our common stock. As part of this repurchase program, on November 5, 2002, pursuant to a Redemption Agreement, we repurchased an aggregate of 871,473 shares of our common stock from Randall Davis (who resigned from our Board of Directors on November 4, 2002) and Titanium Holdings Group, Inc., or Titanium Holdings, for an aggregate purchase price of approximately $1,437,900. The repurchased shares have been retired and have resumed the status of authorized and unissued shares. Pursuant to the Redemption Agreement, we also granted a general release to Titanium Holdings, Randall Davis, Steven Etra and Richard Kandel and paid them an aggregate of approximately $217,900 for the following: (i) we were granted an option to acquire up to an additional 657,125 shares of our common stock from Titanium Holdings, Steven Etra and Richard Kandel at an exercise price of $4.00 per share at any time on or before May 5, 2004; (ii) the optionees agreed that, until May 5, 2004, they would not transfer the shares of our common stock that are subject to the option to any person or entity other than to

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us or our affiliates; (iii) Titanium Holdings and Steven Etra further agreed that, until May 5, 2004, they would not transfer an additional 307,125 and 150,000 shares of our common stock owned by them respectively to any person or entity other than to us; and (iv) we and our affiliates received general releases from Titanium Holdings, Randall Davis, Steven Etra and Richard Kandel.

CRITICAL ACCOUNTING POLICIES

Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate our estimates, including those related to product returns, allowance for doubtful accounts, inventories, intangible assets, income and other tax accruals, warranty obligations, and contingencies and litigation. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Our assumptions and estimates may, however, prove to have been or to be incorrect and our actual results may differ from these estimates under different assumptions or conditions. We believe the following critical accounting policies and the judgments and estimates we make concerning their application have significant impact on our consolidated financial statements.

A principal source of revenue is our “reagent rental” program in which customers make reagent kit purchase commitments with us that typically last for a period of three to five years. In exchange, we include a Mago^® instrument and any required instrument service, which are paid for by the customer through these reagent kit purchases over the life of the commitment. We recognize revenue from the reagent kit sales when title passes, which is generally at the time of shipment. Should actual reagent kit or instrument failure rates significantly increase, our future operating results could be negatively impacted by increased warranty obligations and service delivery costs.

We maintain allowances for doubtful accounts, particularly in Italy for the operations of our Italian subsidiary, for estimated losses resulting from the inability of our customers to make required or timely payments. In many instances our receivables in Italy, while currently due and payable, take in excess of a year to collect. If the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make payments, then we may be required to make additional allowances which would adversely affect our operating results during the period in which the determination or reserve is or was made.

We regularly review inventory quantities on hand and, if necessary, record a provision for excess and obsolete inventory based primarily on our estimates of product demand and production requirements. These estimates of future product demand may prove to be inaccurate, in which case any resulting adjustments to the value of inventory would be recognized in our cost of goods sold at the time of such determination.

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Pursuant to SFAS No. 142, Goodwill and Other Intangible Assets, we analyzed our goodwill for impairment issues and will continue to do so in future periods on a periodic basis. In assessing the recoverability of our goodwill and other intangibles, we made assumptions regarding estimated future cash flows, including current and projected levels of income, business trends, prospects and market conditions, to determine the fair value of the respected assets. If these estimates or their related assumptions change in the future, we may be required to record impairment charges for these assets not previously recorded. Any resulting impairment loss would be recorded as a charge against our earnings and could have a material adverse impact on our financial condition and results of operations.

We accounted for income taxes on our consolidated financial statements on a stand-alone basis as if we had filed our own income tax returns. However, the pre-merger Diagnostics reported its income taxes until the merger as part of a consolidated group. Therefore, all domestic net operating losses generated prior to the merger were utilized by IVAX. Since the merger, we have experienced domestic losses from operations. Accounting principles generally accepted in the United States require that we record a valuation allowance against the deferred tax asset associated with these losses if it is “more likely than not” that we will not be able to utilize the net operating loss to offset future taxes. Due to the losses from the operations of our domestic operations since the merger, we have provided full valuation reserves against domestic deferred tax assets and currently provide for only foreign income taxes. Over time we may reach levels of profitability which could cause our management to conclude that it is more likely than not that we will realize all or a portion of the net operating loss carryforward. Upon reaching such a conclusion, and upon such time as we reversed the entire valuation against the deferred tax asset, we would then provide for income taxes at a rate equal to our combined federal and state effective rates. These subsequent revisions to the estimated net realizable value of the deferred tax asset could cause our provision for income taxes to vary significantly from period to period.

The critical accounting policies discussed are not intended to be a comprehensive list of all of our accounting policies. In many cases, the accounting treatment of a particular transaction is specifically dictated by accounting principles generally accepted in the United States, with no need for management’s judgment in their application. There are also areas in which management’s judgment in selecting any available alternative would not produce a materially different result.

