<PAGE>


                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                   FORM 10-KSB

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

                   For the Fiscal Year ended December 31, 2005

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

    For the transition period from __________________ to ___________________

                        Commission File Number 001-14053

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

                            MILESTONE SCIENTIFIC INC.
                  --------------------------------------------
                 (NAME OF SMALL BUSINESS ISSUER IN ITS CHARTER)

              DELAWARE                                       13-3545623
   (State or other jurisdiction of                        (I.R.S. Employer
   incorporation or organization)                        Identification No.)

    220 South Orange Avenue, Livingston Corporate Park, Livingston, NJ 07039
  ---------------------------------------------------------------------------
   (Address of Principal Executive Offices)                     (Zip Code)

                    Issuer's telephone number (973) 535-2717

Securities registered under Section 12(b) of the Exchange Act:

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<CAPTION>
                                                                              NAME OF EACH EXCHANGE
                 TITLE OF EACH CLASS                                           ON WHICH REGISTERED
                 -------------------                                           -------------------
<S>                                                             <C>
Common Stock, par value $.001 per share                         American Stock Exchange and Pacific Stock Exchange
Warrants, each to purchase one share of common stock                         American Stock Exchange

Securities registered under Section 12(g) of the Exchange Act:
                                      None
</TABLE>

Check whether the issuer is not required to file reports pursuant to Section 13
or 15(d) of the Exchange Act. | |

Check whether the registrant: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 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 | |

Check if there is no disclosure of delinquent filers pursuant to Item 405 of
Regulation S-B contained herein, and no disclosure will be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. |X|

         Indicate by check mark whether the registrant is a shell company.
Yes |  | No |x|

         For the year ended December 31, 2005, the revenues of the registrant
were $6,433,148.

         The aggregate market value of the voting and non-voting common equity
held by non-affiliates computed by reference to the price at which the common
equity was sold, or the average bid and asked price of such common equity, on
the American Stock Exchange, on March 31, 2006 of $1.16 was approximately
$10,271,126.

         As of April 4, 2006 the issuer has a total of 11,561,214 shares of
Common Stock, $0.001 par value, outstanding.

                       DOCUMENTS INCORPORATED BY REFERENCE
                                      None
<PAGE>

                            MILESTONE SCIENTIFIC INC.

                            FORM 10-KSB ANNUAL REPORT

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<CAPTION>
                                TABLE OF CONTENTS
                                                                                                      PAGE
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<S>        <C>                                                                                          <C>
PART I
      Item 1.  Description of Business...............................................................   3
      Item 2.  Description of Property...............................................................  16
      Item 3.  Legal Proceedings.....................................................................  16
      Item 4.  Submission of Matters to a Vote of Security Holders...................................  16

PART II
      Item 5.  Market for Common Equity and Related Stockholder Matters..............................  17
      Item 6.  Management's Discussion and Analysis or Plan of Operation.............................  20
      Item 7.  Financial Statements..................................................................  30
      Item 8.  Changes in and Disagreements With Accountants on Accounting and Financial Disclosure..  30
      Item 8A.  Controls and Procedures..............................................................  31

PART III
      Item 9.  Directors, Executive Officers, Promoters and Control Persons;
                                 Compliance with Section 16 (a) of the Exchange Act  ................  32
      Item 10. Executive Compensation................................................................  34
      Item 11. Security Ownership of Certain Beneficial Owners and Management and Related
                                Stockholder Matters..................................................  36
      Item 12. Certain Relationships and Related Transactions........................................  38
      Item 13. Exhibits..............................................................................  39
      Item 14. Principal Accountant Fees and Services................................................  41

SIGNATURES...........................................................................................  42

EXHIBITS.............................................................................................  43
</TABLE>

FORWARD-LOOKING STATEMENTS

     Certain statements made in this Annual Report on Form 10-KSB are
"forward-looking statements" (within the meaning of the Private Securities
Litigation Reform Act of 1995) regarding the plans and objectives of management
for future operations. Such statements involve known and unknown risks,
uncertainties and other factors that may cause actual results, performance or
achievements of Milestone to be materially different from any future results,
performance or achievements expressed or implied by such forward-looking
statements. The forward-looking statements included herein are based on current
expectations that involve numerous risks and uncertainties. Milestone's plans
and objectives are based, in part, on assumptions involving the continued
expansion of business. Assumptions relating to the foregoing involve judgments
with respect to, among other things, future economic, competitive and market
conditions and future business decisions, all of which are difficult or
impossible to predict accurately and many of which are beyond the control of
Milestone. Although Milestone believes that its assumptions underlying the
forward-looking statements are reasonable, any of the assumptions could prove
inaccurate. In light of the significant uncertainties inherent in the
forward-looking statements included herein, particularly in view of Milestone's
early stage operations, the inclusion of such information should not be regarded
as a representation by Milestone or any other person that the objectives and
plans of Milestone will be achieved.

                                       2
<PAGE>

                                     PART I

ITEM 1.  DESCRIPTION OF BUSINESS

         All references in this report to "we," "us," "our" or "Milestone" refer
to Milestone Scientific Inc., and its former subsidiary, Spintech, Inc.
("Spintech"), unless the context otherwise indicates. We have rights to the
following trademarks: CompuDent(R), CompuMed(R), CompuFlo(TM), The Wand(R), The
WandPlus(R), The SafetyWand(TM) and CoolBlue(TM) Wand. Milestone was
incorporated in the State of Delaware in 1989. On December 10, 2004, Milestone
merged its three subsidiaries into itself in order to reduce administrative
expenses. Two of the subsidiaries were wholly owned. The third, Spintech, was
merged into Milestone by a short-form merger. Also on December 10, 2004 we
purchased a 19.9% interest in a German wholesale distributorship that sells
dental products including our CompuDent technology and CoolBlue product lines in
Germany, the world's third largest dental market.

         All share number and share price information in this report have been
retroactively adjusted to reflect the 1-for-3 reverse stock split effected in
January 2004.

                                    BUSINESS

BACKGROUND

         Milestone Scientific Inc. is the world leader in advanced injection
technology. Its principal product, a computer controlled, precision metered,
local anesthetic injection system (the "CompuDent"), enables a dentist to
consistently administer safe, effective and painless injections. CompuDent is a
revolutionary device, considered one of the major advances in dentistry of the
twentieth century. It has been favorably evaluated in approximately 50
peer-reviewed or independent clinical research reports. In 2004, the CompuDent
was prominently featured in the leading textbook on dental anesthesia, the
"Handbook of Local Anesthesia" by Stanley F. Malamed, DDS.(1)

     CompuDent, including its ergonomically designed single-use hand-piece ("The
Wand"), provides numerous, well documented benefits:

     o    CompuDent minimizes the pain associated with palatal, mandibular block
          and other injections, resulting in a more comfortable injection
          experience for the patient;

     o    the pencil grip used with The Wand handpiece allows unprecedented
          tactile sense and accurate control;

     o    new injections made possible with the CompuDent technology eliminate
          collateral numbness of the tongue, lips and facial muscles;

     o    bi-directional rotation of The Wand handpiece eliminates needle
          deflection resulting in greater success and more rapid onset of
          anesthesia in mandibular block injections;

     o    the use of a single patient use, disposable handpiece minimizes the
          risk of cross contamination;

     o    the ergonomic design of The Wand handpiece makes an injection easier
          and less stressful to administer, lowering the risk of carpal tunnel
          syndrome.

         Despite CompuDent's many benefits, including the administration of
painless injections, dentists in the United States have been slow to give up the
use of traditional syringes. Dentists have all been trained to use syringes in
dental school and often have become accustomed to and comfortable with their use
during many years of clinical practice, in spite of the obvious reluctance
and/or fear of the patient in relation to injections administered by hypodermic
syringe. There are approximately 40 million dental phobics, those people afraid
to visit a dentist, in the United States. Therefore, there may be a disconnect
in the way dentists perceive their patients' attitudes toward injection by
hypodermic syringe. As a result of this disconnect,, sales were below
expectations in 1999 and 2000 following a successful launch in early 1998 to
"new adopters". By the end of 2000, Milestone had limited financial resources
and was forced to choose between maintaining its leadership position in advanced
injection technology and continuing to promote sales through high levels of
sales and marketing expenses, including trade show appearances. Milestone chose
to maintain its technology leadership position and drastically reduced marketing
and sales expenses, thus allowing domestic sales of new units to suffer.
However, despite limited marketing efforts, foreign sales continued to grow.
Also, increasing handpiece use by the domestic customer base resulted in rising
handpiece sales.

-----------
(1) Dr. Malamed is widely recognized as the preeminent authority on dental
anesthesia. New editions of his "Handbook of Local Anesthesia" are published
once every seven years and are used in all major U.S. and many foreign dental
schools. It is the largest selling textbook in dental anesthesia and the third
largest selling dental textbook. The current edition recommends use of the
CompuDent and devotes 62 paragraphs to the device and its application. Milestone
believes that this is the first instance in which Dr. Malamed's text has
recommended a particular device.

                                       3
<PAGE>

         In support of its current product portfolio, as well as marketing and
sales efforts, Milestone has developed the following array of other
technologically advanced products for the delivery of local anesthetics and
liquid medicaments.

         CompuMed

         Milestone developed, and in 2001 began limited marketing of,
"CompuMed(R)", a computer controlled injection system geared to the needs of the
medical market and to providing benefits similar to the CompuDent. CompuMed
allows many medical procedures, now requiring intravenous sedation, to be
performed with only local anesthesia because of the dramatic pain reduction.
Also, dosages of local anesthetic can often be significantly reduced, thus
reducing side effects, accelerating recovery times, lowering costs and
eliminating complications. Clinical evidence is now increasingly showing
benefits from use of CompuMed in colorectal surgery, podiatry, dermatology,
including MOH's surgery for the removal of basal cell carcinomas and other
oncological dermatologic procedures, nasal and sinus surgery, including
rhinoplasty, hair transplantation and plastic surgery.

         SafetyWand

         Following the adoption of the Federal Needlestick Safety and Prevention
Act, Milestone developed, and in September 2003 the FDA approved marketing of,
Milestone's SafetyWand disposable handpiece, a patented injection device that
incorporates safety engineering sharps protection features to aid in the
prevention of needlesticks. The SafetyWand is the first patented injection
device to be fully compliant with OSHA regulations under the federal Needlestick
Safety Act while meeting the clinical needs of dentists.

         The SafetyWand represents the culmination of two years' effort to
develop a safer injection device for dentists, physicians and hygienists. While
safety injection devices have been mandated since 2000 under federal law, OSHA
had been unable to enforce this law against dentists because of the inadequacy
of existing devices to meet both the requirements of the law and the clinical
needs of dentists. The SafetyWand meets these requirements and provides dental
practitioners with a safer retractable needle device, with single hand
activation, which is reusable multiple times during a single patient visit, yet
small and sleek enough not to obscure the dentist's sometimes limited field of
view. Since SafetyWand is now available commercially, OSHA has begun to enforce
existing regulations requiring the use of safety engineered devices. OSHA is
empowered to levy substantial fines for failure to use these devices. We believe
the Safety Wand will promote increased handpiece use by the more than 15,000
CompuDent anesthetic delivery systems previously sold in the United States while
also providing new impetus for the purchase of these systems by new users.


MEDICAL TECHNOLOGY DEVELOPMENT

         With its core of intellectual property, particularly in advanced
injection technology and fluid dynamics, Milestone has begun transitioning from
a company focused on dental applications to one focused on medical applications.
We believe our portfolio of intellectual property for both medical and dental
applications will allow Milestone to strengthen its role as a world leader in
advanced injection technology for medical and dental applications.


                                       4
<PAGE>


         COMPUFLO ADVANCED INJECTION TECHNOLOGY

         Medical Applications - Spinal Anesthesia

          "CompuFlo", developed by Milestone, is a revolutionary new technology
for injections. CompuFlo enables health care practitioners to monitor and
precisely control "pressure", "rate" and "volume" during all injections and can
be used to inject all liquid medicaments as well as anesthetics. CompuFlo can
also be used to aspirate body fluids.

         Negative side effects from the use of traditional hypodermic drug
delivery injection systems are well documented in dental and medical literature
and include risk of death, transient or permanent paralysis, pain, tissue damage
and post-operative complications. The pain and tissue damage are a direct result
of uncontrolled flow rates and pressures that are created during the
administration of drug solutions into human tissue. While several technologies
have been capable of controlling flow rate, the ability to accurately and
precisely control pressure has been unobtainable until our development of
CompuFlo.

         On September 14, 2004, Milestone Scientific was issued United States
Patent No. 6,786,885 over the CompuFlo technology, entitled "Pressure/Force
Computer Controlled Drug Delivery System with Exit Pressure. Proprietary
software, working with an innovative technology, allows the system to
continuously monitor and control the exit pressure of fluid and/or medication
during an injection. This same technology also enables doctors to accurately
identify different tissue types based on exit pressure during an injection. The
technology appears to have many applications in both medicine and dentistry
including epidural injections.

         In December 2004, the United States Patent Office issued a "Notice of
Allowance" for patent protection on two additional critical elements of the
CompuFlo automated drug delivery technology: "Drug Delivery System with
Profiles" and "Pressure/Force Computer Controlled Drug Delivery with Automated
Charging".

         The Drug Delivery System with Profiles standardizes and simplifies the
drug delivery process, while reducing the risk of medical complications by
controlling parameters that are essential for the safe injection of local
anesthetics and other medications, as well as the aspiration of bodily fluids.
This is accomplished through an integrated injection database in the CompuFlo
technology that contains the critical components of specific drugs, parameters
of needles, tubing and syringes and all pertinent components for the safe and
efficacious delivery of medications, including procedures such as epidural
injections.

         Pressure/Force Computer Controlled Drug Delivery with Automated
Charging provides the means to deliver any volume of medication or infused
fluid, such as a saline solution, into the human body. In many instances, the
volume of medication or other liquid that is required for a medical procedure
exceeds the capacity of the normal vessels used. This technology allows the
smaller vessel to be automatically refilled from a larger one without
interrupting the surgery or medical procedure.

         In 2004 and 2005, successful results of four independent pilot clinical
studies confirmed the efficacy of the CompuFlo pressure/force computer
controlled anesthetic delivery system in identifying the epidural space.
Identifying when a hypodermic needle has entered the epidural space is a
critically important factor in the safety and effectiveness of anesthetic
injections administered during childbirth and in the course of pain management
therapy. A report on the results of the study, conducted through the University
of Texas Health Science Center at Houston under the guidance of Dr. Oscar
Ghelber, Assistant Professor of Anesthesiology, was presented at the Society for
Technology in Anesthesia (STA) meeting on October 28th, 2004. Proper and
consistent identification of the epidural space represents a critical step
toward the adoption of Milestone's technology for the administration of epidural
anesthesia.

         When administering epidural injections, it is critical to recognize the
risks associated with administering potentially neurotoxic substances into the
subarachnoid space, from which 40% of spinal fluid is produced. If local
anesthesia is injected into this space, instead of the epidural space, the
patient may face a lifetime of continuing agony due to adhesive arachnoiditis.
This represents a potential disaster for any patient undergoing an epidural
injection today, because doctors must rely upon tactile "feel" to identify the
epidural space. Clinical studies using Milestone's CompuFlo Computer Controlled
Infusion Pump in the administration of epidural anesthesia have provided highly
encouraging results. In a presentation to the 2005 Annual Meeting of the
International Anesthesia Research Society last October, Dr. Ghelber noted that
existing epidural techniques use subjective feedback to identify the epidural
space, while the CompuFlo technology provides precise and objective feedback and
also allows anesthesiologists to use both hands to advance and direct the
needle, thereby making it easier to perform this task. Dr. Ghelber further
advised the meeting that CompuFlo accurately identified the epidural space in
100% of the cases tested in his pilot study.


                                       5
<PAGE>

      In December 2005, Milestone submitted a pre-market notification to the
US Food and Drug Administration (FDA) on its CompuFlo Technology. This initial
submission is critical for the continuing efforts to develop and commercialize
this important technology. Milestone has identified a number of potential
applications for CompuFlo, including the identification of the epidural space
for injections of anesthetic, most notably in child delivery and pain
management.

         Dental Applications - Single-Tooth Anesthesia (STA) System

         For several years, Milestone has been developing a product that
combines the capabilities of its CompuDent local anesthetic delivery system and
its CompuFlo pressure-sensing technology (see discussion below). This is
currently referred to as the Company's "single-tooth anesthesia" or "STA"
device, and management's goal is to have the STA device on the market in early
2007.

         The STA device is designed to significantly improve the efficiency of a
procedure that is highly popular among dentists - the periodontal ligament
injection. Currently, dentists can assure effective anesthetic administration
only by using a mandibular block, which effectively deadens half of the face
instead of just the tooth being worked on by the dentist. Unfortunately,
dentists 'miss' the targeted area for the anesthesia about 30% of the time,
requiring multiple injections and more patient time in the dentist chair. In
addition, when a patient requires anesthesia for work on opposite sides of the
mouth, dentists currently must schedule two separate appointments. Our STA
device will deliver anesthesia locally and offer a relatively short duration of
anesthesia. We believe that a device which allows dentists to effectively
anesthetize a single tooth will greatly enhance the productivity of dental
practices and, when combined with the painless injection capabilities already
present in our CompuDent system, such a device should represent a compelling
value in the marketplace. As with the Company's CompuDent system, the STA device
will generate recurring revenues from per-patient disposable kits.

         LIGHT EMITTING DIODES (LED) TECHNOLOGY

         In addition to products enhancing its position in advanced injection
technology, in 2004 Milestone acquired rights to a portfolio of technology
centered around the use of blue light emitting diodes (LED) for a variety of
dental treatment and diagnostic applications as well as for professional and
consumer teeth whitening. The first product commercialized was a proprietary
dental enhancement system now named the CoolBlue Wand(TM), which was launched in
2004. Subsequent to this, Milestone successfully entered the consumer teeth
whitening market with Ionic White(TM) as well as the CoolBlue(TM) professional
Teeth Whitening System

         COOLBLUE WAND DENTAL ENHANCEMENT SYSTEM

         The CoolBlue Wand(TM) dental enhancement system uses blue light
emitting diodes for fast curing of dental composite material, trans-illumination
of teeth and activation of whitening gels and pastes. Initially Milestone viewed
the CoolBlue Wand as an aid to its sales force in gaining access to dental
offices for sales of CompuDent. However, in view of the burgeoning consumer
demand for tooth whitening, the professional product will also provide Milestone
with access to the consumer tooth whitening market.

         CONSUMER TOOTH WHITENING

         In October 2004, Milestone announced the planned launch of its
proprietary tooth whitening system, for the home-use consumer market. The system
and consumable gels and rinses used with the system will be manufactured by
United Systems, Inc. under an exclusive license agreement with Milestone
requiring the purchase of a minimum of 1 million system Starter Kits from
Milestone during the four-year term of the agreement.


                                       6
<PAGE>

         The $400 million (annual revenues) consumer segment of the $1
billion-plus tooth whitening market is one of the fastest growing areas in the
oral hygiene industry. Milestone's system utilizes a patent pending blue LED
intra-oral light (incorporated into a hand held battery-powered device) to
activate proprietary tooth-whitening gels. The system is designed to provide a
safe, convenient and time saving method of whitening teeth. When used on a
regular basis with a specially formulated rinse, also to be offered by the
licensee, the system will maintain the brightness of teeth on an ongoing basis.

