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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2004

Commission File Number 1-14798

IVAX DIAGNOSTICS, INC.

(Exact name of registrant as specified in its charter)

2140 North Miami Avenue, Miami, Florida 33127

(Address of principal executive offices) (Zip Code)

(305) 324-2300

(Registrant’s telephone number, including area code)

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 whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

27,019,829 shares of Common Stock, $.01 par value, outstanding as of November 8, 2004.

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IVAX DIAGNOSTICS, INC.

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PART I - FINANCIAL INFORMATION

Item 1 - Financial Statements

IVAX DIAGNOSTICS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

The accompanying Notes to Consolidated Financial Statements are an integral part of these balance sheets.

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IVAX DIAGNOSTICS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.

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IVAX DIAGNOSTICS AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.

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IVAX DIAGNOSTICS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(1) GENERAL:

The accompanying unaudited interim consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission for reporting on Form 10-Q and, therefore, do not include all information normally included in audited financial statements. However, in the opinion of management, all adjustments (consisting of only normal recurring adjustments) necessary to present fairly the results of operations, financial position and cash flows have been made. The results of operations and cash flows for the nine months ended September 30, 2004 are not necessarily indicative of the results of operations and cash flows which may be reported for the remainder of 2004. The interim consolidated financial statements should be read in conjunction with the consolidated financial statements and the notes to consolidated financial statements included in the IVAX Diagnostics, Inc. (“IVAX Diagnostics,” “the Company,” “we,” “us,” “our”) Annual Report on Form 10-K for the year ended December 31, 2003. Certain prior period amounts presented in the consolidated financial statements have been reclassified to conform to the current period’s designation.

On March 14, 2001, b2bstores.com Inc. (“b2bstores.com”), IVAX Corporation (“IVAX”) and IVAX Diagnostics, Inc., a wholly-owned subsidiary of IVAX at that date (the “pre-merger IVAX Diagnostics”), consummated a merger of the pre-merger IVAX Diagnostics into b2bstores.com pursuant to which all of the issued and outstanding shares of the pre-merger IVAX Diagnostics were converted into 20,000,000 shares of b2bstores.com stock and b2bstores.com’s name was changed to IVAX Diagnostics, Inc.

(2) CASH EQUIVALENTS AND SHORT-TERM MARKETABLE SECURITIES:

The Company owns certain short-term investments in marketable debt securities with original maturities of three months or less that are classified as cash equivalents.

Substantially all cash and cash equivalents are presently held at one national securities brokerage firm. Accordingly, the Company is subject to credit risk if this brokerage firm is unable to repay the balance in the account or deliver the Company’s securities or if the brokerage firm should become bankrupt or otherwise insolvent. At September 30, 2004 and December 31, 2003, the Company owned no marketable securities. It is the Company’s policy to invest in select money market instruments, municipal securities and corporate issuers.

(3) INVENTORIES:

Inventories consist of the following:

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(4) CONCENTRATION OF CREDIT RISK:

The Company performs periodic credit evaluations of its customers’ financial condition and provides allowances for doubtful accounts as required. The Company’s accounts receivables are generated from sales made from both in the United States and Italy. As of September 30, 2004 and December 31, 2003, $5,198,893 and $4,721,125, respectively, of the Company’s net accounts receivable were due in Italy. Of the total net accounts receivable, 59.5% at September 30, 2004 and 59.6% at December 31, 2003 were due from hospitals and laboratories controlled by the Italian government.

(5) EARNINGS (LOSS) PER SHARE:

A reconciliation of the denominator of the basic and diluted earnings (loss) per share computation is as follows:

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(6) INCOME TAXES:

The provision for income taxes consists of the following:

The Company’s income tax provision for the three months and nine months ended September 30, 2004 and 2003 was 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 the non-recognition of the benefits of domestic taxable losses. Included in the loss before provision for income taxes was nondeductible stock option compensation expense of $222,225 for the nine months ended September 30, 2003. No stock option compensation expense was recorded in the three months ended September 30, 2003.