RECENTLY ISSUED ACCOUNTING STANDARDS

Financial Accounting Standards Board, or FASB, Interpretation No. 46, Consolidation of Variable Interest Entities, an interpretation of Accounting Research Bulletin No. 51, Consolidated Financial Statements, addresses consolidation by business enterprises of variable interest entities. During December 2003 the FASB revised FASB Interpretation No. 46, deferring the effective date of application for public companies to the first reporting period ending after March 15, 2004. Based upon our preliminary review, we have neither created nor obtained variable interest entities. Accordingly, we believe that the impact of the adoption of this interpretation will not be material.

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Statement of Financial Accounting Standards, or SFAS, No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity, establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liability and equity. It requires that an issuer classify a financial instrument that is within its scope as a liability (or an asset in some circumstances). This statement is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003, except for its provisions related to limited-life subsidiaries which have been deferred indefinitely. The adoption of SFAS No. 150 did not have a material impact on our consolidated financial statements.

Staff Accounting Bulletin, or SAB, No. 104, Revenue Recognition, revises the existing revenue recognition SAB in Topic 13, Revenue Recognition, in order for the interpretive guidance to be consistent with current accounting guidance, primarily Emerging Issues Task Force Issue No. 00-21, Revenue Arrangements with Multiple Deliverables. The adoption of SAB No. 104 did not have a material impact on our consolidated financial statements.

CURRENCY FLUCTUATIONS

For the years ended December 31, 2003, 2002 and 2001, approximately 33.8%, 34.8% and 36.1%, respectively, of our net revenues were generated in currencies other than the United States dollar. Fluctuations in the value of foreign currencies relative to the United States dollar affect our reported results of operations. If the United States dollar weakens relative to the foreign currency, then our earnings generated in the foreign currency will, in effect, increase when converted into United States dollars and vice versa. Exchange rate differences resulting from the strength or weakness of the United States dollar against the Euro resulted in an increase of approximately $953,000 in net revenues for the year ended December 31, 2003 compared to the same period of the prior year and an increase of approximately $254,000 in net revenues for the year ended December 31, 2002 compared to the same period of the prior year. During the three years ended December 31, 2003, no subsidiary was domiciled in a highly inflationary environment. The effects of inflation on consolidated net revenues and operating income were not significant.

For the year ended December 31, 2003, Delta represented 33.8% of our net revenues. Conducting an international business inherently involves a number of difficulties, risks, and uncertainties, such as export and trade restrictions, inconsistent and changing regulatory requirements, tariffs and other trade barriers, cultural issues, longer payment cycles, problems in collecting accounts receivable, political instability, local economic downturns, seasonal reductions in business activity in Europe during the traditional summer vacation months, and potentially adverse tax consequences.

For the three year period ended December 31, 2003, the impact of inflation and changing prices on our net sales and revenues and on income from continuing operations was not material.

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INCOME TAXES

We recognized a tax provisions (benefits) of $80,000, $(126,000) and $343,000 for the three years ended December 31, 2003, 2002 and 2001, respectively, which related to foreign operations. Through March 14, 2001, we reported our domestic income taxes as part of a consolidated group with IVAX. All domestic taxable losses generated prior to that date were utilized by IVAX. Effective March 14, 2001, as a result of the merger, we are no longer included in the consolidated income tax returns of IVAX.

For financial statement purposes, we accounted for income taxes on a stand-alone basis as though we had filed our own income tax returns. Our income tax provisions for the years ended December 31, 2003, 2002 and 2001 were different from the amount computed on the loss before provision for income taxes at the United States federal statutory rate of 35% primarily due to non-recognition of the benefits of domestic taxable losses which include the previously discussed non-deductible stock option compensation expense.

As of December 31, 2003, we had no net domestic deferred tax asset, as domestic net operating losses generated prior to the merger were utilized by IVAX and a full valuation allowance has been established against domestic deferred tax assets generated subsequent to March 14, 2001. The foreign net deferred tax asset was $897,000 at December 31, 2003, of which $885,000 is included in other current assets and $12,000 is included in other assets in the accompanying consolidated balance sheet. Realization of the net deferred tax asset is dependent upon generating sufficient future foreign taxable income. Although realization is not assured, we believe it is more likely than not that we will reach levels of profitability which will permit the net deferred tax asset to be realized.

RISK OF PRODUCT LIABILITY CLAIMS

Developing, manufacturing and marketing diagnostic test kits, reagents and instruments subject us to the risk of product liability claims. We believe that we continue to maintain an adequate amount of product liability insurance, but there can be no assurance that our insurance will cover all existing and future claims. There can be no assurance that claims arising under any pending or future product liability cases, whether or not covered by insurance, will not have a material adverse effect on our business, results of operations or financial condition. Our current products liability insurance is a “claims made” policy.