         In March 2005, the Ionic White Tooth Whitening system was launched in
the United States through a 30-minute infomercial. The infomercial was played
throughout the U.S. starting in April, on a variety of cable and local channels.
The Ionic White product line includes a Starter Kit that contains the gels, the
rinse and the intra-oral light. Refill Kits with a new supply of gels and
specially formulated rinse were also made available. The product was launched in
Canada in July and in other countries throughout the year. As a result of the
introduction of competitive products and subsequent litigation, which was
settled in November 2005, our sales through the television infomercial were
curtailed, however, the Ionic White was launched into retail outlets such as
Walgreen's, Linens and Things and Target Stores in the September time frame.

         PROFESSIONAL TOOTH WHITENING

         Towards the end of 2005, Milestone Scientific announced the market
launch of its CoolBlue Professional Tooth Whitening System, which targets the $1
billion global professional teeth whitening market. As with other Milestone
products, the CoolBlue system is designed to maximize long-term revenues from
disposable per-patient kits that are utilized in the whitening treatment
process.

         The CoolBlue Tooth Whitening System utilizes the same basic technology
found in the Ionic White system. The basic technology uses the light generated
from the CoolBlue Wand as a means to generate energy and thus small levels of
heat, which will accelerate the chemical reaction necessary to remove
chromagenic staining from teeth. The CoolBlue System is unique in that it
eliminates the need for high levels of heat to accelerate the breakdown, thereby
reducing the chair-time necessary to achieve satisfactory results. In addition,
the CoolBlue Whitening system includes a revolutionary home maintenance kit
which uses a simple, easy and fast application of a whitening solution using
sprays. This Once-A-Week(TM) home maintenance kit also eliminates the need for
the dentist to mold custom trays typically required for home maintenance. These
custom trays can take a dentist upwards of 35 minutes to fabricate, which uses
valuable chair time. From the patient's perspective, the use of trays at home
can be problematic, particularly when the trays need to be worn overnight. The
unique Once-A-Week maintenance kit makes compliance much easier for the patient.


         MILESTONE RENAISSANCE

         In 2003, we recognized that the domestic market had become ready to
accept our CompuDent technology. An authoritative and growing body of
peer-reviewed and other independent clinical studies had established the
superiority of the CompuDent to the traditional syringe in administering dental
anesthesia; the CompuDent had been readily accepted in first world international
markets, despite limited marketing efforts; and, more than 16 million injections
had been administered with CompuDent, creating growing professional acceptance
and consumer demand for the administration of painless injections by dental
practitioners. Two ingredients were missing, a new marketing approach and funds
to support the new sales effort required by this marketing approach.

         During 2003 we tested the use of our own highly-trained force of
independent sales representatives and inside sales support and sales staff to
generate additional sales to our existing base, to increase handpiece usage and
both to generate leads and sell to new customers. Based on our pilot programs
and studies, we determined that a new sales program built around the following
components could be successful:


                                       7
<PAGE>

         o     An increased base price for CompuDent to new customers to provide
               sufficient gross profit to allow adequate compensation to a new
               sales force;

         o     An inside sales support staff to generate leads for outside
               independent sales representatives and also to set appointments,
               provide technical support and customer service and foster
               increased handpiece use;

         o     Providing ancillary products to its outside sales force, such as
               the CoolBlue Wand, to assist that force in gaining access to
               dental offices for sales of CompuDent;

         o     Primary reliance on an inside sales force in the domestic market;
               and,

         o     Use of independent highly trained exclusive outside sales
               representatives only in high density markets to prevent excessive
               costs.

         The plan also contemplated increased marketing and promotional
activities, including increased trade show appearances, advertising directed
towards dental professionals and, possibly, toward consumers.

         To fund this new marketing plan, we arranged for new equity funding
through Paulson Investment Company, Inc. This offering was consummated in
February 2004 with a raise of gross proceeds of $9,388,000 from the sale of
1,440,000 units, each consisting of two shares of common stock and one warrant
to purchase an additional share of common stock at $4.89 per share.

         As contemplated in the offering, we used the proceeds to significantly
expand the Company's sales capability by taking the following steps:

         o     expanding significantly its independent sales force, both inside
               and outside sales representatives, and our sales support staff;

         o     conducting extensive training programs for our new sales force;

         o     beginning to implement new marketing and advertising campaigns
               directed at the professional dental market and, possibly, the
               consumer market;

         o     completing the final production, tooling and other work necessary
               to launch the SafetyWand; and,

         o     taking the initial steps necessary to re-establish our dental and
               hygiene school teaching programs.

         Because of the time required to rent additional facilities, install
computer lines and an internal computer network, obtain high traffic telephone
lines and otherwise create the essential infrastructure, hire and train
managers, allow managers to hire or engage sales representatives and then the
long training time necessary to provide the sales force with the skills required
to sell CompuDent, the effects of these new initiatives only became apparent in
the fourth quarter of 2004.

         Following through with initiatives taken in late 2004, the domestic
sales organization achieved double digit growth in the CompuDent Systems in each
of first three quarters of the year compared to the prior year period. The
expenses attributed to the domestic sales organization were significant, which
again was contemplated in the design of the infrastructure. The sales
organization also began selling the CoolBlue Systems in the fourth quarter,
which while distracting from CompuDent sales, provided the groundwork for sales
in 2006.

COMPETITION

         Our anesthetic delivery systems compete with disposable and reusable
syringes that generally sell at lower prices and that use established and
well-understood methodologies and other local anesthetic delivery systems, in
both the dental and medical marketplaces. SafetyWand competes with other safety
engineered products in the medical market and against a single product claiming
to be compliant with OSHA regulations under the Needle Stick Act in the dental
market.

         Our systems compete on the basis of their performance characteristics
and the benefits provided to both the practitioner and the patient. Clinical
studies have shown that our systems reduce fear, pain and anxiety for some
patients, and we believe that they can also reduce practitioner stress levels.
CompuDent can be used for all local anesthesia techniques that can be performed
with a syringe. CompuDent can also be used for new and modified techniques that
cannot be performed with traditional syringes. These new techniques allow for
faster procedures shortening chair-time, minimizing numbing of the lips and
facial muscles, enhancing productivity, reducing stress, and virtually
eliminating pain and anxiety.

                                       8
<PAGE>

         The Luer Lock needle, sold by us, competes with dental needles produced
and distributed by a number of major manufacturers and distributors and other
producers or distributors of dental products, many of which have significant
competitive advantages because of their size, strength in the marketplace,
financial and other resources and broad product lines. We compete on the basis
of convenience since we can package the product with an order for disposable
handpieces.

         The competition in the professional and consumer tooth whitening
sectors is intense. There are a significant number of competitors in both
sectors and many of these competitors are quite substantial. We believe the
benefits of both CoolBlue and Ionic White will elevate Milestone above many of
the competitors while providing an entree to the dentist heretofore made very
difficult as a single product company.

         We face intense competition from many companies in the medical and
dental device industry, possessing substantially greater financial, marketing,
personnel, and other resources. Most of our competitors have established
reputations, stemming from their success in the development, sale, and service
of competing dental products. Further, rapid technological change and research
may affect our products. Current or new competitors could, at any time,
introduce new or enhanced products with features that render our products less
marketable or even obsolete. Therefore, we must devote substantial efforts and
financial resources to improve our existing products, bring our products to
market quickly, and develop new products for related markets. In addition, our
ability to compete successfully requires that we establish an effective
distribution network as well as support this distribution with a strong
marketing plan. Historically, we have been unsuccessful in executing the
marketing plans for our products, primarily due to resource constraints. New
products must be approved by regulatory authorities before they may be marketed.
We cannot assure you that we can compete successfully; that our competitors will
not develop technologies or products that render our products less marketable or
obsolete; or, that we will succeed in improving our existing products,
effectively develop new products, or obtain required regulatory approval for
those products. We have not been successful in marketing the product.

                                       9
<PAGE>

PATENTS AND INTELLECTUAL PROPERTY

         We hold the following U.S. utility and design patents:

<TABLE>
<CAPTION>
                                                                           U.S. PATENT        DATE OF
                                                                           NUMBER             ISSUE
<S>                                                                        <C>                <C>
                    Computer Controlled Drug Delivery Systems

Hypodermic Anesthetic Injection Method                                     4,747,824          5/31/88
Hypodermic Anesthetic Injection Apparatus & Method.....................    5,180,371          1/19/93
  (CompuFlo, CompuMed, and CompuDent )
Dental Anesthetic and Delivery Injection Unit..........................    6,022,337          2/8/00
Design for a Dental Anesthetic Delivery System Holder..................    D422,361           4/4/00
Design for a Dental Anesthetic Delivery System Housing.................    D423,665           4/25/00
Design for a Dental Anesthetic Delivery System Handle..................    D427,314           6/27/00
Dental Anesthetic Delivery Injection Unit..............................    6,132,414          10/17/00
Dental Anesthetic Delivery Injection Unit..............................    6,152,734          11/28/00
Dental Anesthetic and Delivery Injection Unit with Automated
 Rate Control..........................................................    6,652,482          11/25/03
Pressure/Force Computer Controlled Drug Delivery System................    6,200,289          3/13/01
Pressure/Force Computer Controlled Drug Delivery System with
 Exit Pressure.........................................................    6,786,885          9/14/04
Pressure/Force Computer Controlled Drug Delivery System with
 Automated Charging...................................................     6,887,216          5/3/05
Drug Delivery System with Profiles.....................................    6,945,954          9/20/05

                Engineered Sharps Injury Protection Devices

Handpiece for Injection Device with a Retractable and Rotating Needle..    6,428,517          8/6/02
Safety IV Catheter Device..............................................    6,726,658          4/27/04
Safety IV Catheter Infusion Device.....................................    6,905,482          6/14/05
Handpiece for Injection Device with a Retractable and Rotating Needle..    6,966,899          11/22/05


                                       Other

Apparatus and Method for Sterilizing, Destroying and Encapsulating
Medical Implement Wastes...............................................    4,992,217          2/12/91
Apparatus and Method for Verifiably Sterilizing Destroying and
Encapsulating Regulated Medical Wastes.................................    5,078,924          1/7/92
Apparatus and Method for Verifiably Sterilizing, Destroying and
Encapsulating Regulated Medical Wastes.................................    5,401,444          3/28/95
Self-Sterilizing Hypodermic Syringe and Method.........................    5,512,730          4/30/96
Hypodermic Syringe and Method..........................................    4,877,934          12/19/88
Self-Sterilizing Hypodermic Syringe and Method.........................    5,693,026          12/2/97
</TABLE>

         In 2005, four U.S. patents were issued to Milestone. Two of those
patents protect elements of the Company's CompuFlo automated drug delivery
technology, namely, "Drug Delivery System with Profiles" and "Pressure/Force
Computer Controlled Drug Delivery with Automated Charging". The Drug Delivery
System with Profiles standardizes and simplifies the drug delivery process,
while reducing the risk of medical complications by controlling parameters that
are essential for the safe injection of local anesthetics and other medications,
as well as aspiration of bodily fluids. This is accomplished through an
integrated injection database in the CompuFlo technology that contains the
critical components of specific drugs, parameters of needles, tubing and
syringes and all pertinent components for the safe and efficacious delivery of
medications, particularly in procedures such as epidural injections.

         The Pressure/Force Computer Controlled Drug Delivery with Automated
Charging provides the means to deliver any volume of medication or infused
fluid, such as a saline solution, into the human body. In many instances, the
volume of medication or other liquid that is required for a medical procedure
exceeds the capacity of the normal vessels used. This technology allows the
smaller vessel to be automatically refilled from a larger one without
interrupting the surgery or medical procedure.

         We also have several patent applications pending before the U.S. Patent
and Trademark Office, and hold a number of corresponding patents and patent
applications in Europe and other major markets. During the 2005 and 2004 fiscal
years, we expensed $286,260 and $187,992, respectively, on research and
development activities. The higher costs incurred during 2005 were primarily
associated with the development of the CompuFlo and STA.

                                      10
<PAGE>

         We rely on a combination of patent, copyright, trade secret, and
trademark laws and employee and third party nondisclosure agreements to protect
our intellectual property rights. Despite the precautions taken by us to protect
our products, unauthorized parties may attempt to reverse engineer, copy, or
obtain and use products and information that we regard as proprietary, or may
design products serving similar purposes that do not infringe on our patents.
Litigation may be necessary to protect our intellectual property rights and
could result in substantial cost to us and diversion of our efforts with no
guarantee of success. Our failure to protect our proprietary information and the
expenses of doing so could have a material adverse effect on our operating
results and financial condition.

         While there are no current claims that our products infringe the
proprietary rights of third parties, there can be no assurance that third
parties will not assert infringement claims against us in the future with
respect to current or future products or that any such assertion may not require
us to cease selling such products, or to enter into arrangements that require us
to pay royalties, or to engage in costly litigation. Although we have received
no claims of infringement, it is possible that infringement of existing or
future patents or proprietary rights of others may occur. In the event that our
products infringe upon patent or proprietary rights of others, we may be
required to modify our processes or to obtain a license. There can be no
assurance that we would be able to do so in a timely manner, upon acceptable
terms and conditions, or at all. The failure to do so would have a material
adverse effect on us.

GOVERNMENT REGULATION

         The FDA cleared CompuDent system and its disposable handpiece for
marketing in the U.S. for dental applications in July 1996; the CompuMed system
for marketing in the U.S. for medical applications in May 2001; and, the
SafetyWand for marketing in the U.S. for dental applications in September 2003.
For us to commercialize our other products in the U.S., we will have to submit
additional 510(k) applications with the FDA.

         The manufacture and sale of medical devices and other medical products
are subject to extensive regulation by the FDA pursuant to the FDC Act, and by
other federal, state and foreign authorities. Under the FDC Act, medical devices
must receive FDA clearance before they can be marketed commercially in the U.S.
Some medical products must undergo rigorous pre-clinical and clinical testing
and an extensive FDA approval process before they can be marketed. These
processes can take a number of years and require the expenditure of substantial
resources. The time required for completing such testing and obtaining such
approvals is uncertain, and FDA clearance may never be obtained. Delays or
rejections may be encountered based upon changes in FDA policy during the period
of product development and FDA regulatory review of each product submitted.
Similar delays also may be encountered in other countries. Following the
enactment of the Medical Device Amendments to the FDC Act in May 1976, the FDA
classified medical devices in commercial distribution into one of three classes.
This classification is based on the controls necessary to reasonably ensure the
safety and effectiveness of the medical device. Class I devices are those
devices whose safety and effectiveness can reasonably be ensured through general
controls, such as adequate labeling, pre-market notification, and adherence to
the FDA's Quality System Regulation ("QSR"), also referred to as "Good
Manufacturing Practices" ("GMP") regulations. Some Class I devices are further
exempted from some of the general controls. Class II devices are those devices
whose safety and effectiveness reasonably can be ensured through the use of
special controls, such as performance standards, post-market surveillance,
patient registries, and FDA guidelines. Class III devices are those which must
receive pre-market approval by the FDA to ensure their safety and effectiveness.
Generally, Class III devices are limited to life-sustaining, life-supporting or
implantable devices.


                                      11
<PAGE>

      If a manufacturer or distributor can establish that a proposed device
is "substantially equivalent" to a legally marketed Class I or Class II medical
device or to a Class III medical device for which the FDA has not required
pre-market approval, the manufacturer or distributor may seek FDA marketing
clearance for the device by filing a 510(k) Pre-market Notification. The 510(k)
Pre-market Notification and the claim of substantial equivalence may have to be
supported by various types of data and materials, including test results
indicating that the device is as safe and effective for its intended use as a
legally marketed predicate device. Following submission of the 510(k) Pre-market
Notification, the manufacturer or distributor may not place the device into
commercial distribution until an order is issued by the FDA. By regulation, the
FDA has no specific time limit by which it must respond to a 510(k) Pre-market
Notification. At this time, the FDA typically responds to the submission of a
510(k) Pre-market Notification within 90 days. The FDA response may declare that
the device is substantially equivalent to another legally marketed device and
allow the proposed device to be marketed in the U.S.. However, the FDA may
determine that the proposed device is not substantially equivalent or may
require further information, such as additional test data, before the FDA is
able to make a determination regarding substantial equivalence. Such
determination or request for additional information could delay market
introduction of our products and could have a material adverse effect on us. If
a device that has obtained 510(k) Pre-market Notification clearance is changed
or modified in design, components, method of manufacture, or intended use, such
that the safety or effectiveness of the device could be significantly affected,
separate 510(k) Pre-market Notification clearance must be obtained before the
modified device can be marketed in the U.S.. If a manufacturer or distributor
cannot establish that a proposed device is substantially equivalent to a legally
marketed device, the manufacturer or distributor will have to seek pre-market
approval of the proposed device, a more difficult procedure requiring extensive
data, including pre-clinical and human clinical trial data, as well as extensive
literature to prove the safety and efficacy of the device.

         Though CompuDent, the SafetyWand and CompuMed have received FDA
marketing clearance, there can be no assurance that any of our other products
under development will obtain the required regulatory clearance in a timely
manner, or at all. If regulatory clearance of a product is granted, such
clearance may entail limitations on the indicated uses for which the product may
be marketed. In addition, modifications may be made to our products to
incorporate and enhance their functionality and performance based upon new data
and design review. There can be no assurance that the FDA will not request
additional information relating to product improvements; that any such
improvements would not require further regulatory review, thereby delaying the
testing, approval and commercialization of our development products; or, that
ultimately any such improvements will receive FDA clearance.

         Compliance with applicable regulatory requirements is subject to
continual review and will be monitored through periodic inspections by the FDA.
Later discovery of previously unknown problems with a product, manufacturer, or
facility may result in restrictions on such product or manufacturer, including
fines, delays or suspensions of regulatory clearances, seizures or recalls of
products, operating restrictions and criminal prosecution and could have a
material adverse effect on us.

         We are subject to pervasive and continuing regulation by the FDA, whose
regulations require manufacturers of medical devices to adhere to certain QSR
requirements as defined by the FDC Act. QSR compliance requires testing, quality
control and documentation procedures. Failure to comply with QSR requirements
can result in the suspension or termination of production, product recall or
fines and penalties. Products also must be manufactured in registered
establishments. In addition, labeling and promotional activities are subject to
scrutiny by the FDA and, in certain circumstances, by the Federal Trade
Commission. The export of devices is also subject to regulation in certain
instances.

         The Medical Device Reporting ("MDR") regulation obligates us to provide
information to the FDA on product malfunctions or injuries alleged to have been
associated with the use of the product or in connection with certain product
failures that could cause serious injury. If, as a result of FDA inspections,
MDR reports or other information, the FDA believes that we are not in compliance
with the law, the FDA can institute proceedings to detain or seize products,
enjoin future violations, or assess civil and/or criminal penalties against us,
our officers or employees. Any action by the FDA could result in disruption of
our operations for an undetermined time.

         In June 2003 we received a CE mark for marketing the SafetyWand and the
Wand Handpiece with Needle in Europe. In July 2003, we obtained regulatory
approval to sell CompuDent and its handpieces in Australia and New Zealand.

                                      12
<PAGE>

PRODUCT LIABILITY

         Failure to use any of our products in accordance with recommended
operating procedures could potentially result in health hazards or injury.
Failures of our products to function properly could subject us to claims of
liability. We maintain liability insurance in an amount that we believe is
adequate. However, there can be no assurance that our insurance coverage will be
sufficient to pay product liability claims brought against us. A partially or
completely uninsured claim, if successful and of significant magnitude, could
have a material adverse effect on us.

EMPLOYEES

         On December 31, 2005, Milestone had 28 full-time employees, consisting
of four executive officers, a senior product manager, a national sales manager,
three sales support representatives, thirteen inside sales representatives,
three customer service representatives, an assistant controller, a bookkeeper,
and an administrative assistant. We also had a part-time clinical director, a
part-time director of professional relations, and six independent sales
representatives, who sell our CompuDent system.