The Company has established a full valuation allowance on its net domestic deferred tax assets, which are primarily comprised of net operating loss carryforwards. The portion of these domestic net operating loss carryforwards generated prior to March 14, 2001, the consummation date of the merger between b2bstores.com and the pre-merger IVAX Diagnostics, then a wholly-owned subsidiary of IVAX, were utilized by IVAX. On a separate return basis, no recognition of that utilization is reflected in the accompanying consolidated financial statements. Domestic net operating losses generated by the Company after March 14, 2001 are approximately $6,480,000 and $5,955,000 at September 30, 2004 and December 31, 2003, respectively. These net operating losses will begin to expire in 2021. Foreign deferred tax assets totaled $932,349 at September 30, 2004, of which $926,131 is included in other current assets and $6,218 is included in other assets. As of December 31, 2003, foreign deferred tax assets totaled $897,244, of which $884,649 and $12,595 were included in other current assets and other assets, respectively. Realization of the net foreign deferred tax asset is dependent upon generating sufficient future taxable income through operations or tax planning strategies. Although realization is not assured, management believes that it is more likely than not that the net foreign deferred tax asset will be realized, and accordingly, no valuation allowance has been recorded relative to the net foreign deferred tax asset.

(7) COMPREHENSIVE INCOME (LOSS):

The components of the Company’s comprehensive income (loss) are as follows:

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(8) STOCK-BASED COMPENSATION:

The Company’s pro forma net loss and pro forma weighted average fair value of options granted, with related assumptions, assuming the Company had adopted the fair value method of accounting for all stock-based compensation arrangements consistent with the provisions of Statement of Financial Accounting Standard (“SFAS”) No. 148, Accounting for Stock Based Compensation – Transition and Disclosure and SFAS No. 123, Stock-Based Compensation, using the Black-Scholes option pricing model, are indicated below:

(9) STOCKHOLDERS’ EQUITY:

On June 25, 2004, the Company purchased and redeemed a total of 657,125 shares of its common stock from a group of three unaffiliated stockholders at an exercise price of $4.00 per share in accordance with the terms of a previously announced Redemption Agreement. These shares have been retired and have resumed the status of authorized and unissued shares.

(10) SEGMENT INFORMATION:

The Company’s management reviews financial information, allocates resources and manages its business by geographic region. The Domestic region, which includes corporate expenditures, contains the Company’s subsidiaries in the United States. The Italian region contains the Company’s subsidiary located in Italy. The information provided is based on internal reports and was developed and utilized by management for the sole purpose of tracking trends and changes in the results of the regions. The information, including the allocations of expense and overhead, was calculated based on a management approach and may not reflect the actual

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economic costs, contributions or results of operations of the regions as stand-alone businesses. If a different basis of presentation or allocation were utilized, the relative contributions of the regions might differ but the relative trends would, in management’s view, likely not be materially impacted. The table below sets forth net revenues, losses from operations and assets by region.

(11) COMMITMENTS AND CONTINGENCIES:

The Company is 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 possible 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 the financial position, results of operations or cash flows of the Company.

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(12) RECENTLY ISSUED ACCOUNTING STANDARDS:

Financial Accounting Standards Board (“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 a review by the Company, no variable interest entities have been created or obtained. Accordingly, the adoption of FASB Interpretation No. 46 in the first quarter of 2004 did not have any impact on the Company’s consolidated financial statements.

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Item 2 - Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis should be read in conjunction with the consolidated financial statements and the related notes to consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2003 and the unaudited interim consolidated financial statements and the related notes to unaudited interim consolidated financial statements included in Item 1 of this Quarterly Report on Form 10-Q. Certain prior period amounts have been reclassified to conform to the current period’s designation.

We have made forward-looking statements, which are subject to risks and uncertainties, in this Quarterly Report on Form 10-Q. 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 our technological, strategic and business initiatives; our anticipated new instrument system may not be available when or perform as expected; constantly changing, and our compliance with, governmental regulation; our limited operating revenues and history of operational losses; our agreements with 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; 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 Quarterly Report on Form 10-Q and in our Annual Report on Form 10-K for the year ended December 31, 2003. Many of these factors are beyond our control.