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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Market risk represents the risk of loss that may impact our consolidated financial position, results of operations or cash flows. In the normal course of doing business, we are exposed to the risks associated with foreign currency exchange rates and changes in interest rates.

Foreign Currency Exchange Rate Risk. We are exposed to exchange rate risk when our Italian subsidiary enters into transactions denominated in currencies other than its functional currency. For additional information about foreign currency exchange rate risk, see “Currency Fluctuations” in our Management’s Discussion and Analysis of Financial Condition and Results of Operation.

Interest Rate Risk. We do not have debt obligations and our investments are current. We believe that our exposure to market risk relating to interest rate risk is not material.

Commodity Price Risk. We do not believe we are subject to any material risk associated with commodity prices.

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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

IVAX Diagnostics, Inc. and Subsidiaries

Index to Consolidated Financial Statements

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REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

To the Board of Directors and Shareholders

of IVAX Diagnostics, Inc.:

We have audited the accompanying consolidated balance sheets of IVAX Diagnostics, Inc. (a Delaware corporation and majority owned subsidiary of IVAX Corporation) and subsidiaries as of December 31, 2003 and 2002, and the related consolidated statements of operations, shareholders’ equity and cash flows for the years then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits. The consolidated financial statements of IVAX Diagnostics, Inc. for the year ended December 31, 2001 were audited by other auditors who have ceased operations and whose report dated March 20, 2002, expressed an unqualified opinion on those statements.

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

In our opinion, the 2003 and 2002 financial statements referred to above present fairly, in all material respects, the consolidated financial position of IVAX Diagnostics, Inc. and subsidiaries at December 31, 2003 and 2002, and the consolidated results of their operations and their cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States.

As discussed in Note 2 to the consolidated financial statements, the Company changed its method of accounting for goodwill during the year ended December 31, 2002.

As discussed above, the financial statements of IVAX Diagnostics, Inc. for the year ended December 31, 2001, were audited by other auditors who have ceased operations. As described in Note 2, these financial statements have been revised to include the transitional disclosures required by Statement of Financial Accounting Standards (Statement) No. 142, Goodwill and Other Intangible Assets, which was adopted by the Company as of January 1, 2002. Our audit procedures with respect to the disclosures in Note 2 with respect to 2001 include (a) agreeing the previously reported net loss to the previously issued financial statements and the adjustments to reported net loss representing amortization expense (including any related tax effects) recognized in those periods related to goodwill to the Company’s underlying records obtained from management and (b) testing the mathematical accuracy of the reconciliation of adjusted net loss to reported net loss, and the related loss-per-share amounts. In our opinion, the disclosures for 2001 in Note 2 are appropriate. However, we were not engaged to audit, review, or apply any procedures to the 2001 financial statements of the Company other than with respect to such disclosures and, accordingly, we do not express an opinion or any other form of assurance on the 2001 financial statements taken as a whole.

/s/ Ernst & Young, LLP

Miami, Florida,

February 12, 2004

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REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

To The Board of Directors and

Shareholders of IVAX Diagnostics, Inc.:

We have audited the accompanying consolidated balance sheets of IVAX Diagnostics, Inc. (a Delaware corporation) and subsidiaries as of December 31, 2001 and 2000, and the related consolidated statements of operations, shareholders’ equity and cash flows for each of the three years in the period ended December 31, 2001. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

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

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of IVAX Diagnostics, Inc. and subsidiaries as of December 31, 2001 and 2000, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2001 in conformity with accounting principles generally accepted in the United States.

As explained in Note 2 to the financial statements, IVAX Diagnostics, Inc. and subsidiaries has given retroactive effect to the change in accounting for Emerging Issues Task Force No. 00-10, “Accounting for Shipping and Handling Fees and Costs.”

ARTHUR ANDERSEN LLP

Miami, Florida,

March 20, 2002 (except with respect to the matters discussed in the first paragraph of Note 13, as to which the date is March 21, 2002).

This is a copy of the audit report previously issued by Arthur Andersen LLP in connection with the Company’s Annual Report on Form 10-K for the year ended December 31, 2001. This audit report has not been reissued by Arthur Andersen LLP in connection with the Company’s Annual Report on Form 10-K for the year ended December 31, 2003. See Exhibit 23.2 for further discussion.

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Table of Contents

IVAX Diagnostics, Inc. and Subsidiaries

Consolidated Balance Sheets

December 31, 2003 and 2002

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

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IVAX Diagnostics, Inc. and Subsidiaries

Consolidated Statements of Operations

for the Years Ended December 31, 2003, 2002 and 2001

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

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IVAX Diagnostics, Inc. and Subsidiaries

Consolidated Statements of Shareholders' Equity

for the Years Ended December 31, 2003, 2002 and 2001

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

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IVAX Diagnostics, Inc. and Subsidiaries

Consolidated Statements of Cash Flows

For the Years Ended December 31, 2003, 2002 and 2001