CERTAIN RISK FACTORS THAT MAY AFFECT GROWTH AND PROFITABILITY

         The following factors may affect the growth and profitability of
Milestone and should be considered by any prospective purchaser or current
holder of Milestone's securities:

WE HAVE NO HISTORY OF PROFITABLE OPERATIONS. CONTINUING LOSSES COULD EXHAUST OUR
CAPITAL RESOURCES AND FORCE US TO DISCONTINUE OPERATIONS.

         Although our operations commenced in November 1995, until 1998 we had
limited revenues. For the years ended December 31, 1998, 1999, 2000, 2001, 2002,
2003, 2004, and 2005 our revenues were approximately $8.8 million, $2.9 million,
$5.7 million, $4.1 million, $4.1 million, $4.0 million, $4.8 million, and $6.4
million, respectively. In addition, we have had losses for each year since the
commencement of operations, including net losses of approximately $3 million for
2004 and 2005, respectively. At December 31, 2005, we had an accumulated deficit
of approximately $50 million. Unless we can significantly increase sales of our
CompuDent units, handpieces or other injection devices, we expect to incur
losses for the foreseeable future.

WE CANNOT BECOME SUCCESSFUL UNLESS WE GAIN GREATER MARKET ACCEPTANCE FOR OUR
PRODUCTS AND TECHNOLOGY.

         As with any new technology, there is substantial risk that the
marketplace will not accept the potential benefits of this technology or be
unwilling to pay for any cost differential with the existing technologies.
Market acceptance of CompuDent, the SafetyWand, CompuMed and CompuFlo depends,
in large part, upon our ability to educate potential customers of their
distinctive characteristics and benefits and will require substantial marketing
efforts and expense. More than 28,000 units of the CompuDent or its predecessors
have been sold worldwide since 1998. Sales of disposable handpieces in 2003
reflect a moderate increase in the worldwide usage of our dental and medical
systems. We cannot assure you that our current or proposed products will be
accepted by practitioners or that any of the current or proposed products will
be able to compete effectively against current and alternative products.

OUR LIMITED DISTRIBUTION CHANNELS MUST BE EXPANDED FOR US TO BECOME SUCCESSFUL.

         Our future revenues depend on our ability to market and distribute our
anesthetic injection technology successfully. In the U.S. we rely on a limited
number of independent representatives and in-house sales people. Abroad, we lack
distributors in many markets. To be successful we will need to hire and retain
additional sales personnel, provide for their proper training and ensure
adequate customer support. We cannot assure you that we will be able to hire and
retain an adequate sales force or engage suitable distributors, or that our
sales force or distributors will be able to successfully market and sell our
products.

                                      13
<PAGE>

WE DEPEND ON THREE PRINCIPAL MANUFACTURERS. IF WE CANNOT MAINTAIN OUR EXISTING
RELATIONSHIPS OR DEVELOP NEW ONES, WE MAY HAVE TO CEASE OUR OPERATIONS.

         We have informal arrangements with the manufacturer of our CompuDent
and CompuMed units, one of the principal manufacturers of our handpieces, and
the principal manufacturer of our handpieces for those units pursuant to which
they manufacture these products under specific purchase orders but without any
long-term contract or minimum purchase commitment. We have a manufacturing
agreement with one of the principal manufacturers of our handpieces pursuant to
which they manufacture products under specific purchase orders but without
minimum purchase commitments. We have been supplied by the manufacturer of the
CompuDent and CompuMed since the commencement of production in 1998, one of the
manufacturers of our handpieces since 2002 and the other manufacturer of
handpieces since 2003. However, termination of the manufacturing relationship
with any of these manufacturers could significantly and adversely affect our
ability to produce and sell our products. Though we have established an
alternate source of supply for our handpieces in China and other alternate
sources of supply exist, we would need to recover our existing tools or have new
tools produced to establish relationships with new suppliers. Establishing new
manufacturing relationships could involve significant expense and delay. Any
curtailment or interruptions of the supply, whether or not as a result or
termination of the relationship, would adversely affect us.

WE MAY BE SUBJECT TO PRODUCT LIABILITY CLAIMS THAT ARE NOT FULLY COVERED BY OUR
INSURANCE AND THAT COULD PUT US UNDER FINANCIAL STRAIN.

         We could be subject to claims for personal injury from the alleged
malfunction or misuse of our dental and medical products. While we carry
liability insurance that we believe is adequate, we cannot assure you that the
insurance coverage will be sufficient to pay such claims should they be
successful. A partially or completely uninsured claim, if successful and of
significant magnitude, could have a material adverse effect on us.

WE RELY ON THE CONTINUING SERVICES OF OUR CHAIRMAN AND CHIEF EXECUTIVE OFFICER,
CHIEF OPERATING OFFICER, PRESIDENT AND DIRECTOR OF CLINICAL AFFAIRS.

         We depend on the personal efforts and abilities of our Chairman and
Chief Executive Officer, our Chief Operating Officer, our President who was
promoted to this position from that of Senior Vice President in September 2003,
and our Director of Clinical Affairs. We maintain a key man life insurance
policy in the amount of $1,000,000 on the life of our Chairman and Chief
Executive Officer. However, the loss of his services or the services of each of
our Chief Operating Officer, President, or Director of Clinical Affairs, on whom
we maintain no insurance, could have a materially adverse effect on our
business.

THE MARKET PRICE OF OUR COMMON STOCK HAS BEEN VOLATILE AND MAY CONTINUE TO
FLUCTUATE SIGNIFICANTLY BECAUSE OF VARIOUS FACTORS, SOME OF WHICH ARE BEYOND OUR
CONTROL.

         Our stock price has been extremely volatile, fluctuating over the last
three years between closing prices of $1.17 and $7.77. The market price of our
common shares could continue to fluctuate significantly in response to a variety
of factors, some of which may be beyond our control.

WE ARE CONTROLLED BY A LIMITED NUMBER OF SHAREHOLDERS.

         Our principal shareholders, Leonard Osser and K. Tucker Andersen, own
22.96% of the issued and outstanding shares of our common stock. As a result,
they have the ability to exercise substantial control over our affairs and
corporate actions requiring shareholder approval, including electing directors,
selling all or substantially all of our assets, merging with another entity or
amending our certificate of incorporation. This de facto control could delay,
deter or prevent a change in control and could adversely affect the price that
investors might be willing to pay in the future for our securities.


                                      14
<PAGE>

FUTURE SALES OR THE POTENTIAL FOR SALE OF A SUBSTANTIAL NUMBER OF SHARES OF OUR
COMMON STOCK COULD CAUSE THE TRADING PRICE OF OUR COMMON STOCK AND WARRANTS TO
DECLINE AND COULD IMPAIR OUR ABILITY TO RAISE CAPITAL THROUGH SUBSEQUENT EQUITY
OFFERINGS.

         Sales of a substantial number of shares of our common stock in the
public markets, or the perception that these sales may occur, could cause the
market price of our stock to decline and could materially impair our ability to
raise capital through the sale of additional equity securities. At December 31,
2005, we had outstanding options and warrants to purchase 3,687,085 shares of
our common stock at prices ranging from $.87 to $7.50 per share with a weighted
average exercise price of $4.60. Holders of these warrants and options are given
the opportunity to profit from a rise in the market price of our common stock
and are likely to exercise their securities at a time when we would be able to
obtain additional equity capital on more favorable terms. Thus, the terms upon
which we will be able to obtain additional equity capital may be adversely
affected, since the holders of outstanding options and warrants can be expected
to exercise them at a time when we would, in all likelihood, be able to obtain
any needed capital on terms more favorable to us than the exercise terms
provided by such outstanding securities. The market price of our common shares
has been volatile and may continue to fluctuate significantly because of various
factors, some of which are beyond our control.

THE DECREASE OF OUR OUTSTANDING SHARES AS A RESULT OF THE REVERSE STOCK SPLIT,
WITHOUT CHANGE TO OUR AUTHORIZED CAPITALIZATION, INCREASED THE ABILITY OF OUR
BOARD OF DIRECTORS TO ISSUE SHARES WITHOUT STOCKHOLDER APPROVAL. ISSUANCE OF
SHARES MAY DILUTE THE VALUE OF OUR OUTSTANDING SHARES OR HAVE A NEGATIVE IMPACT
ON THE TRADING PRICE OF THE COMMON STOCK.

         The 1-for-3 stock split effected in January 2004 reduced our
outstanding shares from 18,338,033 to 6,112,678 (9,663,907 shares after giving
effect to the consummation of the Public Offering and related issuances of
units). Since the reverse stock split was effected without change in our
authorized shares, the differential between outstanding shares and authorized
shares increased, thus providing the Board of Directors with increased ability
to effect issuances of stock without stockholder authorization. For example,
shares may be issued in capital raising transactions, mergers or acquisitions or
for compensatory reasons where other governing rules or statutes do not
separately require stockholder approval. The issuance of these shares for less
than their book value or for less than value paid by purchasers in the recently
completed offering could have a dilutive effective on purchasers in this
offering. Further the issuance of the shares could also have a negative impact
on the trading price of our then outstanding common stock, including the stock
issued in the recently completed offering

IMPLEMENTATION OF PROCEDURES TO COMPLY WITH THE SARBANES-OXLEY ACT AND SEC RULES
CONCERNING INTERNAL CONTROLS MAY BE SO COSTLY THAT COMPLIANCE COULD HAVE AN
ADVERSE EFFECT ON US.

         We must comply with Sarbanes-Oxley requirements to include in our
annual report a management report on the effectiveness of our internal control
over financial reporting and an accompanying auditor's report. In 2005, the SEC
extended, for an additional one year, the compliance date for filing internal
control reports by non-accelerated filers. As a result, our filing deadline is
postponed to our financial year ending December 31, 2007. In 2005, we hired an
outside consultant to assist us to develop and implement the necessary internal
controls and reporting procedures. We expect that the additional costs that we
will incur due to the compliance requirements could have an adverse effect on
our profitability.

IF WE ARE UNABLE TO SATISFY THE AMERICAN STOCK EXCHANGE MAINTENANCE
REQUIREMENTS, OUR COMMON STOCK MAY BE DELISTED FROM THE AMERICAN STOCK EXCHANGE
AND, AS A RESULT, OUR LIQUIDITY AND THE VALUE OF OUR COMMON STOCK MAY BE
IMPAIRED.

         Shares of our common stock are currently listed on the American Stock
Exchange. Continued listing on the American Stock Exchange requires that we
maintain at least $6,000,000 in stockholders' equity since we have sustained
losses in our five most recent fiscal years. While our equity at year end was
approximately $6.3 million, if our losses continue and our equity falls below $6
million we would be subject to possible delisting, subject to our right to
appeal any notice of delisting and submit an equity recovery plan. If our
securities are delisted from the Exchange, trading, if any, in our securities
would be conducted in the over-the-counter market on the NASD's "OTC Bulletin
Board". Consequently, the liquidity of our securities could be impaired, not
only in the number of securities that could be bought and sold, but also through
delays in the timing of transactions, reduction in security analyst and news
media coverage of Milestone, and lower prices for our securities than might
otherwise be obtained.

                                      15
<PAGE>

ITEM 2.  DESCRIPTION OF PROPERTY

Our offices are located in Livingston Corporate Park in Livingston, New Jersey.
We lease approximately 4,503 square feet of office space including 1,810 square
feet of additional office space acquired in April 2004. As part of this
expansion, the lease term was extended through June 30, 2009 at a monthly cost
of $7,317 which we believe to be competitive. All the properties that we lease
are in good condition. A third party distribution and logistics center in
Pennsylvania handles shipping and order fulfillment on a month-to-month basis.

ITEM 3.  LEGAL PROCEEDINGS

         Not applicable

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

         On November 17, 2005, we held our Annual Meeting of Stockholders for
the purpose of electing directors, approving the issuance or proposed issuance
of 806,309 shares of Milestone's common stock and confirming the appointment of
Eisner LLP as Milestone's independent auditor for the fiscal year ending
December 31, 2005.

         At the meeting, for which proxies were solicited pursuant to Regulation
14A under the Securities Exchange Act of 1934 (the "Exchange Act"), there was no
solicitation in opposition to any of the nominees and all of the nominees were
elected as directors of Milestone Scientific Inc. to serve until the next
Annual Meeting of Stockholders, with the following vote:

<TABLE>
<CAPTION>
                                                                  VOTES
         NOMINEE                        FOR                       AGAINST                   WITHHELD
<S>                                  <C>                              <C>                    <C>
Leonard Osser                        9,320,700                        0                      120,732
Leslie Bernhard                      9,375,939                        0                       65,493
Jeffrey Fuller                       9,380,818                        0                       60,614
Paul Gregory                         9,380,252                        0                       61,180
Leonard M. Schiller                  9,379,785                        0                       61,647
</TABLE>


         The Stockholders also approved the issuance or proposed issuance of
806,309 shares of Milestone's common stock. The issuance or proposed issuance of
806,309 shares of Milestone's common stock was approved with 4,723,816 votes
for, 195,066 votes against and 25,162 votes withheld.

         The Stockholders also approved the appointment of Eisner LLP as our
independent auditor for the 2005 fiscal year. The appointment of Eisner LLP was
ratified with 9,400,086 votes in favor, 26,924 votes against and 14,422 votes
withheld.

                                      16
<PAGE>

                                     PART II

ITEM 5.  MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

MARKET INFORMATION

         Milestone's Common Stock is traded on the American Stock Exchange under
the symbol "MSS" and the Pacific Stock Exchange under the symbol "MSS."
Milestone's warrants are traded on the American Stock Exchange under the symbol
"MSS.WS".

         Common Stock

         The following table sets forth the high and low sales prices of our
Common Stock, as quoted by the American Stock Exchange after adjustment for the
1-for-3 reverse stock split in January 2004.

<TABLE>
<CAPTION>
                                                                                    HIGH         LOW
                                                                                    ----         ---
<S>                                                                                 <C>          <C>
     2004
     First Quarter................................................................. $4.20        $2.38
     Second Quarter................................................................ $2.46        $1.75
     Third Quarter................................................................. $2.48        $1.67
     Fourth Quarter................................................................ $1.85        $1.55

     2005
     First Quarter................................................................. $4.11        $1.72
     Second Quarter................................................................ $3.98        $2.22
     Third Quarter................................................................. $2.70        $1.75
     Fourth Quarter................................................................ $2.04        $1.17
</TABLE>

         Warrants

         The following table sets forth the high and low sales prices of our
warrants, each to purchase one share of common stock, as quoted by the American
Stock Exchange, commencing on March 18, 2004, their first day of trading.

<TABLE>
<CAPTION>
     2004
                                                                                    HIGH         LOW
                                                                                    ----         ---
<S>                                                                                 <C>          <C>
     First Quarter (Commencing March 18 and ending March 31)....................... $.65         $.55
     Second Quarter................................................................ $.70         $.25
     Third Quarter................................................................. $.60         $.26
     Fourth Quarter................................................................ $.52         $.26

     2005
                                                                                    HIGH         LOW
                                                                                    ----         ---
     First Quarter................................................................. $.80         $.27
     Second Quarter................................................................ $.70         $.36
     Third Quarter................................................................. $.48         $.25
     Fourth Quarter................................................................ $.34         $.22
</TABLE>

                                      17
<PAGE>

HOLDERS

         According to the records of our transfer agent, there were
approximately 3,800 shareholders of record of our common stock as of December
31, 2005.

DIVIDENDS

         The holders of our Common Stock are entitled to receive such dividends
as may be declared by Milestone's Board of Directors. Milestone has not paid and
does not expect to declare or pay any dividends in the foreseeable future.

     For information regarding securities authorized under our equity
compensation plan, see Item 11


SALES OF UNREGISTERED SECURITIES

         During 2005, we issued 362,345 shares of common stock valued at
$801,708 for the following reasons:

               o    pursuant to a technology agreement to provide Milestone with
                    patent rights, Milestone issued 43,424 shares valued at
                    $70,000;

               o    for various consulting services, 139,362 shares valued at
                    $372,000 (of which $238,166 was expensed in 2005) were
                    issued to 7 consultants;

               o    as part of annual compensation and severance, 23,461 shares
                    valued at $53,333 (of which $45,001 was expensed in 2005)
                    were issued to two employees and a former employee;

               o    in satisfaction of payables owed in connection with
                    warehousing and fulfillment services and exhibition
                    facilities, 156,098 shares valued at $306,375 were issued to
                    2 vendors.

         In addition, on November 1, 2005, we converted 25,365 shares of 8%
convertible preferred stock and accumulated dividends to 7,074 shares of common
stock based on a conversion factor of 1:0.1731.

         In 2005, Milestone issued 272,000 options to its board of directors and
employees as bonus and compensation. These options are vested immediately, with
a 5-year expiration date, and a weighted average exercise price of $1.89.

         In 2005, Milestone issued 16,666 options valued at $28,166 to the
Company's outside Director of Clinical Affairs in consideration of newly granted
patent rights. This value was capitalized as patents and is being amortized over
the life of the patents.

         Milestone also issued options to various consultants and its outside
general counsel for which we recorded expense of $110,557 in 2005.

         During 2004, we issued common stock in payment of amounts due for goods
and services, satisfaction of notes payable and as compensation to two employees
and a key distributor for services during 2004:

         In June 2004, we issued 1,106 shares of common stock having a fair
value of $2,500 in partial payment of services to be provided under 1 year
public relations consulting agreement which amount was charged to expense in
2004.

         In August 2004, we issued 36,331 shares of common stock having a fair
value of $70,411 in payment of trade accounts payable related to the purchase of
fixed assets valued at $70,411.

         In November 2004, Milestone satisfied the $50,000 promissory note and
accrued interest at 6% of $4,475 by issuing 58,200 shares of common stock.

                                      18
<PAGE>

         In December 2004, we issued 6,060 shares having a fair value of $10,000
to two employees and 9,091 shares to a distributor having a fair value of
$15,000.

         In April 2004, we issued to Marina Co., a nominee of partners of Morse,
Zelnick, Rose & Lander LLP, our legal counsel, options expiring April 16, 2009
for the purchase of 160,000 shares of our common stock, at an exercise price of
$3.26 per share, and warrants, expiring April 16, 2009, to purchase 80,000
shares of our common stock at $4.89 per share, as partial consideration for
services rendered in connection with our February 2004 public offering.

         In May of 2004, we issued 1,133 options for consulting services valued
at $1,548.

         On May 10, 2004, our Board of Directors granted options, expiring May
10, 2009, to purchase 40,000 shares of our common stock at an exercise price of
$2.25 per share, to our investor relations consultant as consideration for the
provision of consulting services. On the same date, the Board of Directors also
granted options, expiring May 10, 2009, for the purchase of an aggregate number
of 59,668 shares of common stock at an exercise price of $4.92 per share, to
certain vendors in payment of services.

         In June 2003, we issued a 6% convertible note in the amount of $50,000
and warrants to purchase 53,419 shares of our common stock at $1.56 per share.

         In September 2003, we issued a 6% convertible note in the amount of
$50,000 and warrants to purchase 5,000 shares of our common stock at $6.00 per
share.

         In October 2003, we issued 1,646,419 shares of common stock in
satisfaction of 6% / 12% Secured and Senior Secured Notes in the aggregate
amount of approximately $5 million. We also committed to issue 25,365 shares of
8% convertible preferred stock in satisfaction of $25,365 of principal and
accrued interest. The preferred stock will be convertible into 4,390 shares of
common stock at $5.79. Subsequently, we issued 94,327 additional shares of
common stock to these former noteholders as consideration for their previous
consent to extend the maturity date of these notes.