RESULTS OF OPERATIONS

NINE MONTHS ENDED SEPTEMBER 30, 2004 COMPARED TO THE NINE MONTHS ENDED SEPTEMBER 30, 2003

NET REVENUES AND GROSS PROFIT

Net revenues for the nine months ended September 30, 2004 totaled $14,321,000, an increase of $1,042,000, or 7.8%, from the $13,279,000 reported in the prior year comparable period. This increase was comprised of an increase in external net revenues of $648,000 from Italian operations and an increase in external net revenues of $395,000 from domestic operations. External net revenues from Italian operations totaled $5,115,000 for the nine months ended September 30, 2004, compared to $4,467,000 for the nine months ended September 30, 2003. This 14.5% 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, Italian revenues increased primarily as a result of higher revenue generated from reagent sales due to an increased number of instrument placements, partially offset by decreased revenue resulting from a lower

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volume of instrument sales. Domestic operations generated external net revenues of $9,206,000 for the nine months ended September 30, 2004, compared to $8,811,000 for the nine months ended September 30, 2003. This 4.5% increase in domestic external revenues was primarily due to greater revenue derived from reagent sales due to an increased number of instrument placements and revenue from a contract manufacturing arrangement, which commenced in December 2003, partially offset by decreased revenue from a lower volume of instrumentation sales. Gross profit for the nine months ended September 30, 2004 increased $678,000, or 8.7%, to $8,463,000 (59.1% of net revenues) from $7,785,000 (58.6% of net revenues) for the nine months ended September 30, 2003. The increases in gross profit and gross profit as a percentage of net revenues were primarily attributable to the increase in net revenues as well as manufacturing efficiencies gained from the replacement of products manufactured by others with products manufactured by us. Also contributing to the increase in gross profit was the effect of exchange rate fluctuations of the United States dollar relative to the Euro.

OPERATING EXPENSES

Selling expenses of $4,251,000 (29.7% of net revenues) for the nine months ended September 30, 2004 were composed of expenses of $2,578,000 from domestic operations and $1,672,000 from Italian operations. For the nine months ended September 30, 2003, domestic selling expenses were $2,674,000 while $1,332,000 was incurred in Italy, totaling $4,006,000 (30.2% of net revenues). This increase in Italian selling expenses of $245,000 was primarily due to the effect of exchange rate fluctuations. As measured in local currency, the increase in expenses incurred in Italy was primarily attributable to increased payroll costs, as well as, to a lesser extent, increased promotional costs related to our anticipated new instrument system. Domestic selling expenses decreased primarily as a result of decreased travel, promotional and consulting expenses, partially offset by increased payroll costs. General and administrative expenses totaled $3,345,000 (23.4% of net revenues) for the nine months ended September 30, 2004, a decrease of $290,000 from $3,635,000 (27.4% of net revenues) for the nine months ended September 30, 2003. General and administrative expenses decreased primarily due to 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 IVAX Diagnostics. Further decreases in general and administrative expenses due to lower legal costs were partially offset by increased insurance expenses. Research and development expenses totaled $962,000 and $995,000 for the nine months ended September 30, 2004 and September 30, 2003, respectively, representing 6.7% and 7.5% of net revenues, respectively. The decrease of $33,000 in research and development expenses consisted of a decrease in domestic research and development expenses from $634,000 in the nine months ended September 30, 2003 to $578,000 in the nine months ended September 30, 2004, offset by an increase in Italian research and development expenses to $384,000 in the nine months ended September 30, 2004 from $361,000 in the nine months ended September 30, 2003. The decrease in research and development expenses was primarily the result of lower payroll and consulting costs, partially offset by an increase in Italian research and development expenses as a result of the effect of exchange rate fluctuations. 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.