         On October 9, 2003, we entered into a binding agreement with our Chief
Executive Officer and a major investor under which we have sold and issued to
them 246,044 units, each consisting of two shares of common stock and one
warrant to purchase one share of common stock in payment of $1,604,204 of debt
and interest due to our Chief Executive Officer and a major investor, and
approximately 58,896 units in payment of $384,000 of accrued compensation due to
our Chief Executive Officer. The Units were issued on the date of our offering.
Both investors are accredited investors.

         On October 31, 2003, we issued 102,195 shares of our common stock to
principal vendors, in satisfaction of trade payables in the aggregate amount of
approximately $503,000.

         The foregoing securities were issued in reliance upon the exemption
from the registration requirements of the Act, as amended, provided in Section
4(2) thereof, as a transaction by an issuer not involving a Public Offering. The
registrant reasonably believed that each purchaser had such knowledge and
experience in financial and business matters to be capable of evaluating the
merits and risks of the investment, each purchaser represented an intention to
acquire the securities for investment only and not with a view to distribution
thereof and appropriate legends were affixed to the stock certificates or
warrants. No commissions were paid in connection with such issuances.


                                      19
<PAGE>

ITEM 6.  MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.

         The following discussions of our financial condition and results of
operations should be read in conjunction with the financial statements and the
notes to those statements included elsewhere in this annual report. Certain
statements in this discussion and elsewhere in this report constitute
forward-looking statements, within the meaning of section 21E of the Exchange
Act, that involve risks and uncertainties. Our actual results may differ
materially from those anticipated in these forward-looking statements. See "Risk
Factors" on page 13 of this Form 10-KSB.

OVERVIEW

In 2005, we continued to execute a multi-point strategy designed to:

         o     penetrate the dental and medical markets with our existing
               computer controlled injection technology;

         o     utilize our LED technology platform to enter both the consumer
               and professional tooth whitening market; and,

         o     continue development of our pressure force technology for both
               dental and medical applications.

         Based on the results to date, we believe that we have made substantial
progress toward achieving the above objectives. We have recruited and developed
a highly trained domestic inside sales organization to service the U.S.. In
developing this core inside sales competency, we have been able to begin
bundling our two product portfolios to both users and new customers. While this
has resulted in an increase in our spending and incurred losses, all of which
were planned in line with our projections, we believe that the return on this
investment has been and will continue to be increased revenues.

         In March 2005, the Ionic White Tooth Whitening system was launched in
the U.S. through a 30 minute infomercial. The infomercial was played throughout
the U.S. starting in April on a variety of cable and local channels. The Ionic
White product line includes a Starter Kit that contains the gels, the rinse and
the intra-oral light. Refill Kits with a new supply of gels and specially
formulated rinse were also made available. The product was launched in Canada in
July and in other countries throughout the year. As a result of the introduction
of competitive products and subsequent litigation, our sales through the
television infomercial were curtailed; however, the Ionic White was launched
into retail outlets such as Walgreen's, Linens and Things and Target Stores in
the fourth quarter.

         Towards the end of 2005, Milestone Scientific announced the market
launch of its CoolBlue Professional Tooth Whitening System, which targets the $1
billion global professional teeth whitening market. As with other Milestone
products, the CoolBlue system is designed to maximize long-term revenues from
disposable per-patient kits that are utilized in the whitening treatment
process.

         The CoolBlue Tooth Whitening System utilizes the same basic technology
found in the Ionic White system. The basic technology uses the light generated
from the CoolBlue Wand as a means to generate energy and thus small levels of
heat, which will accelerate the chemical reaction necessary to remove
chromagenic staining for teeth. The CoolBlue System is unique in that it
eliminates the need for high levels of heat to accelerate the breakdown thereby
reducing the chair-time necessary to achieve satisfactory results. In addition,
the CoolBlue Whitening system includes a revolutionary home maintenance kit
which uses a simple, easy and fast application of a whitening solution using
sprays. This Once-A-Week(TM) home maintenance kit also eliminates the need for
the dentist to mold custom trays typically required for home maintenance.

         We have also developed new advanced sophisticated technology, for which
we have been granted patent protection that can be used for a number of medical
and dental purposes. In medical, this advanced technology was the subject of
multiple clinical studies which proved the efficacy of identifying the epidural
space for spinal anesthesia. A prototype of the epidural injection device has
been successfully reviewed in four clinical studies at a major university
affiliated hospital. In the dental market, the technology is the foundation of
the next generation product, which will allow dentists to administer a single
tooth anesthetic injection, known as a Periodontal Ligament Injection (PDL), as
a primary injection.

                                      20
<PAGE>

         Our focus on sales and marketing are reflected in the strong revenue
growth in 2005. Revenues have increased both domestically and internationally,
from increases in all product lines including CompuDent units, an increasing
base of handpiece sales and the sales from CoolBlue products. Global equipment
sales, including CompuDent and Wand Plus units increased by 68%. Handpiece sales
increased 15% domestically and 28% internationally.

         The following table shows a breakdown of our product sales (net),
domestically and internationally, by product category, and the percentage of
product sales (net) by each product category:

<TABLE>
<CAPTION>
                                                       Year Ended December 31,
                                   --------------------------------------------------------------
                                                2005                              2004
                                   -------------------------------   ----------------------------
<S>                                      <C>               <C>          <C>               <C>
DOMESTIC
CompuDent                                $ 1,363,705        31.5%         $ 813,610        24.1%
Handpieces                                 2,762,944        64.0%         2,334,297        69.1%
Other                                        196,409         4.5%           230,627         6.8%
                                   ------------------   ----------   ---------------   ----------
Total Domestic                           $ 4,323,058       100.0%       $ 3,378,534       100.0%
                                   ------------------   ----------   ---------------   ----------

INTERNATIONAL
CompuDent                                  $ 506,136        34.8%         $ 682,708        49.7%
Handpieces                                   854,718        58.9%           682,968        49.8%
Other                                         91,482         6.3%             6,976         0.5%
                                   ------------------   ----------   ---------------   ----------
Total International                      $ 1,452,336       100.0%       $ 1,372,652       100.0%
                                   ------------------   ----------   ---------------   ----------

DOMESTIC/INTERNATIONAL ANALYSIS
Domestic                                 $ 4,323,058        74.9%       $ 3,378,534        71.1%
International                              1,452,336        25.1%         1,372,652        28.9%
                                   ------------------   ----------   ---------------   ----------
Total Product Sales                      $ 5,775,394       100.0%       $ 4,751,186       100.0%
                                   ==================   ==========   ===============   ==========
</TABLE>

         We have earned gross profits of 60% and 49% in the years ended December
31, 2005 and 2004, respectively. However, our revenues have not been sufficient
to support our overhead and research and development expenses. We have therefore
reported substantial losses for each of those periods. We have taken steps to
cut our overhead and increase sales.

         The February 2004 public offering and the private placements in March
and June 2005 enabled us to continue execution of our strategic plan including
the creation of a domestic sales organization, expansion of marketing and
advertising programs and investment in new product development. During 2005, our
operating results reflected increased spending in those areas, consistent with
the plan, including:

         o     continued recruitment and training of a domestic sales
               organization;

         o     increased spending on marketing and advertising, including the
               development of a consumer radio campaign targeting the
               Indianapolis metropolitan area;

         o     continued investment into research and development of our tooth
               whitening products, CompuFlo technology and Single Tooth
               Anesthetic Product;

                                      21
<PAGE>

         o     increased spending in patent development to support the
               technology as well as an increase in litigation expense as a
               result of a law suit filed by a competitor in the consumer tooth
               whitening market; and, (2)

         o     increased legal fees related to the submission of a 510(k)
               Pre-market assessment to the FDA for our CompuFlo technology


          During 2005, we continued to take steps in order to reduce expenses.
Selling, general, and administrative expenses increased, in general, because of
the development of the domestic sales infrastructure. However, legal expenses
and consulting expenses, in particular, decreased slightly toward the end of the
year. We will continue to invest in the R&D associated with our new
technologies.

         Since our public offering in February 2004, we have invested
heavily in the development of a national sales organization implementing the new
marketing and sales plan successfully tested in 2003. As a result of the
experiences during the latter part of 2004 and 2005, we have reduced the total
numbers of territories from 41 to 20, which allows effective penetration of the
U.S. dental market. At the end of 2005, the domestic sales force consisted of a
national sales manager, 13 inside sales representatives communicating with
customers primarily by telephone, e-mail and fax, 3 sales support
representatives working in conjunction with our outside sales representatives
and 6 outside independent sales representatives.

         We plan to further support our increased sales and marketing activity
through trade show appearances, increased advertising to dental professionals
and, consumer advertising. Since our public offering we have provided further
support for our expanded activities through added investment in the following
areas:


Tooth Whitening and Curing

         o     transferring of the manufacturing of the CoolBlue Light System to
               Tricor Systems, Inc., our manufacturer of the CompuDent systems.

CompuFlo

         o     developing new software for the epidural clinical studies;

         o     additional engineering effort to make the software suitable for
               clinical studies;

         o     researching related activities to support the software
               development and clinical trials;

         o     paying legal fees related to the submission of the 510(k) to the
               FDA.

Single Tooth Anesthetic System

         o     developing the next generation product for the dental market - a
               new unit which incorporates the pressure sensing technology from
               the CompuFlo and marries it to the core technology underlying the
               CompuDent system.

Direct to Consumer Marketing

         o     developing and implementing a targeted radio campaign to increase
               awareness of our computer controlled anesthetic delivery systems
               in the dental market; and,

         o     launching this campaign into the Indianapolis market in August
               through December of 2005.


CURRENT CONDITION OF MILESTONE

         With the progress achieved in 2005, we believe that we are now
positioned to seize the market opportunities that we believe are available to us
through our patent protected products. We believe that our ownership of the
SafetyWand technology in light of OSHA regulations, issued pursuant to recent
federal and state government legislation mandating needle stick safety
standards, positions us to become a leading provider for dentists and other
health care professionals in the administration of local anesthesia. We have
used the financial resources gained in the Public Offering to build the
infrastructure necessary to market our products throughout the United States.
Our goal in 2006 is to carry out the plan that we initiated in 2005 and to grow
our revenue base of CompuDent users, thereby increasing our recurring revenue
stream from the sales of our consumable hand piece products.

-----------
(2) The suit filed by a competitor to the Ionic White Tooth Whitening System was
settled in November 2005, with the only cost to Milestone being the legal fees.

                                      22
<PAGE>

     PROMOTIONAL PROGRAM

         One of the persistent issues that prevents dentists from purchasing the
CompuDent system is the recurring cost for handpieces. Milestone has not faced
pricing pressures on the drive unit, raising prices several times from a low of
$1,000 in 1998 to the $2,495 current retail price. However, Milestone has found
that once dentists begin using CompuDent in a regular way their concern with the
$1.50 cost of each handpiece is mitigated. Accordingly, in January 2005,
Milestone implemented a sales program for the first quarter, designed to drive
revenues from the sale of the CompuDent unit. The program includes:

         1.    After upgrading the CompuDent system to include TurboFlo,
               increase its retail price in the U.S. to $2,495 from $2,195. This
               is expected to increase the gross margin on the unit to 87% when
               sold at its retail price. Taking into account all discount and
               pricing programs for 2005, the gross margin on the CompuDent unit
               was 71%.

         2     Offer to first-time buyers of CompuDent at the retail price a
               free one year supply of handpieces, including our new SafetyWand
               handpiece.

         The premise of this program is to increase the installed base of users,
eliminate the initial cost issue associated with handpieces and nurture the
customers so that they will begin purchasing handpieces when they run out.

         Toward the latter part of 2005, additional programs were made available
to the inside and outside sales organization, which provided bundled
opportunities to sell the CompuDent and new CoolBlue Professional Tooth
Whitening products to both new and existing customers. The retail price on an
individual CoolBlue kit is $79.95 and for the CoolBlue Wand, $995.00. The
programs initiated for the launch of the CoolBlue Tooth Whitening System
included:

         1.    Offering a deal whereby, with the purchase of 12 CoolBlue kits,
               one receives a 40% discount from list, making the kit price
               $47.97 each, or 12 for $575.64. This was done to encourage the
               dentist to purchase more than one kit.

         2.    Offering a bundle price of $959.00, with the purchase of the
               above 12 kits, which includes the 12 CoolBlue kits and the
               CoolBlue Wand with the required Whitening Tip.

         3.    Bundling the above with a CompuDent unit for a total price of
               $1,990.00, which provides the dentist computer controlled local
               anesthetic delivery as well as whitening.

     COMPUDENT WITH TURBOFLO(TM)

         In March 2005, Milestone introduced a software enhancement to the
current CompuDent, TurboFlo(TM) , which enables a practitioner to deliver
medication using a third speed. This eliminates one of the few remaining
obstacles to the sale of the product, as some practitioners are concerned that
the system takes longer to deliver medication than a traditional syringe. As a
result of the change in software and the subsequent launch, a significant number
of units with the older style software were available. Milestone was able to
leverage this inventory position by offering the older style units to the
existing customer base at a discounted price of $995. This reduced pricing,
which was put into effect in March until the inventory supplies were exhausted,
caused the increase in domestic sales between the first and second quarters in
2005. This new CompuDent with TurboFlo was well received in the market and is
now our standard product offering.


                                      23
<PAGE>

         SAFETYWAND

         This product was launched in January 2005 in metropolitan areas of
California, Chicago and New York. To date, sales have been sluggish, primarily
the result of a lack of enforcement from OSHA, the government agency tasked with
the administration and enforcement with the federal legislation related to
needlestick safety.

         PROFESSIONAL TOOTH WHITENING PRODUCT

         There are two basic methods used to whiten teeth in the dental office.
The first method, which varies in price from $600 to $900, utilizes a high
intensity plasma arc light to illuminate a very potent gel material on the
teeth. The heat from this light accelerates the whitening process by
accelerating the decomposition of the peroxide based material in the whitening
gels. After application of the gels, the teeth are heated for 20 minutes and
then the gels are removed. This is typically repeated multiple times and takes
between one and two hours. The patient is given a home kit which consists of
custom molded trays which the dentist must produce, requiring approximately 30
minutes of time for their teeth and enough gel material to continue the
treatment for several days.

         The second method, which costs between $300 and $500, consists of the
dentist making custom molds of the patient's teeth and providing the patient
with gel material which is applied for one hour per day over a period of three
to five weeks or in some cases, the trays and gel material are worn overnight
for several weeks.

         The CoolBlue Tooth Whitening system is a professional whitening system
marketed directly to dental offices. The technique used with this system is
differentiated from the competition in the following manner:

         1.    it uses a proprietary gel material which includes Silver Ion
               which is illuminated by blue Light Emitting Diodes (LED), and
               when the light and Silver Ion interact, energy is created which
               converts to a very small increase in temperature, thus
               accelerating the whitening process;

         2.    it requires a minimum amount of time in the dental chair, as the
               teeth are illuminated for only ten seconds which is enough to
               begin the whitening process; and,

         3.    the patient goes home with our proprietary whitening rinse
               Once-A-Week(TM), which does not require custom trays, again
               reducing the time in the dentist's office.

         This method has advantages for both the dentist and patient. For the
dentist, it requires less chair-time, which increases the number of patients a
dentist can see. It will also be cost effective against competitors, thus we
believe allowing the dentist to increase their margin. From the patient's
perspective, less chair-time and lower costs are both very attractive.

         We believe that the sales initiative for this product will enable us to
access an expanded number of dental offices, thereby providing an opening to
sell our core product - the CompuDent system. The CoolBlue Tooth Whitening
System was officially launched at the American Dental Association Meeting (ADA)
held in October 2005 in Philadelphia, PA.


         CONSUMER TOOTH WHITENING PRODUCT

         Ionic White(TM) Tooth Whitening system is a consumer product designed
to whiten and brighten teeth. This product uses a proprietary formulation of
whitening gels in conjunction with an intra-oral mouthpiece which contains a
series of blue LEDs used to accelerate the whitening process. There are patents
pending in the U.S. and internationally on both the design and method of this
product. In an independent study, Ionic White was clinically proven to whiten
teeth.

                                      24
<PAGE>

         What differentiates this product from other over-the-counter consumer
products can be summed up in the following points:

         o     It uses a proprietary gel material which includes Silver Ion
               which is illuminated by blue Light Emitting Diodes (LED) and when
               the light and Silver Ion interact, energy is created which
               converts to a very small increase in temperature, thus
               accelerating the whitening process;

         o     The proprietary whitening gel uses micropore gel, which is 1/10
               the size of the typical molecules used in tooth whitening
               products, allowing the gels to enter the dentin tubules for
               superior whitening;

         o     The unique construction of the intra-oral mouthpiece allows the
               gels to migrate to the top and bottom of the teeth, as well as
               the front and back, unlike OTC products, including whitening
               strips, which typically whiten only the front of the teeth and
               leave teeth looking stained where the back of the teeth are
               stained, since teeth are translucent;

         o     The initial process takes only 21 minutes, after which there is a
               noticeable difference in the brightness of the teeth, and once
               the customers begin using the whitening rinse on a regular basis,
               their teeth will continue to whiten; and,

         o     Following any whitening procedure, teeth will continue to stain,
               primarily due to coffee, tea and other items that cause
               chromagenic stain, and the Ionic White system uses a proprietary
               whitening rinse, which, when used with the intra-oral mouthpiece,
               maintains white, bright teeth.

         There will be two products marketed. The first is the starter-kit which
will contain three applications of the whitening gels, the intra-oral
mouthpiece, as well as a supply of the whitening rinse. The second kit will
include three applications of the whitening gels and another supply of the
whitening rinse. The recurring revenue will come from customers who begin using
the starter kit and want to maintain white, bright teeth.

         Ionic White was launched via television infomercials in March 2005. In
April, Milestone initiated legal action against Telebrands and White Light(TM),
a product the company believes unfairly competes with its product. In September,
due to the continued competition from White Light, Ionic White Inc., launched
Ionic White into retails outlets, including Target(R), Walgreens(R) and Linens
and Things(R). Shortly after this retail launch, Telebrands initiated legal
action against Milestone and Ionic White for false advertising, claiming that
claims were made which could not be substantiated and as a result, White Light
sales dropped precipitously. This action was settled in November 2005, with
legal fees being the only expense for Milestone.

         COMPUFLO

         In December 2005, Milestone submitted a pre-market notification to the
FDA on its CompuFlo Technology. This initial submittal is critical for the
continuing efforts to develop and commercialize this important technology.
Milestone has identified a number of potential applications for CompuFlo,
including the identification of the epidural space for injections of anesthetic,
most notably in child delivery and pain management.

         SINGLE TOOTH ANESTHESIA

         The STA device is designed to significantly improve the efficiency of a
procedure that is highly popular among dentists - the periodontal ligament
injection. Our STA device will deliver anesthesia locally and offer a relatively
short duration of anesthesia. We believe that a device which allows dentists to
effectively anesthetize a single tooth will greatly enhance the productivity of
dental practices and, when combined with the painless injection capabilities
already present in our CompuDent system, such a device should represent a
compelling value in the marketplace. As with the Company's CompuDent system, the
STA device will generate recurring revenues from per-patient disposable kits.

         The technology underlying our SafetyWand, the CompuFlo and an
improvement to the controls for CompuDent was developed by our Director of
Clinical Affairs and assigned to us. We purchased this technology pursuant to an
agreement dated January 1, 2005, for 43,424 shares of restricted common stock
and $145,000 in cash, payable on April 1, 2005. In addition, our Director of
Clinical Affairs will receive additional deferred contingent payments of 2.5% of
our total sales of products using some of these technologies, and 5% of our
total sales of products using some other of the technologies. If products
produced by third parties use any of these technologies (under license from us)
then he will receive the corresponding percentage of the consideration received
by us for such sale or license.

                                      25
<PAGE>

         The technology underlying our CoolBlue Professional Whitening and Ionic
White Consumer Whitening Products was acquired from DaVinci Systems. We pay a 7%
royalty to DaVinci Systems on the amounts paid to us by our joint venture
partner as a result of its sales of the consumer whitening product.

         We also pay a 5% fee to Strider Inc. on the amounts paid to us by our
joint venture partner as a result of its sales of the consumer and professional
whitening products. Strider assisted in bringing the CoolBlue and Ionic White
product lines to Milestone.



     SUMMARY OF CRITICAL ACCOUNTING POLICIES AND ESTIMATES

         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
U.S.. The preparation of these consolidated 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 accounts receivable, inventories, stock-based compensation and
contingencies. 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. Actual results may differ from those estimates under different
assumptions or conditions.

Inventory

         Inventories principally consist of finished goods and component parts
stated at the lower of cost (first-in, first-out method) or market.

Impairment of Long-Lived Assets

         We review long-lived assets for impairment whenever circumstances and
situations change such that there is an indication that the carrying amounts may
not be recovered.

Revenue Recognition

         Revenue is recognized when title passes at the time of shipment and
collectibility is reasonably assured.




RESULTS OF OPERATIONS
         The consolidated results of operations for the year ended December 31,
2005 compared to 2004 reflect our focus on the development and implementation of
our strategic sales and marketing initiatives in the U.S.. During 2005 we
continued recruitment and training of our domestic sales organization. Our
spending on marketing also increased through more aggressive advertising,
greater attendance at industry tradeshows and the direct-to-consumer advertising
campaign. Increased expenses associated with this expansion are in line with
management's expectations and contribute to the continued loss from operations.



                                      26
<PAGE>

         The following table sets forth for the periods presented, statement of
operations data as a percentage of revenues. The trends suggested by this table
may not be indicative of future operating results.

<TABLE>
<CAPTION>
                                                      Year Ended December 31,
                                  ----------------------------------------------------------------
                                               2005                             2004
                                  ------------------------------   -------------------------------
<S>                                    <C>                 <C>          <C>                  <C>
 Products sales, net                    $5,775,394          90%          $4,751,186          100%
 Royalty income                            657,754          10%                   -             -
                                  -----------------   ----------   -----------------   -----------
 Total revenue                           6,433,148         100%           4,751,186          100%
                                  -----------------   ----------   -----------------   -----------
 Cost of products sold                   2,521,022          39%           2,415,826           51%
 Royalty expense                            78,930           1%                   -             -
                                  -----------------   ----------   -----------------   -----------
 Total cost of revenue                   2,599,952          40%           2,415,826           51%
                                  -----------------   ----------   -----------------   -----------
 Gross Profit                            3,833,196          60%           2,335,360           49%
                                  -----------------   ----------   -----------------   -----------
 Selling, general and
  administrative expenses                6,794,032         106%           5,155,569          108%
 Research and
  development expenses                     286,260           4%             187,992            4%
                                  -----------------   ----------   -----------------   -----------
 Total operating expenses                7,080,292         110%           5,343,561          112%
                                  -----------------   ----------   -----------------   -----------
 Loss from operations                   (3,247,096)        -50%          (3,008,201)         -63%
 Other income/expense                      492,869           8%              11,337            0%
                                  -----------------   ----------   -----------------   -----------
 Net loss                              ($2,754,227)        -42%         ($2,996,864)         -63%
                                  =================   ==========   =================   ===========
</TABLE>

Year ended December 31, 2005 compared to year ended December 31, 2004

         Total revenues for the years ended December 31, 2005 and 2004 were
$6,433,148 (product sales of $5,775,394 and royalty income of $657,754) and
$4,751,186, respectively. The 22% increase in product sales is primarily related
to a $550,095 or 68% increase in domestic sales of CompuDent and CompuMed, and a
$600,397 or 20% increase in worldwide sales of the Wand handpieces, offset by a
decrease of $176,572 or 26% in international CompuDent and CompuMed sales. Total
domestic sales, including CompuDent, CompuMed, handpieces, and our new CoolBlue
products increased $944,524 or 28%, while total international sales increased by
$79,684 or 6% in 2005. This shows the effect of our investment in our domestic
sales force and marketing initiatives while maintaining a strong presence
internationally. Domestic handpiece sales increased $428,647 or 18%, while
international handpiece sales increased by $171,750 or 25%. This is primarily
the result of the success of the bonded handpiece in the global market. The
amount of $657,754 or 10% of total revenue in 2005 is royalty income from
granting United Systems Inc. a license to manufacture, market, and sublicense
the Ionic White(TM) to the consumer market.

         Cost of products sold for the years ended December 31, 2005 and 2004
were $2,521,022 and $2,415,826, respectively. The $105,196 or 4% increase is
primarily attributable to the additional cost of goods sold for the higher
revenues previously discussed. Royalty expense related to the royalty income
from the sales of the Ionic White(TM) Tooth Whitening System was $78,930 in
fiscal year 2005. This expense did not exist in 2004.

         For the year ended December 31, 2005, Milestone generated a gross
profit of $3,833,196 or 60% as compared to a gross profit of $2,335,360 or 49%
for the year ended December 31, 2004. Excluding the net royalty income (net of
royalty expense) of $578,824, which has a gross profit of 88%, gross profit of
products sales was 56% in 2005. The increase in gross profit percentage was due
to higher domestic sales, which has higher profit margin than international
sales.

                                      27
<PAGE>

         Selling, general and administrative expenses for the years ended
December 31, 2005 and 2004 were $6,794,032 and $5,155,569, respectively. The
$1,638,463 or 32% increase is primarily attributable to Milestone's continued
execution of its strategy to develop our domestic sales force and distribution
capacity as well as increased legal and consulting expenses. Hiring and related
employee expenses including commissions increased by $672,010 or 31%. Legal fees
increased by $281,178 or 67% for legal fees relating to patent protection for
the Ionic White(TM) Tooth Whitening System, litigation expenses related to the
action taken by Telebrands as well as divisional patent protection for
CompuFlo(TM). Professional fees related to consulting services and investor
relations increased by $265,971 or 74% primarily related to the vested portion
of stock options granted to outside consultants and the engagement of several
outside consultants for marketing services. Accounting fees increased by
$155,615 or 84% as a result of requirements of the Sarbanes-Oxley Act and
increased SEC filings. Selling, marketing, and advertising expenses including
trade shows increased by $241,688 or 65%. This reflects the additional expenses
related to the direct-to-consumer advertising campaign, advertising and
marketing initiatives related to CompuDent and the launch of the CoolBlue(TM)
Professional Tooth Whitening product. Most of the increases in these expenses
were anticipated and in line with management's strategy of investing in revenue
generating areas of the business.

         Research and development expenses for the years ended December 31, 2005
and 2004 were $286,260 and $187,992, respectively. These costs are associated
with the development of Milestone's CoolBlue(TM) Tooth Whitening Systems
CompuFlo(TM) products, the Single Tooth Anesthetic (STA) products, and our
consumer tooth whitening product sold under our distributor's Ionic White(TM)
trademark.

         The loss from operations for the years ended December 31, 2005 and 2004
was $3,247,096 and $3,008,201, respectively. The $238,895 or 8% increase in loss
from operations is explained above.

         Interest income of $92,869 was earned through December 31, 2005
compared with $80,867 for the prior year. This difference was due to the
increased interest rate in 2005.

         Other income of $400,000 was earned in 2005. This amount was paid to
Milestone for the purchase of certain rights held by the Company.

         There was no interest expense for the year ended December 31, 2005
compared to interest expense of $69,530 for the year ended December 31, 2004.
The decrease is mainly attributable to a $1.4 million extinguishment of debt
related to the February 2004 equity placement.

         For the reasons explained above, net loss for the year ended December
31, 2005 was $2,754,227 as compared to a net loss of $2,996,864 for the year
ended December 31, 2004. The $242,637 or 8% decrease in net loss is primarily a
result of the increased total revenue which is partially offset by the increased
operating expenses and the other income.

LIQUIDITY AND CAPITAL RESOURCES

         Milestone incurred net losses of $2,754,227 and $2,996,864 and negative
cash flows from operating activities of $3,266,317 and $4,284,869 during the
year ended December 31, 2005 and 2004, respectively. Milestone improved its
liquidity position with the private placement of units completed in April, and
June, 2005, as discussed below. We have maintained our net worth at $6,000,000
for the four consecutive quarters ended December 31, 2005. On August 23, 2005,
we announced that we had received notice from the American Stock Exchange that
we had regained compliance with all continued listing requirements. The American
Stock Exchange has removed the special symbol indicating that we were below
continued listing standards, although it will continue to monitor our compliance
with continued listing standards.

Private Placements

         On April 4, 2005 Milestone completed a $2,999,996 private placement of
101,044 units to accredited investors. Each unit consisted of 10 shares of
Common Stock and two Warrants. Each Warrant entitles the holder to purchase a
share of Common Stock at $4.89 per share through the close of business on
February 16, 2009. I-Bankers Securities, Inc. acted as Placement Agent for
Milestone in this transaction and received a fee of $209,978 and 101,044
Warrants identical in terms to those issued to the investors. The units, which
are restricted securities and bear a restrictive legend, are subject to stop
transfer restrictions. Net proceeds to Milestone after commissions and other
expenses were $2,655,659.

                                      28
<PAGE>

         On June 30, 2005 Milestone completed a $847,960 private placement of
34,000 units. Each unit consists of 10 shares of Common Stock and two Warrants.
Each Warrant entitles the holder to purchase a share of Common Stock at $4.89
per share through the close of business on February 16, 2009. Dynamic Decisions
acted as Placement Agent for Milestone in this transaction and received a fee of
$50,878 and 600 units, which are substantially the same form as those issued to
the investors. Total proceeds from this private placement, after commissions and
other expenses, were $797,054.


CASH FLOW RESULTS

         As of December 31, 2005, we had cash and cash equivalents of $2,892,679
and working capital of $5,194,760.

         For the year ended December 31, 2005, our net cash used in operating
activities was $3,266,317. This was attributable primarily to a net loss of
$2,754,227 adjusted for noncash items of $851,359 (of which $99,060 was
depreciation expense, $19,090 was amortization of patents, $33,111 was bad debt
expense, and $700,098 was stock and options issued for compensation, consulting,
and vendor services), a $41,163 decrease in accounts receivable, a $185,702
increase in royalty receivable, a $435,133 increase in inventory, a $957,629
increase in advances to contract manufacturer, a net $32,770 increase in
accounts payable and accrued expenses, and a $150,000 increase in deferred
compensation.

         For the year ended December 31, 2005, Milestone used $335,772 in
investing activities. This was primarily attributable to the purchase of patent
rights for $145,000 and $161,317 of legal fees related to new patent
application. Capital expenditures of $23,092 were primarily for the purchase of
molds and tooling for new products.

         For the year ended December 31, 2005, Milestone generated $3,453,462
from financing activities relating to the private placements discussed above and
an employee option exercise.

         Management believes that it has sufficient resources to meet its
obligations over the next twelve months.


RECENT ACCOUNTING PRONOUNCEMENTS

         In February 2006, the Financial Accounting Standards Board ("FASB")
issued SFAS No. 155, Accounting for Certain Hybrid Financial Instruments - an
amendment of FASB Statement No. 133 and 140. FAS 155 permits fair value
remeasurement for any hybrid financial instrument that contains an embedded
derivative that otherwise would require bifurcation. It resolves issues in the
implementation of Statement 133 and amends Statement 140 to eliminate the
prohibition on a qualifying special-purpose entity from holding a derivative
financial instrument that pertains to a beneficial interest other than another
derivative financial instrument. FAS 155 is effective for all financial
instruments acquired or issued after the beginning of an entity's first fiscal
year that begins after September 15, 2006. Milestone does not expect this
standard to have any impact on the company's results of operations or financial
position.

         In May 2005, the FASB issued SFAS No. 154, Accounting Changes and Error
Corrections, which replaces APB Opinion No. 20 and FASB Statement No. 3. FAS 154
amends APB No. 20 to require retrospective application of voluntary changes in
accounting principle to prior periods' financial statements. The statement also
requires that a change in depreciation, amortization, or depletion method for
long-lived, nonfinancial assets be accounted for as a change in accounting
estimates effected by a change in accounting principles. FAS 154 is effective
for accounting changes and corrections of errors made in fiscal years beginning
after December 15, 2005. We do not expect this standard to have any impact on
the Company's results of operations or financial position.

                                      29
<PAGE>

         In December 2004, the FASB issued SFAS No. 123 (revised 2004),
Share-Based Payment ("FAS 123R"), which replaces FAS 123 and supersedes APB No.
25. FAS 123R requires all share-based payments to employees, including grants of
employee stock options, to be recognized in the financial statements based on
their fair values. For public entities that file as small business issuers, the
effective date is the first interim or annual reporting period beginning after
December 15, 2005. The pro-forma disclosures previously permitted under FAS 123
no longer will be an alternative to financial statement recognition. The Company
is required to adopt FAS 123R beginning January 1, 2006. Under FAS 123R, the
Company must determine the appropriate fair value model to be used for valuing
share-based payments, the amortization method for compensation cost and the
transition method to be used at date of adoption. The transition methods include
prospective and retroactive adoption options. The impact of adoption of FAS 123R
cannot be predicted at this time because it will depend on levels of share-based
payments granted in the future.

         In November 2004, the FASB issued SFAS No. 151, Inventory Costs, an
amendment of ARB No. 43, Chapter 4 ("FAS 151"). FAS 151 amends Accounting
Research Bulletin no. 43, Chapter 4, to clarify that abnormal amounts of idle
facility expense, freight, handling costs and wasted materials (spoilage) should
be recognized as current-period charges. In addition, FAS No 151 requires that
allocation of fixed production overhead to inventory be based on the normal
capacity of the production facilities. FAS 151 is effective for periods
beginning January 1, 2006 and is not expected to have a significant impact on
the Company's results of operations or financial position.

         In December 2004, the FASB issued SFAS No. 153, Exchange of Nonmonetary
Assets, an amendment of APB No. 29, Accounting for Nonmonetary Transactions
("FAS 153"). FAS 153 amends APB No. 29 to eliminate the exception for
nonmonetary exchanges of similar productive assets and replaces it with a
general exception for exchanges of nonmonetary assets that do not have
commercial substance. A nonmonetary exchange has commercial substance if the
future cash flows of the entity are expected to change significantly as a result
of the exchange. Adoption of FAS 153 is required on a prospective basis, for
nonmonetary exchanges beginning after June 15, 2005. We do not expect this
standard to have any impact on the Company's results of operations or financial
position.


ITEM 7.  FINANCIAL STATEMENTS

         The financial statements of Milestone required by this Item are set
forth beginning on page F-1.

ITEM 8.  CHANGE IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

            On June 10, 2004, the Registrant engaged Eisner LLP as its
Independent Registered Public Accounting Firm and dismissed J.H. Cohn LLP,
Milestone's former Independent Registered Public Accounting Firm. The reports of
J.H. Cohn LLP for the years ended December 31, 2003 and 2002 did not contain an
adverse opinion or disclaimer of opinion and were not modified as to
uncertainty, audit scope or accounting principles.

            The decision to change accountants was approved by the Registrant's
Audit Committee and its Board of Directors as a whole.

            During 2003 and 2002, and during the period from January 1, 2004 to
June 10, 2004, there were no disagreements with J.H. Cohn LLP on accounting
principles or practices, financial statement disclosure, or auditing scope or
procedure which, if not resolved to the satisfaction of J.H. Cohn LLP, would
have caused J.H. Cohn LLP to make reference to the subject matter of the
disagreement in connection with their report.

            During the two most recent fiscal years and the subsequent interim
period preceding the engagement of Eisner LLP, neither the Registrant, nor
anyone on its behalf, has consulted Eisner LLP regarding: (i) the application of
accounting principles to a specific completed or proposed transaction, or the
type of audit opinion that might be rendered on the Registrant's financial
statements, which consultation resulted in the providing of a written report or
oral advice concerning the same to the Registrant that was an important factor
considered by the Registrant in reaching a decision as to the accounting,
auditing or financial reporting issue; or (ii) any matter that was either the
subject of a disagreement (as defined in Rule 304(a)(1)(iv) of Regulation S-B
promulgated under the Securities Act of 1933, as amended) or a reportable event
(as defined in Rule 304(a)(1)(v) of Regulation S-B).

                                      30
<PAGE>

ITEM 8A. CONTROLS AND PROCEDURES

         A) Evaluation of Disclosure Controls and Procedures. Milestone's
            management, with the participation of the Chief Executive Officer
            and the Chief Financial Officer, carried out an evaluation of the
            effectiveness of Milestone's "disclosure controls and procedures"
            (as defined in the Securities Exchange Act, Rule 13a-14a. Based upon
            that evaluation, the Chief Executive Officer and Chief Financial
            Officer concluded that Milestone's disclosure controls and
            procedures were effective, as of the date of their evaluation, for
            purposes of recording, processing, summarizing and timely reporting
            material information required to be disclosed in reports filed by
            Milestone under the Securities Exchange Act of 1934. There were no
            changes in our internal control over financial reporting that
            occurred during Milestone's most recent fiscal quarter that have
            materially affected, or are reasonably likely to materially affect,
            Milestone's internal control over financial reporting.

ITEM 8B. OTHER INFORMATION
Not Applicable


                                      31
<PAGE>

                                    PART III

ITEM 9.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

         The current executive officers, directors and key personnel of
Milestone and their respective ages as of March 30, 2005 are as follows:

<TABLE>
<CAPTION>
NAME                                      AGE                     POSITION                       DIRECTOR SINCE
----                                      ---                     --------                       --------------

<S>                                        <C>   <C>                                                  <C>
Leonard A. Osser.........................  58    Chairman and Chief Executive Officer                 1991
Thomas R. Ronca..........................  60    Chief Operating Officer
Stuart J. Wildhorn.......................  48    President
Rosaline Shau............................  45    Chief Financial Officer
Mark Hochman, D.D.S......................  48    Director of Clinical Affairs
Eugene Casagrande, D.D.S.................  62    Director of Professional Relations
Leonard M. Schiller(1)(2)................  64    Director                                             1997
Jeffrey Fuller(1)(2) ....................  60    Director                                             2003
Leslie Bernhard(1).......................  61    Director                                             2003
</TABLE>

--------------------
(1) Member of the Audit Committee

(2) Member of the Compensation Committee

         Leonard A. Osser has been our Chairman and Chief Executive Officer
since July 1991. From 1980 until the consummation of Milestone's Public Offering
in November 1995, he was engaged primarily as the principal owner and Chief
Executive Officer of U.S. Asian Consulting Group, Inc., a New Jersey based
provider of consulting services in "work-out" and "turnaround" situations for
publicly and privately owned companies in financial difficulty.

         Thomas R. Ronca has been our Chief Operating Officer since May 2005. In
2004, Mr. Ronca was a self-employed business consultant. From 1994 until 2003,
Mr. Ronca was a Senior Vice President and General Manager of the Medical
Technology Division of B. Braun Medical, Inc., a subsidiary of B. Braun
Melsungen AG. From 1996 through 2000, he simultaneously served as President and
Chief Operating Officer of B. Braun Biotech, Inc., which provides fermenters,
bioreactors and laboratory equipment to over 200 customers in the pharmaceutical
and biotechnology industries.