LOSS FROM OPERATIONS

Losses from operations were $95,000 and $851,000 during the nine months ended September 30, 2004 and September 30, 2003, respectively. Excluding intersegment elimination adjustments, which decreased consolidated loss from operations by $119,000, the loss from operations in the nine months ended September 30, 2004 was composed of losses from operations of $134,000 from domestic operations and $80,000 from

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Italian operations. Excluding intersegment elimination adjustments, which decreased consolidated loss from operations by $102,000, the loss from operations in the nine months ended September 30, 2003 was composed of a loss from operations of $960,000 from domestic operations and income from operations of $8,000 from Italian operations.

OTHER INCOME, NET

Interest income decreased to $138,000 for the nine months ended September 30, 2004 from $182,000 for the nine months ended September 30, 2003. The decrease was primarily due to interest received in Italy in 2003 on past due accounts receivable. Other income, net totaled $104,000 during the nine months ended September 30, 2004, compared to $146,000 during the nine months ended September 30, 2003, a decrease of $42,000. This decrease in other income, net was due to larger net foreign currency gains recognized in 2003 as compared to net foreign currency gains recognized in 2004, on transactions by our Italian subsidiary which were denominated in currencies other than its functional currency.

THREE MONTHS ENDED SEPTEMBER 30, 2004 COMPARED TO THE THREE MONTHS ENDED SEPTEMBER 30, 2003

NET REVENUES AND GROSS PROFIT

Net revenues for the three months ended September 30, 2004 totaled $4,583,000, an increase of $239,000, or 5.5%, from the $4,344,000 reported in the prior year comparable period. This increase was comprised of an increase of $154,000 in external net revenues from Italian operations and an increase of $85,000 in external net revenues from domestic operations. Domestic operations generated external net revenues of $3,011,000 for the three months ended September 30, 2004, compared to $2,926,000 for the three months ended September 30, 2003, an increase of 2.9%. External net revenues from Italian operations totaled $1,572,000 for the three months ended September 30, 2004, compared to $1,418,000 for the three months ended September 30, 2003. This 10.9% 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. When measured in Euros, external net revenues from Italian operations increased due to slightly higher revenue from reagent sales due to the increased number of instrument placements, offset by decreased revenue from lower volume and prices of instrumentation sales. Gross profit for the three months ended September 30, 2004 increased $13,000, to $2,644,000 (57.7% of net revenues) from $2,631,000 (60.6% of net revenues) for the three months ended September 30, 2003. Excluding the effect of exchange rate fluctuations, gross profit decreased slightly. The decrease in gross profit as a percentage of net revenues was primarily due to the lower instrumentation sales in Italy at relatively lower gross profit percentages.

OPERATING EXPENSES

Selling expenses of $1,489,000 (32.5% of net revenues) for the three months ended September 30, 2004 were composed of expenses of $916,000 from domestic operations and $573,000 from Italian operations. For the three months ended September 30, 2003, domestic selling expenses were $911,000 while $418,000 was incurred in Italy, totaling $1,329,000 (30.6% of net revenues). This increase in selling expenses of $160,000 consisted of increases in selling expenses from Italian operations of $155,000 and selling expenses from domestic operations of $5,000. After considering the effect of exchange rate fluctuations, the increase in expenses incurred in Italy was primarily attributable to increased payroll costs, as well as, to a lesser extent, increased promotional costs related to our anticipated new instrument system. General and administrative expenses totaled $1,081,000 (23.6% of net revenues) for the three months ended September 30, 2004, a decrease of $115,000 from $1,196,000 (27.5% of net revenues) for the three months ended September 30, 2003.

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General and administrative expenses decreased primarily due to lower legal costs as well as a nonrecurring reduction to insurance expenses. Research and development expenses totaled $327,000 for the three months ended September 30, 2004 compared to $305,000 for the three months ended September 30, 2003, representing 7.1% and 7.0% of net revenues, respectively. The increase of $22,000 in research and development expenses consisted of an increase in Italian research and development expenses to $148,000 in the three months ended September 30, 2004 from $111,000 in the three months ended September 30, 2003. This increase, excluding the effect of exchange rate fluctuations, was primarily the result of increased consulting costs. Domestic research and development expenses decreased $15,000, to $179,000 in the three months ended September 30, 2004 from $194,000 in the three months ended September 30, 2003. 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.