         Stuart J. Wildhorn has been our President since September 2003 and
prior to that he had been our Senior Vice President since April 2001. From 1990
until April 2001, Mr. Wildhorn held progressive senior management positions with
Datex-Ohmeda, a leading manufacturer of anesthesia and patient monitoring
products.

         Rosaline Shau has been our Chief Financial Officer since August 2005.
Prior to that, she had been our Assistant Controller since October 2004. From
2002 to October 2004, Ms. Shau was a self-employed accounting and tax consultant
for businesses in various industries. Prior to 2002, Ms. Shau served as an
assistant controller of a chemical manufacturer for 5 years. Ms. Shau is a CPA
and holds an MBA degree in accounting from City University of New York, Baruch
College. Prior to joining Milestone, Ms. Shau had over 15 years of diversified
accounting and tax consulting experience

         Dr. Mark Hochman has been a clinical consultant to Milestone since 1997
and has served on a part-time basis as the Director of Clinical Affairs and
Director of Research and Development since 1999. He has a doctorate of dental
surgery with advanced training in the specialties of periodontics and
orthodontics from New York University College of Dentistry and has been
practicing dentistry since 1984. He holds a faculty appointment as a clinical
associate professor at NYU School of Dental Surgery. Dr. Hochman is a recognized
world authority on advanced drug delivery systems, has published numerous
articles in this area and is personally responsible for inventing much of the
technology currently available from Milestone.

                                      32
<PAGE>

         Dr. Eugene Casagrande has been the Director of Professional Relations
for Milestone since September 1998. In his capacity, Dr. Casagrande represents
Milestone in a variety of clinical and industry related opportunities. Dr.
Casagrande is the President and founder of Casagrande Consulting Services, an
entity devoted to quality management to the dental industry.

         Leonard M. Schiller has been a director of Milestone since April 1997.
Mr. Schiller has been a partner in the Chicago law firm of Schiller, Klein &
McElroy, P.C. since 1977. He has also been President of The Dearborn Group, a
residential property management and real estate acquisition company since 1980.

         Jeffrey Fuller has been a director of Milestone since January 2003. Mr.
Fuller has been president and owner of two municipal water supply systems,
Hudson Valley Water Co. and Lake Lenape Water Co. since 1983 and in addition has
been an executive recruiter since 1995. Early in his career, for a period of two
years, he was an auditor with Arthur Andersen LLP, and thereafter, for four
years, a senior internal auditor with the Dreyfus Corp. Mr. Fuller has been an
adjunct professor since 2002 at Berkeley College, NY, teaching several courses
including Accounting.

         Leslie Bernhard has been a director of Milestone since May 2003. Ms.
Bernhard co-founded AdStar, Inc., and since 1986 has been its President, Chief
Executive Officer and a director. AdStar is an application service provider for
the newspaper classified advertising industry.

         All directors hold office until the next annual meeting of stockholders
and until their successors are duly elected and qualified. Officers are elected
to serve, subject to the discretion of the Board of Directors, until their
successors are appointed.

         Milestone's Board of Directors has established compensation and audit
committees. The Compensation Committee reviews and recommends to the Board of
Directors the compensation and benefits of all the officers of Milestone,
reviews general policy matters relating to compensation and benefits of
employees of Milestone, and administers the issuance of stock options to
Milestone's officers, employees, directors and consultants. All compensation
arrangements between Milestone and its directors, officers and affiliates are
reviewed by the Compensation Committee, the majority of which is made up of
independent directors. The Audit Committee meets with management and Milestone's
independent auditors to determine the adequacy of internal controls and other
financial reporting matters. The Board of Directors has determined that Jeffrey
Fuller qualifies as an Audit Committee Financial Expert pursuant to Item 401 (e)
of Regulation S-B. Mr. Fuller is independent, as that term is used in Item7 (d)
(3)(iv) of Schedule 14A under the Exchange Act.

SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

         Section 16(a) of the Securities Exchange Act of 1934 requires
Milestone's officers and directors, and persons who own more than ten percent
(10%) of a registered class of Milestone's equity securities to file reports of
ownership and changes in ownership with the Securities and Exchange Commission
("SEC"). Officers, directors and greater than ten percent (10%) stockholders are
required by SEC regulations to furnish Milestone with copies of all Section
16(a) forms they file.

         To the best of Milestone's knowledge, based solely on review of the
copies of such forms furnished to Milestone, or written representations that no
other forms were required, Milestone believes that all Section 16(a) filing
requirements applicable to its officers, directors and greater than ten percent
(10%) shareholders were complied with during 2005.

CODE OF ETHICS

         Milestone has adopted a code of ethics that applies to Milestone's
principal executive officer, principal financial officer and other persons
performing similar functions. This code of ethics is filed herewith as an
exhibit to this annual report and is posted on Milestone's web site at
www.milesci.com. We will also provide a copy of the Code of Ethics to any person
without charge, upon written request addressed to our Chief Financial Officer,
Rosaline Shau, at our principal executive office, located at 220 South Orange
Avenue, Livingston, NJ, 07039.

                                      33
<PAGE>

ITEM 10.  EXECUTIVE COMPENSATION.

         The following Summary Compensation Table sets forth all compensation
earned, in all capacities, during the fiscal years ended December 31, 2005,
2004, and 2003 by (i) Milestone's Chief Executive Officer and (ii) the most
highly compensated executive officers, other than the CEO, who were serving as
executive officers at the end of the 2005 fiscal year and whose salary as
determined by Regulation S-B, Item 402, exceeded $100,000 (the individuals
falling within categories (i) and (ii) are collectively referred to as the
"Named Executives").

                          SUMMARY OF COMPENSATION TABLE

<TABLE>
<CAPTION>
                                                               ANNUAL                     COMMON                COMMON STOCK
                                                            COMPENSATION                   STOCK                 UNDERLYING
                                                               SALARY                      AWARD                  OPTIONS
NAME AND PRINCIPAL POSITION                   YEAR                $                          #                        #
-----------------------------------------  -----------  -----------------------        --------------       ----------------------
<S>                                           <C>             <C>                         <C>                      <C>
Leonard A. Osser                              2005            300,000   (1)
 Chief Executive Officer                      2004            300,000   (2)
 and Chairman                                 2003            351,770   (3)                                        16,667
Thomas R. Ronca                               2005            111,667   (4)               7,435
 Chief Operation Officer
Stuart J. Wildhorn                            2005            183,425
 President                                    2004            180,740                     9,091  (5)               16,667
                                              2003            163,207
</TABLE>

        (1) Includes $150,000 in deferred compensation in accordance with his
        employment agreement to be paid in common stock and not paid until the
        termination of the agreement in 2010. Excludes $28,830 paid by Milestone
        to Marilyn Elson, a certified public accountant, in payment of tax
        services. Ms. Elson is the wife of Mr. Osser.

        (2) Includes $150,000 in deferred compensation in accordance with his
        employment agreement to be paid in common stock and not paid until the
        termination of the agreement in 2010. Excludes $25,773 paid by Milestone
        to Marilyn Elson, a certified public accountant, in payment of tax
        services. Ms. Elson is the wife of Mr. Osser.

        (3) Includes $320,000 in deferred compensation but excludes $51,928 paid
        by Milestone to Marilyn Elson, a certified public accountant, in payment
        of tax services and assistance with preparation of the recently
        completed registration statement.

        (4) Includes pro-rated $20,000 annual stock compensation.

        (5) On December 16, 2004, the Board of Directors approved a grant of
        9,091 shares of restricted stock to Mr. Wildhorn. The dollar value of
        the grant reflected in the Summary Compensation Table is calculated by
        multiplying the shares by $1.65, the closing price of Milestone stock on
        the date of grant. Dividends are not paid on restricted stock. The value
        of these shares was $12,635 on December 31, 2005 based on a closing
        price of $1.39.


                                      34
<PAGE>

                                  STOCK OPTIONS

         The following tables show certain information with respect to incentive
and non-qualified stock options granted in 2005 to Named Executives under
Milestone's 2004 Stock Option Plan and the aggregate value at December 31, 2005
of such options. In general, the per share exercise price of all options is
equal to the fair market value of a share of Common Stock on the date of grant.

               OPTION GRANTS IN 2005 INDIVIDUAL GRANTS OF OPTIONS

<TABLE>
<CAPTION>
                                   NUMBER OF           PERCENT OF TOTAL
                                SHARES OF COMMON       OPTIONS GRANTED
                                STOCK UNDERLYING        TO EMPLOYEES        EXERCISE PRICE
NAME                                 OPTIONS               IN 2005            ($/SH)           EXPIRATION DATE
----                                 -------               -------            ------           ---------------
<S>                                 <C>                      <C>               <C>               <C>
Mark Hochman...................     10,000 (1)                9%                $1.25            12-20-2010
Rosaline Shau..................     15,000 (1)               13%                $1.25            12-20-2010
</TABLE>

 (1) Options vest immediately on the date of the grant.


                     AGGREGATED 2005 YEAR END OPTIONS VALUES
                  FOR OPTIONS GRANTED PRIOR TO AND DURING 2005

<TABLE>
<CAPTION>
                                                     Number of Shares of
                                                            Common
                                                       Stock Underlying             Value of Unexercised
                                                         Unexercised               In-The-Money Options At
                                                    Options At 12-31-2005              12-31-2005 (1)
                                                         Exercisable/                   Exercisable/
                         Name                           Unexercisable                   Unexercisable
                         ----                           -------------                   -------------
<S>                                                   <C>                              <C>
          Leonard A. Osser.......................         0 / 50,000                    $0 / $14,500
          Stuart J. Wildhorn.....................      24,556 / 11,111                    $0 / $0
          Rosaline Shau..........................         15,000 / 0                    $18,750 / $0
</TABLE>

(1) Based on the closing price on December 31, 2005 of $1.39 as quoted on the
    American Stock Exchange.


EMPLOYMENT CONTRACTS

         In December 2003, Milestone entered into a new employment agreement
with Mr. Osser for a five-year term commencing January 1, 2004. Under the new
agreement Mr. Osser receives base compensation of $300,000 per year, payable one
half in cash and one half in common stock valued at the average closing price of
the common stock during the first 15 trading days in the month of December
during each year of the term. While the number of shares to be issued will be
determined each year, the stock will not be issuable until the end of the term
of the agreement. In addition, Mr. Osser may earn annual bonuses up to an
aggregate of $300,000, payable one half in cash and one half in common stock,
contingent upon Milestone achieving predetermined annual operating cash flow,
revenue and earnings targets. For 2005 he could have earned a $100,000 bonus
based upon Milestone achieving break-even cash flow from operations, a $100,000
bonus based upon Milestone achieving net revenues of $7,000,000 and a $100,000
bonus based upon Milestone achieving break-even earnings determined in
accordance with generally accepted accounting principles. The cash flow bonus
and the earnings bonus will not be payable to the extent that the payment
thereof will reduce operating cash flow or earnings below break-even,
respectively. For purposes of the agreement operating cash flow shall mean cash
flow from operations plus accounts receivable increases and less accounts
payable increases. Shares of common stock issued in partial payment of bonuses
will be valued at the average closing price of the common stock during the first
15 trading days in the month of December during each year of the term. The stock
portion of the bonus awards, if any, will be paid at the end of the term of the
agreement.

                                      35
<PAGE>

         In addition, if during any year of the term of the agreement Mr. Osser
earns a bonus under the above formula, he shall also be granted 5-year stock
options to purchase twice the number of shares earned under the above formula,
each such option to be exercisable at a price per share equal to the fair market
value of a share on the date of grant (110% of fair market value if Mr. Osser is
a 10% or greater stockholder on the date of grant). The options shall vest and
become exercisable to the extent of one-third of the shares covered at the end
of each of the first three years following the date of grant, but shall only be
exercisable while Mr. Osser is employed by Milestone or within 30 days after the
termination of his employment.

COMPENSATION OF DIRECTORS

         Milestone paid no cash or stock based compensation to the directors in
2005. On March 19, 2005, Milestone awarded, to each of its outside directors,
options expiring March 19, 2010 for the purchase of 20,000 shares of its common
stock, exercisable immediately at $3.27 per share, with respect to the year
starting with Milestone's 2004 annual meeting and ending with Milestone's 2005
annual meeting. On November 17, 2005, Milestone granted 20,000 options,
exercisable immediately at $1.40 per share, expiring November 17, 2010, to each
of its outside directors with respect to the year beginning Milestone's 2005
annual meeting and ending with Milestone's 2006 annual meeting.


ITEM 11.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS


         The following table, together with the accompanying footnotes, sets
forth information, as of March 30, 2006, regarding stock ownership of all
persons known by Milestone to own beneficially more than 5% of Milestone's
outstanding common stock, Named Executives, all directors, and all directors and
officers of Milestone as a group:

<TABLE>
<CAPTION>
                                                             Shares of
                                                           Common Stock
                                                           Beneficially                   Percentage of
            Name of Beneficial Owner (1)                     Owned (2)                      Ownership

<S>                                                          <C>                              <C>
    EXECUTIVE OFFICERS AND DIRECTORS

    Leonard Osser...............................             1,670,135(3)                     14.50%
    Thomas R. Ronca.............................                 7,435                          *
    Stuart J. Wildhorn..........................                39,203(4)                       *
    Leonard M. Schiller.........................                48,432(5)                       *
    Jeffrey Fuller..............................                46,667(6)                       *
    Leslie Bernhard                                             46,667(7)                       *
    All  directors  &  executive  officers  as  a
      group (6 persons).........................              1,858,539                       16.14%
    K. Tucker Andersen..........................              1,603,582(8)                    13.92%
</TABLE>

        * Less than 1%

        (1) The addresses of the persons named in this table are as follows:
        Leonard A. Osser, Thomas R. Ronca, and Stuart Wildhorn are all at 220
        South Orange Avenue, Livingston Corporate Park, Livingston, NJ 07039;
        Leonard M. Schiller, Schiller, Klein & McElroy, P.C., 33 North Dearborn
        Street, Suite 1030, Chicago, Illinois 60602; Jeffrey Fuller, Eagle
        Chase, Woodbury, NY 11797; Leslie Bernhard, AdStar, Inc., 4553 Glencoe
        Avenue, Suite 325, Marina del Rey, California 90292; K. Tucker Anderson,
        c/o Cumberland Associates LLC, 1114 Avenue of the Americas, New York,
        New York 10036.

                                      36
<PAGE>

        (2) A person is deemed to be a beneficial owner of securities that can
        be acquired by such person within 60 days from the filing of this annual
        report upon the exercise of options and warrants or conversion of
        convertible securities. Each beneficial owner's percentage ownership is
        determined by assuming that options, warrants and convertible securities
        that are held by such person (but not held by any other person) and that
        are exercisable or convertible within 60 days from the filing of this
        report have been exercised or converted. Except as otherwise indicated,
        and subject to applicable community property and similar laws, each of
        the persons named has sole voting and investment power with respect to
        the shares shown as beneficially owned. All percentages are determined
        based on the number of all shares, including those underlying options
        exercisable within 60 days from the filing of this report held by the
        named individual, divided by 11,517,146 outstanding shares on December
        31, 2005 plus those shares underlying options exercisable within 60 days
        from the filing of this report held by the named individual or the
        group.

        (3) Includes 325,722 shares issuable upon exercise of stock options
        within 60 days of the date hereof as follows: 204,728 shares at $6.00
        per share and 120,994 shares issuable upon the exercise of warrants
        within 60 days of the date hereof, which are exercisable at $4.89.

        (4) Includes 30,112 shares subject to stock options, exercisable within
        60 days of the date hereof as follows: 16,667 shares at $7.50 per share,
        2,333 shares at $2.25 per share, and 11,112 shares at $4.92 per share.

        (5) Includes 46,667 shares subject to stock options, exercisable within
        60 days of the date hereof as follows: 6,667 shares at $1.50 per share,
        20,000 shares at $3.27 per share, and 20,000 shares at $1.40 per share.

        (6) Includes 46,667 shares subject to stock options, exercisable within
        60 days of the date hereof as follows: 6,667 shares at $1.50 per share,
        20,000 shares at $3.27 per share, and 20,000 shares at $1.40 per share.

        (7) Includes 46,667 shares subject to stock options, exercisable within
        60 days of the date hereof as follows: 6,667 shares at $1.50 per share,
        20,000 shares at $3.27 per share, and 20,000 shares at $1.40 per share.

        (8) Includes 303,559 shares subject to warrants all of which are
        exercisable within 60 days of the date hereof at prices ranging from
        $4.89 to $6.00.



SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS


                      EQUITY COMPENSATION PLAN INFORMATION

         The following table summarizes the (i) options granted under the
Milestone 1997 and 2004 Stock Option Plans, and (ii) options and warrants
granted outside the Milestone 1997 and 2004 Stock Option Plans, as of December
31, 2005. The shares covered by outstanding options and warrants are subject to
adjustment for changes in capitalization stock splits, stock dividends and
similar events. No other equity compensation has been issued.

                                      37
<PAGE>

<TABLE>
<CAPTION>
                                             Number of Securities (1) to                                  Number of securities (1)
                                              be issued upon exercise of    Weighted-average exercise     remaining available for
                                                outstanding options and   prior of outstanding options  future issuance under equity
                                                        warrants                and warrants                  compensation plan
                                                        --------                ------------                  -----------------
<S>                   <C>                                 <C>                      <C>                              <C>
Equity compensation plan
approved by stockholders (1)
     Grants under our 1997 Stock Option Plan              261,167                  $3.59                            52,833
     Grants under our 2004 Stock Option Plan              192,000                   1.31                           308,000
Equity compensation plan
not approved by stockholders (2)
  Aggregate individual option and warrant grants        3,233,918                   4.87                    Not applicable
                                                     ------------
Total                                                   3,687,085                   4.60
                                                     ============
</TABLE>

        (1) Consisting of our 1997 stock option plan covering a total of 333,333
        common shares underlying options issuable to officers and other key
        employees and excluding 2,333 options, which were exercised in October
        2003, 16,667 options, which were exercised in December 2003, and 333
        options which were exercised in April 2005. The plan has a term of 10
        years and is administered by a committee appointed by the board of
        directors. The committee, in its sole discretion, determines who is
        eligible to receive these incentive stock options, how many options they
        will receive, the term of the options, the exercise price and other
        conditions relating to the exercise of the options. Stock options
        granted under the plan must be exercised within a maximum of 10 years
        from the date of grant at an exercise price that is not less than the
        fair market value of the common shares on the date of the grant. Options
        granted to shareholders owning more than 10% of our outstanding common
        shares must be exercised within five years from the date of grant and
        the exercise price must be at least 110% of the fair market value of the
        common shares on the date of the grant.

        In July 2004 the Board of Directors approved the adoption of the 2004
        Stock Option Plan. The 2004 Stock Option Plan provides for the grant of
        options to purchase up to 500,000 shares of Milestone's common stock.
        Options may be granted to employees, officers, directors and consultants
        of Milestone for the purchase of common stock of Milestone at a price
        not less than the fair market value of the common stock on the date of
        the grant. In general, options become exercisable over a three-year
        period from the grant date and expire five years after the date of
        grant. However, options issued in 2005 under the 2004 Stock Option Plan
        are vested immediately.

        (2) The aggregate individual option grants outside the Stock Option Plan
        referred to in the table above include options issued as payment for
        services rendered to us by outside consultants and providers of certain
        services. The aggregate individual warrant grants referred to in the
        table above include warrants granted to investors in Milestone as part
        of private placements and credit line arrangements.



ITEM 12.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS


         On October 9, 2003 we reached an agreement to satisfy $1,265,545 of
debt and accrued interest due to a major investor, K. Tucker Andersen, and
$435,985 of debt and accrued interest and $640,000 of deferred compensation due
to our Chief Executive Officer and Chairman, Leonard Osser. Of the total debt
and accrued interest due to Messrs. Andersen and Osser, and the deferred
compensation owed to Mr. Osser, $1,604,204 and $384,000 respectively were paid
February 24, 2004 through the issuance of 241,988 and 61,350 units valued at the
initial offering price. The remaining $97,326 of indebtedness to Messrs.
Andersen and Osser and $256,000 of deferred compensation to Mr. Osser was paid
in cash on February 23, 2004. The cash portion of the total payment represents
the estimated tax on the interest and compensation.

         The technology underlying our SafetyWand, the CompuFlo and an
improvement to the controls for the CompuDent were developed by our Director of
Clinical Affairs and assigned to us. We purchased this technology pursuant to an
agreement dated January 1, 2005, for 43,424 shares of restricted common stock
and $145,000 in cash, payable on April 1, 2005. In addition, he will receive
additional deferred contingent payments of 2.5% of our total sales of products
using certain of these technologies, and 5% of our total sales of products using
certain other of these technologies. If products produced by third parties use
any of these technologies (under license from us) then he will receive the
corresponding percentage of the consideration received by us for such sale or
license.

                                      38
<PAGE>

         We have adopted a policy that, in the future, the audit committee must
review all transactions with any officer, director or 5% shareholder.


ITEM 13.  EXHIBITS

     Exhibits

         Certain of the following exhibits were filed as Exhibits to previous
filings filed by the Registrant under the Securities Act of 1933, as amended, or
reports filed under the Securities and Exchange Act of 1934, as amended, and are
hereby incorporated by reference.

  EXHIBIT
    NO.                           DESCRIPTION
 ----------  ------------------------------------------------------------------

 3.1         Certificate of Incorporation of Milestone (1)
 3.2         Certificate of Amendment filed July 13, 1995 (2)
 3.3         Certificate of Amendment filed December 6, 1996 (3)
 3.4         Certificate of Amendment filed December 17, 1997 (4)
 3.5         Certificate of Amendment filed July 23, 2003 (6)
 3.6         Certificate of Amendment filed January 8, 2004 (6)
 3.7         Certificate of Designation filed January 15, 2004 (6)
 3.8         By-laws of Milestone (1)
 4.1         Specimen stock certificate (2)
 4.2         Intentionally Left Blank
 4.3         Form of warrant agreement, including form of warrant (8)
10.1         Lease dated November 25, 1996 between Livingston Corporate Park
               Associates, L.L.C. and Milestone. (3)
10.2         Agreement with DaVinci Systems dated July 30, 2003. (6)
10.3         Agreement with Strider dated September 3, 2003. (6)
10.4         Agreement with Len Osser and K. Tucker Andersen,
               dated October 9, 2003. (6)
10.5         Agreement with Morse, Zelnick, Rose & Lander dated
               December 22, 2003. (6)
10.6**       Employment Agreement with Leonard Osser dated December 20,
               2003. (6)
10.7         Agreement with United Systems dated October 20, 2004. (9)
10.8         Agreement with Mark Hochman dated as of January 1, 2005. (9)
10.9         Lease amendment dated April 28, 2004 between  Livingston
               Corporate Park  Associates,  L.L.C. and Milestone. (9)
10.10        Agreement with DaVinci regarding exclusive license over
               patented products dated June 1, 2004.*
14           Code of Ethics (7)
23.1         Consent of Eisner LLP*
31.1         Rule 13a-14(a) Certifications - Chief Executive Officer*
31.2         Rule 13a-14(a) Certifications - Chief Financial Officer*
32.1         Section 1350 Certifications- Chief Executive Officer*
32.2         Section 1350 Certifications- Chief Financial Officer*

                                      39
<PAGE>

---------
*  Filed herewith.
** Indicates management contract or compensatory plan or arrangement

(1) Incorporated by reference to Milestone's Registration Statement on Form SB-2
No. 33-92324.

(2) Incorporated by reference to Amendment No. 1 to Milestone's Registration
Statement on Form SB-2 No. 333-92324.

(3) Incorporated by reference to Milestone's Form 10-KSB for the year ended
December 31, 1996.

(4) Incorporated by reference to Milestone's Form 10-KSB for the year ended
December 31, 1999.

(5) Incorporated by reference to Milestone's Registration Statement on Form S-2
No. 333-110376, Amendment No. 1.

(6) Incorporated by reference to Milestone's Registration Statement on Form S-2
No. 333-110376, Amendment No. 3.

(7) Incorporated by reference to Milestone's Form 10-KSB for the year ended
December 31, 2003.

(8) Incorporated by reference to Milestone's Registration Statement on Form S-2
No. 333-110367, Amendment No. 5.

(9) Incorporated by reference to Milestone's Form 10-KSB for the year ended
December 31, 2004.


                                      40
<PAGE>

ITEM 14.          PRINCIPAL ACCOUNTANT FEES AND SERVICES

     Audit Fees

         Audit fees for 2005 by Eisner LLP, Milestone's principal accountant
were approximately $210,000 covering the audit of our annual financial
statements and the review of our financial statements for the first three
quarters in 2005. Such fees for 2004 by Eisner LLP, Milestone's principal
accountant since June 10, 2004 were $148,400, covering the audit of our annual
financial statements for 2004 and review of our financial statements for the
second and third quarters of 2004. The aggregate fees billed by J. H. Cohn LLP,
Milestone's former auditor, for the review of our financial statements for the
first quarter of 2004 was approximately $22,800.


     Audit-Related Fees

         Audit related fees to our principal accountant, consisting of fees in
connection with S-3 filings and related services, totaled $28,500 for 2005 and
$5,850 for 2004. J. H. Cohn LLP billed Milestone $9,664 in connection with the
2005 S-3 filings. J. H. Cohn LLP billed Milestone $117,507 in connection with
the February 2004 offering.


     Tax Fees

         There were no fees for services related to tax compliance, tax advice
and tax planning billed by our principal accountants in 2004 and 2005.

     All Other Fees

         There were no other fees billed during 2005 and 2004 by Milestone's
principal accountant.

     Audit Committee Administration of the Engagement

         The engagement with Eisner LLP, Milestone's principal accountant, was
approved in advance by our Audit Committee. No non-audit or non-audit related
services were approved by the audit committee in 2005.




                                      41
<PAGE>


                                   SIGNATURES

     Pursuant to the requirements of Section 13 or 15(d) 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.

                                     Milestone Scientific Inc.

                                     By: /s/ Leonard Osser
                                     -------------------------------
                                     Chairman and Chief Executive Officer

Date: April 13, 2006

In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the Registrant and in the capacities and on April
13, 2006.


<TABLE>
<CAPTION>
          SIGNATURE                               DATE                                     TITLE

<S>                                               <C>                              <C>
     /s/  Leonard Osser                           April 13, 2006                   Chairman, and Chief Executive Officer
     ------------------------
          Leonard Osser

     /s/  Rosaline Shau                           April 13, 2006                   Vice President and Chief Financial Officer
     ------------------------
          Rosaline Shau

     /s/ Leonard Schiller                         April 13, 2006                   Director
     ------------------------
        Leonard Schiller

     /s/ Jeffrey Fuller                           April 13, 2006                   Director
     ------------------------
        Jeffrey Fuller

     /s/ Leslie Bernhard                          April 13, 2006                   Director
     ------------------------
        Leslie Bernhard
</TABLE>


                                      42




<PAGE>



                          INDEX TO FINANCIAL STATEMENTS


<TABLE>
<CAPTION>

                                                                                                       Page
                                                                                                       ----

<S>                                                                                                      <C>
               Report of Independent Registered Public Accounting Firm..........................       F-2

               Balance Sheet as of December 31, 2005............................................       F-3

               Statements of Operations for the years ended December 31, 2005 and 2004..........       F-4

               Statements of Changes in Stockholders' Equity (Deficiency) for the
                      years ended December 31, 2005 and 2004....................................       F-5

               Statements of Cash Flows for the years ended December 31, 2005 and 2004..........       F-6

               Notes to Financial Statements....................................................       F-8
</TABLE>



                                      F-1
<PAGE>


         REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

         To the Board of Directors and Stockholders
         Milestone Scientific Inc.


         We have audited the accompanying balance sheet of Milestone Scientific
         Inc. as of December 31, 2005, and the related statements of operations,
         changes in stockholders' equity (deficiency) and cash flows for the
         years ended December 31, 2005 and 2004. These financial statements are
         the responsibility of the Company's management. Our responsibility is
         to express an opinion on these financial statements based on our
         audits.

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

         In our opinion, the financial statements referred to above present
         fairly, in all material respects, the financial position of Milestone
         Scientific Inc. as of December 31, 2005, and its results of operations
         and cash flows for the years ended December 31, 2005 and 2004, in
         conformity with United States generally accepted accounting principles.


         /s/Eisner LLP

         New York, NY
         March 23, 2006


                                      F-2
<PAGE>

                            MILESTONE SCIENTIFIC INC.
                                  BALANCE SHEET
                                December 31, 2005



<TABLE>
<CAPTION>
                                                ASSETS
<S>                                                                                         <C>
Current Assets:
Cash and cash equivalents                                                                   $ 2,892,679
Accounts receivable, net of allowance for doubtful accounts of $27,117                          347,065
Royalty receivable                                                                              185,702
Inventories                                                                                   1,371,354
Advances to contract manufacturer                                                             1,019,663
Prepaid expenses                                                                                109,691
                                                                                            -----------
     Total current assets                                                                     5,926,154
Investment in distributor, at cost                                                               76,319
Equipment, net                                                                                  536,295
Patents, net of accumulated amortization of $19,090.                                            486,635
Other assets                                                                                     24,197
                                                                                            -----------
 Total assets                                                                               $ 7,049,600
                                                                                            ===========

                                 LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable                                                                              $ 508,044
Accrued expenses                                                                                223,350
                                                                                            -----------
     Total current liabilities                                                                  731,394
                                                                                            -----------

Commitments (Note O)

Stockholders' Equity:
Preferred stock, par value $.001; authorized 5,000,000 shares
8% cumulative convertible preferred stock, par value $.001; none issued                               -
Common stock, par value $.001; authorized 50,000,000 shares; 11,550,479
   shares issued, 207,726 shares to be issued, and 11,517,146 shares outstanding                 11,758
Additional paid-in capital                                                                   57,172,915
Accumulated deficit                                                                         (49,954,951)
Treasury stock, at cost, 33,333 shares                                                         (911,516)
                                                                                            -----------
     Total stockholders' equity                                                               6,318,206
                                                                                            -----------
 Total liabilities and stockholders' equity                                                 $ 7,049,600
                                                                                            ===========
</TABLE>


 See Notes to Financial Statements


                                      F-3
<PAGE>

                            MILESTONE SCIENTIFIC INC.
                            STATEMENTS OF OPERATIONS
                     YEARS ENDED DECEMBER 31, 2005 AND 2004

<TABLE>
<CAPTION>
                                                                                       2004
                                                                   2005         (consolidated)
                                                            ------------------  ------------------
<S>                                                               <C>                 <C>
 Products sales, net                                              $ 5,775,394         $ 4,751,186
 Royalty income                                                       657,754                   -
                                                            ------------------  ------------------
 Total revenue                                                      6,433,148           4,751,186
                                                            ------------------  ------------------

 Cost of products sold                                              2,521,022           2,415,826
 Royalty expense                                                       78,930                   -
                                                            ------------------  ------------------
 Total cost of revenue                                              2,599,952           2,415,826
                                                            ------------------  ------------------

 Gross profit                                                       3,833,196           2,335,360

 Selling, general and administrative expenses                       6,794,032           5,155,569
 Research and development expenses                                    286,260             187,992
                                                            ------------------  ------------------
 Total operating expenses                                           7,080,292           5,343,561
                                                            ------------------  ------------------

 Loss from operations                                              (3,247,096)         (3,008,201)

   Other income (expense)
   Interest income                                                     92,869              80,867
   Interest expense                                                         -             (69,530)
   Other income                                                       400,000
                                                            ------------------  ------------------
 Other income (expense), net                                          492,869              11,337
                                                            ------------------  ------------------

 Net Loss                                                          (2,754,227)         (2,996,864)

 Dividends applicable to preferred stock                               (1,691)             (2,029)
                                                            ------------------  ------------------
 Net loss applicable to common stockholders                       $(2,755,918)        $(2,998,893)
                                                            ==================  ==================

 Loss per share applicable to common
   stockholders - basic and diluted                                   $ (0.25)              (0.33)
                                                            ==================  ==================

 Weighted average shares outstanding - basic
   and diluted                                                     11,007,755           9,147,634
                                                            ==================  ==================
</TABLE>

 See Notes to Financial Statements


                                      F-4
<PAGE>

                            MILESTONE SCIENTIFIC INC.
            STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIENCY)
                     YEARS ENDED DECEMBER 31, 2005 AND 2004

<TABLE>
<CAPTION>

                                                         Preferred Stock                 Common Stock
                                                   ---------------------------  -------------------------------
                                                      Shares        Amount           Shares          Amount
                                                   ------------  -------------  ----------------  -------------

<S>                                                     <C>              <C>          <C>              <C>
Balance, January 1, 2004                                25,365           $ 25         6,146,011        $ 6,146
Proceeds from equity financing, net                                                   2,880,000          2,880
Common stock and warrants issued
for payment of:
Outstanding debt and related interest                                                   492,087            492
Accounts payable                                                                         77,610             77
Deferred compensation                                                                   117,791            118
Common stock issued for payment of outstanding
   debt and related interest                                                             58,200             58
Common stock issued for equipment purchase                                               36,331             37
Common stock issued for payment of
 services rendered                                                                       10,197             10
Common stock issued for payment of
bonus and commissions                                                                     6,060              6
Issuance of options for consulting services
Net loss
                                                   ------------  -------------  ----------------  -------------
Balance, December 31, 2004                              25,365             25         9,824,287          9,824
Common stock and options issued
   for payments of patent rights acquired                                                43,424             44
Common stock issued for payment of
   vendor services                                                                      156,098            156
Common stock and options issued for
   payment of consulting services                                                       139,362            140
Common stock issued for payment of
employee compensation                                                                    23,461             23
Common stock issued for exercised options                                                   333              0
Common shares to be issued in
settlement of deferred compensation                                                     207,726            208
Proceeds from equity financings, net                                                  1,356,440          1,356
Conversion of preferred stock                          (25,365)           (25)            4,391              4
Stock dividends applied to preferred stock                                                2,683              3
Net loss
                                                   ---------------------------  -------------------------------
Balance, December 31, 2005                                   -            $ -        11,758,205       $ 11,758
                                                   ===========================  ===============================

<CAPTION>

                                                       Additional
                                                        Paid-in            Accumulated          Treasury
                                                        Capital              Deficit             Stock              Total
                                                   ------------------  ------------------- ------------------  ----------------

<S>                                                     <C>                 <C>                   <C>             <C>
Balance, January 1, 2004                                $ 42,660,349        $ (44,199,675)        $ (911,516)     $ (2,444,671)
Proceeds from equity financing, net                        7,617,224                                                 7,620,104
Common stock and warrants issued
 for payment of:
  Outstanding debt and related interest                    1,603,712                                                 1,604,204
  Accounts payable                                           199,923                                                   200,000
  Deferred compensation                                      383,882                                                   384,000
Common stock issued for payment of outstanding
  debt and related interest                                   54,417                                                    54,475
Common stock issued for equipment purchase                    70,374                                                    70,411
Common stock issued for payment of
 services rendered                                            17,490                                                    17,500
Common stock issued for payment of
 bonus and commissions                                         9,994                                                    10,000
Issuance of options for consulting services                    1,548                                                     1,548
Net loss                                                                       (2,996,864)                          (2,996,864)
                                                   ------------------  ------------------- ------------------  ----------------
Balance, December 31, 2004                                52,618,913          (47,196,539)          (911,516)        4,520,707
Common stock and options issued
  for payments of patent rights acquired                      98,122                                                    98,166
Common stock issued for payment of
  vendor services                                            306,219                                                   306,375
Common stock and options issued for
  payment of consulting services                             348,583                                                   348,723
Common stock issued for payment of
employee compensation                                         44,977                                                    45,000
Common stock issued for exercised options                        749                                                       749
Common shares to be issued in
 settlement of deferred compensation                         299,792                                                   300,000
Proceeds from equity financings, net                       3,451,357                                                 3,452,713
 Conversion of preferred stock                                    21                                                         -
Stock dividends applied to preferred stock                     4,182               (4,185)                                   -
Net loss                                                                       (2,754,227)                          (2,754,227)
                                                   ------------------  ------------------- ------------------  ----------------
Balance, December 31, 2005                              $ 57,172,915        $ (49,954,951)        $ (911,516)      $ 6,318,206
                                                   ==================  =================== ==================  ================
</TABLE>



                                      F-5
<PAGE>

                            MILESTONE SCIENTIFIC INC.
                            STATEMENTS OF CASH FLOWS
                     YEARS ENDED DECEMBER 31, 2005 AND 2004


<TABLE>
<CAPTION>
                                                                                         2005                    2004
                                                                                  -------------------     -------------------
                                                                                                             (consolidated)
<S>                                                                                     <C>                     <C>
 Cash flows from operating activities:
 Net loss                                                                              $ (2,754,227)           $ (2,996,864)
 Adjustments to reconcile net loss to net cash used in operating activities:
  Depreciation                                                                                99,060                  50,920
  Amortization of debt discount and deferred financing costs                                       -                  51,003
  Amortization of patents                                                                     19,090                       -
  Common stock and options issued for compensation and consulting services                   700,098                  29,048
  Stock issued for interest on notes payable                                                       -                   2,700
  Bad debt expense                                                                            33,111                   1,593
  Deferred compensation                                                                      150,000                (106,000)
  Changes in operating assets and liabilities:
   Decrease (increase) in accounts receivable                                                 41,163                 (34,032)
   (Increase) in royalty receivable                                                         (185,702)                      -
   (Increase) in inventories                                                                (435,133)               (509,510)
   (Increase) decrease in advances to contract manufacturer                                 (957,629)                166,463
   (Increase) decrease in prepaid expenses                                                    (5,129)                 12,622
   (Increase) decrease in other assets                                                        (3,789)                  6,933
   Increase (decrease) in accounts payable                                                    33,969              (1,015,516)
   (Decrease) in accrued interest                                                                  -                 (83,532)
   (Decrease) increase in accrued expenses                                                    (1,199)                139,303
                                                                                  ------------------     -------------------
      Net cash used in operating activities                                               (3,266,317)             (4,284,869)
                                                                                  ------------------     -------------------

  Cash flows from investing activities:
  Payment for capital expenditures                                                           (23,092)               (350,529)
  Payment for patent rights                                                                 (306,317)                (75,536)
  Payment for investment in distributor                                                       (6,363)                (69,956)
                                                                                  -------------------     -------------------
      Net cash used in investing activities:                                                (335,772)               (496,021)
                                                                                  -------------------     -------------------

 Cash flows from financing activities:
  Proceeds from equity financings, net                                                     3,452,713               7,868,919
  Proceeds from exercise of options                                                              749
  Payment of note payable - officer/stockholder                                                    -                 (50,000)
                                                                                  -------------------     -------------------
      Net cash provided by financing activities                                            3,453,462               7,818,919
                                                                                  -------------------     -------------------

 NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS                                       (148,627)              3,038,029
 Cash and cash equivalents, beginning of year                                              3,041,306                   3,277
                                                                                  -------------------     -------------------
 Cash and cash equivalents, end of year                                                $   2,892,679           $   3,041,306
                                                                                  ===================     ===================

 Supplemental disclosure of cash flow information:
    Cash paid during the period for interest                                           $           -           $      99,359
                                                                                  ===================     ===================
</TABLE>

 See Notes to Financial Statements



                                      F-6
<PAGE>

                            MILESTONE SCIENTIFIC INC

                      STATEMENTS OF CASH FLOWS (CONTINUED)


         Supplemental schedule of noncash investing and financing activities:

                  In the first quarter of 2005, Milestone issued 43,424 shares
         valued at $70,000 to the Company's outside director of clinical
         affairs, pursuant to a technology agreement to provide Milestone with
         patent rights. In the second and fourth quarters of 2005, Milestone
         issued 16,666 options valued at $28,166 to the Company's outside
         director of clinical affairs in consideration of newly granted patent
         rights.