LOSS FROM OPERATIONS

Losses from operations were $252,000 and $199,000 during the three months ended September 30, 2004 and September 30, 2003, respectively. Excluding intersegment elimination adjustments, which decreased consolidated loss from operations by $48,000, the loss from operations in the three months ended September 30, 2004 was composed of losses from operations of $151,000 from Italian operations and $149,000 from domestic operations. Excluding intersegment elimination adjustments, which decreased consolidated loss from operations by $53,000, loss from operations in the three months ended September 30, 2003 was composed of a loss from operations of $283,000 from domestic operations and income from operations of $31,000 from Italian operations.

OTHER INCOME, NET

Interest income increased to $53,000 for the three months ended September 30, 2004 from $40,000 for the three months ended September 30, 2003. Other income, net totaled $78,000 during the three months ended September 30, 2004, compared to other expense, net of $5,000 during the three months ended September 30, 2003, an increase of $83,000. This increase in other income, net was due to net foreign currency gains recognized in 2004, on transactions by our Italian subsidiary which were denominated in currencies other than its functional currency.

LIQUIDITY AND CAPITAL RESOURCES

At September 30, 2004, our working capital was $22,140,000 compared to $24,334,000 at December 31, 2003. Cash and cash equivalents totaled $11,909,000 at September 30, 2004, as compared to $15,465,000 at December 31, 2003. 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 $343,000 were used by operating activities during the nine months ended September 30, 2004, compared to $423,000 that was provided by operating activities during the nine months ended September 30, 2003. The decrease in cash provided by operating activities was primarily the result of an increase in inventory purchases, the payment of accounts payable and accrued expenses, an increase in other current assets and a decrease in non-cash expenses. These decreases were partially offset by improved operating results.

Net cash flows of $608,000 were used in investing activities during the nine months ended September 30, 2004, as compared to $767,000 used during the same period of the prior year. The decrease in cash used for investing activities was primarily the result of a reduction in our acquisition costs of equipment on lease, partially offset by an increase in capital expenditures.

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Net cash of $2,579,000 was used for financing activities during the nine months ended September 30, 2004, while $262,000 was provided during the same period of 2003. The increase in cash utilized was due to our June 25, 2004 use of $2,629,000 to purchase and redeem 657,125 shares of our common stock from a group of three unaffiliated stockholders at an exercise price of $4.00 per share in accordance with the terms of a previously announced Redemption Agreement. These shares have been retired and have resumed the status of authorized and unissued shares. We made no repurchases of our common stock during the nine months ended September 30, 2004 or 2003 as part of the common stock repurchase program approved by our Board of Directors in May 2002.

Our product research and development expenditures are expected to be approximately $1,400,000 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 $600,000 will be required in fiscal 2004 to improve and expand our facilities, equipment and information systems.

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 IVAX Diagnostics, which we believe will be sufficient to meet our operating needs and anticipated capital expenditures for at least the next twelve months. 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 allowance is or was made.

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 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.

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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 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 allowance 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.

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. 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 of 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 IVAX Diagnostics reported its income taxes until the merger with b2bstores.com 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 net 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 cumulative net 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, since we have sufficient prior year net operating loss carryforwards to offset current taxable income. Over time we may reach levels of profitability that could cause our management to conclude that it is more likely than not that we will realize all or a portion of the domestic 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. Conversely, we have recorded deferred tax assets as a result of losses generated in Italy due to the belief that over time we will return to previous levels of profitability that will permit the deferred asset to be realized. 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.

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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 (“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 review, no variable interest entities have been created or obtained. Accordingly, the adoption of FASB Interpretation No. 46 in the first quarter of 2004 did not have any impact on our consolidated financial statements.

CURRENCY FLUCTUATIONS

For the nine months ended September 30, 2004 and 2003, approximately 35.7% and 33.6%, 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 changes in the strength of the United States dollar against the Euro resulted in increases of approximately $457,000 in net revenues for the nine months ended September 30, 2004 and $122,000 for the three months ended September 30, 2004 compared to the same periods of the prior year. During the nine months ended September 30, 2004 and 2003, none of our subsidiaries were domiciled in highly inflationary environments. The effects of inflation on consolidated net revenues and operating income were not significant.

For the nine months ended September 30, 2004, Delta Biologicals, S.r.l., our subsidiary in Italy, represented 35.7% 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.

INCOME TAXES

We recognized a tax benefit of $27,000 for the three months ended September 30, 2004 and a tax provision of $19,000 for the three months ended September 30, 2003, which relate to foreign operations. In addition, we recognized tax provisions of $17,000 and $55,000 for the nine months ended September 30, 2004 and 2003, respectively, which relate to foreign operations. Through March 14, 2001, the pre-merger IVAX Diagnostics reported its 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 between b2bstores.com and the pre-merger IVAX Diagnostics, we are no longer included in the consolidated income tax returns of IVAX.

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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 provision for the three and nine months ended September 30, 2004 and 2003 was different from the amount computed on the income (loss) before provision for income taxes at the United States federal statutory rate of 35% primarily due to the expected utilization of prior period net operating losses to offset current taxable income for the nine months ended September 30, 2004 and the non-recognition of the benefits of domestic taxable losses for the nine months ended September 30, 2003, which include the previously discussed non-deductible stock option compensation expense.

As of September 30, 2004, 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 $932,000 at September 30, 2004, of which $926,000 is included in other current assets and $6,000 is included in other assets in the accompanying consolidated balance sheet. Realization of the net foreign deferred tax asset is dependent upon generating sufficient future foreign taxable income through operations or tax planning strategies. Although realization is not assured, over time we believe we will reach levels of profitability which will permit the net foreign deferred tax asset to be realized, and accordingly, no valuation allowance has been recorded relative to the net foreign deferred tax asset.

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 3 - Quantitative and Qualitative Disclosures About Market Risk

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

Foreign Currency Exchange Rate Risk – The Company is exposed to exchange rate risk when its 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 the Company’s “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

Interest Rate Risk – The Company does not have debt obligations and its investments are current. The Company believes that its exposure to market risk relating to interest rate risk is not material.

Commodity Price Risk – The Company does not believe it is subject to any material risk associated with commodity prices.

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Item 4 – Controls and Procedures

As of the end of the period covered by this Quarterly Report on Form 10-Q, the Company carried out an evaluation, under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures pursuant to Exchange Act Rule 13a-15. Based upon that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures are effective in timely alerting them to material information relating to the Company required to be included in the Company’s periodic filings with the Securities and Exchange Commission. That conclusion, however, should be considered in light of the various limitations described below on the effectiveness of those controls and procedures, some of which pertain to most, if not all, business enterprises, and some of which arise as a result of the nature of the Company’s business. The Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, does not expect that the Company’s disclosure controls and procedures will prevent all error and all improper conduct. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Due to the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of improper conduct, if any, have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some person or persons, by collusion of two or more people or by management override of the control. Further, the design of any system of controls also is based in part upon assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, controls may become inadequate because of changes in conditions or the degree of compliance with the policies or procedures may deteriorate. Due to the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected. No significant changes were made in our internal controls or in other factors that could significantly affect these controls subsequent to the date of the Company’s Chief Executive Officer’s and Chief Financial Officer’s evaluation.

Exhibits 31.1 and 31.2 to this Quarterly Report on Form 10-Q are Certifications of the Chief Executive Officer and Chief Financial Officer of the Company which are required under Section 302 of the Sarbanes-Oxley Act of 2002. This Item 4, Controls and Procedures, is the information concerning the evaluation referred to in the Section 302 Certifications and this information should be read in conjunction with the Section 302 Certifications for a more complete understanding of the topics presented.

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PART II - OTHER INFORMATION

Item 1 – Legal Proceedings

The Company is 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 possible 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 the financial position, results of operations or cash flows of the Company.

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Item 2 - Unregistered Sales of Equity Securities and Use of Proceeds

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Item 6 - Exhibits

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Signatures

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

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EXHIBIT INDEX

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