                  In February 2004 Milestone issued 335,614 units in
         consideration for notes payable and accrued interest due to an officer
         and a shareholder of $1,604,204, accounts payable due to outside legal
         counsel of $200,000 and deferred compensation to an officer of
         $384,000. Each unit consisted of 2 shares of Milestone's common stock
         (671,228 shares of common stock) and a warrant.

                  As part of its payment for services in connection with the
         February 2004 public offering, Milestone issued to its outside general
         counsel 5-year options to purchase 160,000 common shares at an
         exercise price of $3.26 per share and warrants to purchase 80,000
         common shares of stock at an exercise price of $4.89 per share.

                  In September 2004, Milestone issued 36,331 shares of common
         stock valued at $70,411 for the purchase of equipment.

                  In October 2004 in satisfaction of a $50,000 promissory note
         and accrued interest of $4,475, Milestone issued 58,200 shares of
         common stock.

                  In November 2004 we incurred a liability of $25,706 in
         connection with the acquisition of the minority interest in Spintech, a
         subsidiary of the Company.



         See notes to financial statements


                                      F-7
<PAGE>


                            MILESTONE SCIENTIFIC INC.

                          NOTES TO FINANCIAL STATEMENTS


         NOTE A -- ORGANIZATION AND BUSINESS

         Milestone Scientific Inc. ("Milestone") was incorporated in the State
         of Delaware in August 1989. Milestone has developed a proprietary,
         computer-controlled anesthetic delivery system, through the use of The
         Wand, a single use disposable handpiece. The system is marketed in
         dentistry under the trademark CompuDent and Wand Plus and in medicine
         under the trademark CompuMed. CompuDent is suitable for all dental
         procedures that require local anesthetic. CompuMed and Wand Plus are
         suitable for many medical procedures regularly performed in Plastic
         Surgery, Hair Restoration Surgery, Podiatry, Colorectal Surgery,
         Dermatology, Orthopedics and a number of other disciplines. The systems
         are sold in the United States and in over 25 countries abroad.
         Milestone's products are manufactured by a third-party contract
         manufacturer.

         Milestone effected a 1-for-3 reverse stock split in its common stock,
         effective January 14, 2004, pursuant to previously obtained stockholder
         approval authorizing the board of directors to effect a reverse stock
         split in a ratio of up to 1-for-10. All share and per share information
         in these financial statements has been restated retroactively to
         reflect the 1 for 3 reverse split.


         NOTE B -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

         1.  Basis of Presentation

         The financial statements include the accounts of Milestone, and for
         2004 also includes its subsidiary, Spintech, and two inactive
         subsidiaries prior to the date of merger on December 10, 2004. On
         December 7, 2004 Milestone purchased the 35% minority interest in
         Spintech, and on December 10, 2004 the three subsidiaries were merged
         into the Company. All significant intercompany balances and
         transactions have been eliminated in consolidation. The cost of the
         minority interest in Spintech of $101,242 has been allocated to patents
         which are being amortized over their remaining useful lives.

         2.  Cash and Cash Equivalents

         Milestone considers all highly liquid investments purchased with a
         maturity of three months or less to be cash equivalents.

         3.  Royalty Receivable

         Royalty receivable represents the royalty due from United Systems, Inc,
         the licensee of Milestone's proprietary consumer dental whitening
         product, which is sold under Milestone's distributor's trademark of
         Ionic White(TM). The royalties are received on a quarterly basis.

         4.  Inventories

         Inventories principally consist of finished goods and component parts
         stated at the lower of cost (first-in, first-out method) or market.

         5.  Equipment

         Equipment is recorded at cost, less accumulated depreciation.
         Depreciation expense is computed using the straight-line method over
         the estimated useful lives of the assets, which range from 5 to 7
         years. The costs of maintenance and repairs are charged to operations
         as incurred.

         6.  Investments

         Investments in less than 20% owned entities are accounted for under the
         cost basis and are reviewed for impairment periodically.

                                      F-8
<PAGE>

                            MILESTONE SCIENTIFIC INC.

                          NOTES TO FINANCIAL STATEMENTS


         7.  Patents

         Patents are recorded at cost and are being amortized by the
         straight-line method over their estimated remaining useful lives. Legal
         fees related to new patent applications are capitalized as patent cost.
         Litigation costs incurred to protect and enforce the company's patents
         are charged to expense as incurred.

         8. Impairment of Long-Lived Assets

         Milestone reviews patents and equipment for impairment whenever events
         or circumstances indicate that the carrying amounts may not be
         recoverable.

         9.  Revenue Recognition

         Revenue from product sales is recognized net of discounts and
         allowances when title passes at the time of shipment, collectibility is
         reasonably assured and the Company has no further performance
         obligations.

         Royalty income is recognized as earned based on reports received from
         the licensee and related royalty expense is accrued during the same
         period.

         10.  Research and Development

         Research and development costs, which consist principally of new
         product development costs incurred to third parties, are expensed as
         incurred.

         11.  Advertising Expenses

         Milestone expenses advertising costs as they are incurred. For the
         years ended December 31, 2005 and 2004, Milestone recorded advertising
         expenses of $329,930 and $107,000, respectively.

         12.  Income Taxes

         Milestone accounts for income taxes pursuant to the asset and liability
         method which requires deferred income tax assets and liabilities to be
         computed for temporary differences between the financial statement and
         tax bases of assets and liabilities that will result in taxable or
         deductible amounts in the future based on enacted tax laws and rates
         applicable to the periods in which the differences are expected to
         affect taxable income. Valuation allowances are established when
         necessary to reduce deferred tax assets to the amount expected to be
         realized. The income tax provision or credit is the tax payable or
         refundable for the period plus or minus the change during the period in
         deferred tax assets and liabilities.

         13. Basic and diluted net loss per common share

         Milestone presents "basic" earnings (loss) per common share applicable
         to common stockholders and, if applicable, "diluted" earnings (loss)
         per common share applicable to common stockholders pursuant to the
         provisions of Statement of Financial Accounting Standards No. 128,
         "Earnings per Share" ("SFAS 128"). Basic earnings (loss) per common
         share is calculated by dividing net income or loss applicable to common
         stockholders by the weighted average number of common shares
         outstanding and to be issued during each period. The calculation of
         diluted earnings per common share is similar to that of basic earnings
         per common share, except that the denominator is increased to include
         the number of additional common shares that would have been outstanding
         if all potentially dilutive common shares, such as those issuable upon
         the exercise of stock options, warrants, and the conversion of
         preferred stock were issued during the period.

         Since Milestone had net losses for 2005 and 2004, the assumed effects
         of the exercise of outstanding stock options and warrants and the
         conversion of preferred stock into common stock were not included in
         the calculation as their effect would have been anti-dilutive. Such
         outstanding options and warrants totaled 3,687,085 at December 31, 2005
         and 3,229,407 at December 31, 2004.

                                      F-9
<PAGE>

                            MILESTONE SCIENTIFIC INC.

                          NOTES TO FINANCIAL STATEMENTS

         Net loss applicable to common stockholders is computed after providing
         for cumulative dividends at a rate of 8% per year applicable to
         preferred stock prior to conversion into common stock in November 2005.

         14.  Use of Estimates

         The preparation of financial statements in conformity with accounting
         principles generally accepted in the United States of America requires
         management to make estimates and assumptions in determining the
         reported amounts of assets and liabilities and disclosure of contingent
         assets and liabilities at the date of the financial statements and
         reported amounts of revenues and expenses during the reporting period.
         The most significant estimates relate to the allowance for doubtful
         accounts, inventory valuation, cash flow assumptions regarding
         evaluations for impairment of long-lived assets and valuation
         allowances on deferred tax assets. Actual results could differ from
         those estimates.

         15.  Fair Value of Financial Instruments

         The carrying amounts reported in the consolidated balance sheet for
         cash, accounts receivable, advances to contract manufacturer, accounts
         payable and accrued expenses approximate fair value based on the
         short-term maturity of these instruments.

         16  Accounting for Stock-Based Compensation

         Statement of Financial Accounting Standards No. 123, "Accounting for
         Stock-Based Compensation" ("SFAS 123"), provides for the use of a fair
         value based method of accounting for employee stock compensation.
         However, SFAS 123 also allows an entity to continue to measure
         compensation cost for stock options granted to employees using the
         intrinsic value method of accounting prescribed by Accounting
         Principles Board Opinion No. 25. "Accounting for Stock Issued to
         Employees" ("APB 25"), which only requires charges to compensation
         expenses for the excess, if any, of the fair value of the underlying
         stock at the date a stock option is granted (or at the appropriate
         subsequent measurement date) over the amount the employee must pay to
         acquire the stock. Milestone has elected to continue to account for
         employee stock options using the intrinsic value method under APB 25.
         By making that election, it is required by SFAS 123 and SFAS 148,
         "Accounting for Stock-Based Compensation - Transition and Disclosure"
         ("SFAS 148"), to provide pro forma disclosures of net loss and loss per
         common share as if a fair value based method of accounting had been
         applied.

         If Milestone had elected to recognize compensation expense based upon
         the fair value at the grant date, consistent with the methodology
         prescribed by SFAS No. 123, pro forma net loss applicable to common
         stockholders and net loss per share applicable to common stockholders
         for the years ended December 31, 2005 and 2004 would have increased to
         the following pro forma amounts:

<TABLE>
<CAPTION>
                                                                                      December 31,
                                                                           -----------------------------------
                                                                                 2005              2004
                                                                           ----------------  -----------------

<S>                                                                            <C>                <C>
 Net loss applicable to common stockholders                                    $(2,755,918)       $(2,998,893)
 Deduct total stock-based employee compensation
   expenses determined under the fair value
   based method for all awards*                                                    469,362             27,660
                                                                           ----------------  -----------------

 Net loss applicable to common stockholders, pro forma                         $(3,225,280)       $(3,026,553)
                                                                           ================  =================

 Loss per share applicable to common stockholders:
 Basic and diluted
   As reported                                                                      ($0.25)            ($0.33)
                                                                           ================  =================
   Pro forma                                                                        ($0.29)            ($0.33)
                                                                           ================  =================
</TABLE>

 * Excludes common stock issued as compensation.

                                     F-10
<PAGE>

                            MILESTONE SCIENTIFIC INC.

                          NOTES TO FINANCIAL STATEMENTS


         The weighted-average fair value of the individual options granted
         during 2005 and 2004 was estimated as $1.52 and $1.32, respectively, on
         the date of grant. The fair value for 2005 and 2004 was determined
         using the Black-Scholes option-pricing model with the following
         weighted average assumptions:

<TABLE>
<CAPTION>
                                                     DECEMBER 31,
                                                     ------------
                                                 2005             2004
                                                -------          -------
<S>                                              <C>             <C>
         Volatility                                127%            109%
         Risk-free interest rate                   4.0%            3.7%
         Expected life                           5 years          5 years
         Dividend yield                              0%              0%
</TABLE>


         In accordance with the provisions of SFAS 123, all other issuances of
         common stock, stock options or other equity instruments to
         non-employees as consideration for goods or services received by
         Milestone are accounted for based on the fair value of the equity
         instruments issued (unless the fair value of the consideration received
         can be more reliably measured). The fair value of any options or
         similar equity instruments issued are estimated based on the
         Black-Scholes option-pricing model, which meets the criteria set forth
         in SFAS 123, and the assumption that all of the options or other equity
         instruments will ultimately vest. Such fair value is measured as of an
         appropriate date pursuant to the guidance in the consensus of the
         Emerging Issues Task Force ("EITF") for EITF Issue No. 96-18
         (generally, the earlier of the date the other party becomes committed
         to provide goods or services or the date performance by the other party
         is complete) and capitalized or expensed as if Milestone had paid cash
         for the goods or services.

         In December 2004, the Financial Accounting Standards Board issued SFAS
         No. 123R, "Share-Based Payment", which requires all share-based
         payments to employees, including grants of employee stock options
         ("SFAS 123R"), to be recognized in the income statements as an
         operating expense, based on their fair values. Pro-forma disclosure is
         no longer an alternative. The cost will be recognized as compensation
         expense over the service period, which would normally be the vesting
         period of the options. SFAS No. 123R will be effective for the Company
         beginning January 1, 2006. As a result of adopting SFAS 123R, the
         Company will recognize as compensation expense in its financial
         statements the unvested portion of existing options granted prior to
         the effective date and the cost of stock options granted to employees
         after the effective date based on the fair value of the stock options
         at grant date. Accordingly, the adoption of SFAS 123R's fair value
         method could have a significant impact on the Company's results of
         operations, although it will have no impact on the company's overall
         financial position. The impact of adoption of SFAS 123R cannot be
         predicted at this time because it will depend on levels of share-based
         payments granted in the future.

         17.  Concentration of Credit Risk

         Milestone's financial instruments that are exposed to concentrations of
         credit risk consist primarily of cash and trade accounts receivable.
         Milestone places its cash with high quality credit institutions. At
         times, such investments may be in excess of the Federal Deposit
         Insurance Corporation insurance limit. Milestone has not experienced
         any losses in such accounts and believes it is not exposed to any
         significant credit risks. Financial instruments which potentially
         subject Milestone to credit risk consist principally of trade accounts
         receivable, as Milestone does not require collateral or other security
         to support customer receivables.

         Milestone closely monitors the extension of credit to its customers
         while maintaining allowances, if necessary, for potential credit
         losses. On a periodic basis, Milestone evaluates its accounts
         receivable and establishes an allowance for doubtful accounts, based on
         a history of past write-offs and collections and current credit
         conditions. Management does not believe that significant credit risk
         exists with respect to accounts receivable at December 31, 2005.


                                     F-11
<PAGE>
                            MILESTONE SCIENTIFIC INC.

                          NOTES TO FINANCIAL STATEMENTS


         Milestone entered into a purchase agreement with a vendor to supply
         Milestone with 5,000 units of CompuDent. As part of this agreement,
         Milestone has advanced $1 million to the vendor for purchase of
         materials. The advance will be credited to Milestone when the goods are
         delivered. Milestone understands that there is a potential risk for
         loss in this arrangement. However, based on the long-term business
         relationship with this vendor and the strong financial standing of this
         vendor, Milestone does not believe that significant credit risk exits
         with respect to this advance to the contract manufacturer at December
         31, 2005.


         NOTE C -- INVENTORIES

         Inventories consist of the following:

<TABLE>
<S>                                                              <C>
                  Finished goods                                 $ 1,190,127
                  Component parts and other materials            $   181,227
                                                                 -----------
                                                                 $ 1,371,354
                                                                 ===========
</TABLE>

         NOTE D -- ADVANCES TO CONTRACT MANUFACTURER

         Advances to contract manufacturer represent deposits to our contract
         manufacturer to fund future inventory purchases. The balance of
         advances as of December 31, 2005 totaled $1,019,663.

         NOTE E --EQUIPMENT

         Equipment consists of the following:

<TABLE>
<S>                                                                  <C>
              Leasehold improvements                                 $ 6,913
              Artwork                                                 85,550
              Office furniture and equipment                         101,617
              Trade show displays                                     51,575
              Computers and software                                 224,990
              Tooling equipment                                      372,650
                                                                 -----------
                 Total                                               843,295
              Less accumulated depreciation & amortization          (307,000)
                                                                 -----------
                                                                   $ 536,295
                                                                 ===========
</TABLE>

         Depreciation expense was $99,060 and $50,920 for the years ended
         December 31, 2005 and 2004, respectively.

         NOTE F - PATENTS

         Patents are being amortized by the straight-line method over estimated
         useful lives ranging from 10 to 20 years, with a weighted average
         amortization period of 16 years. Amortization expense amounted to
         $19,090 in 2005 and $0 in 2004. Estimated amortization expense of
         existing patents for each of the next five fiscal years follows:

                    2006                      $22,848
                    2007                      $22,848
                    2008                      $22,848
                    2009                      $22,848
                    2010                      $22,848


                                     F-12
<PAGE>

                            MILESTONE SCIENTIFIC INC.

                          NOTES TO FINANCIAL STATEMENTS


         NOTE G -- INVESTMENT IN DISTRIBUTOR

         In December 2004 the Company purchased a 19.9% equity interest in a
         German distribution company which is an affiliate of the Company's
         principal international distributor.

         NOTE H -- NOTES PAYABLE TO OFFICER/STOCKHOLDER

         Notes payable to officer/stockholder of $358,215 and accrued interest
         thereon of $77,770 representing obligations payable to our CEO, were
         satisfied through the issuance of 62,098 units at $6.52 per unit and
         cash payment of $31,107 in February 2004. Interest expense on these
         notes amounted to $3,360 for the year ended December 31, 2004.

         NOTE I -- NOTES PAYABLE

         In February 2004 Milestone issued 183,946 units at $6.52 per unit and
         paid cash of $66,219 to satisfy $1,100,000 8% promissory notes payable
         and line of credit borrowings and accrued interest thereon of $165,545.
         A $50,000 promissory note and accrued interest thereon of $2,033 was
         paid in May 2004. In November 2004 Milestone issued 58,200 shares of
         common stock to satisfy a $50,000 promissory note and accrued interest
         thereon of $4,475.

         NOTE  J - STOCKHOLDER'S EQUITY

              PUBLIC OFFERING

         On February 17, 2004, Milestone completed a $9.4 million Public
         Offering ($7.6 million after underwriter discount, underwriter non
         accountable expense allowance and other expenses). The Public Offering
         consisted of the sale of 1,440,000 units at a price of $6.52 per unit.
         Each unit consisted of two shares of common stock and one warrant. The
         warrants included in the units are exercisable at any time after they
         became separately tradable until their expiration date, five years
         after the date of the closing of the Public Offering, at an exercise
         price equal to $4.89 (150% of the closing market price of Milestone's
         common stock on the pricing date of the Offering). Some or all of the
         warrants may be redeemed by Milestone at a price of $0.01 per warrant,
         by giving not less than 30 days notice to the holders of the warrants,
         which the Company may do at any time, beginning 6 months from the
         effective date of the offering after the closing price for the
         Company's common stock on the principal exchange on which it trades
         (i.e. AMEX) has equaled or exceeded 200% of the price of the Company's
         common stock on the effective date of the offering. The common stock
         included in the units and the warrants traded only as a unit for 30
         days following the closing date of the Public Offering. As part of its
         payment for services in connection with the February 2004 public
         offering, Milestone issued to its outside general counsel 5-year
         options to purchase 160,000 common shares at an exercise price of $3.26
         per share and warrants to purchase 80,000 common shares of stock at an
         exercise price of $4.89 per share.

         Net proceeds of the Public Offering were used to pay down promissory
         notes, credit facilities, interest and deferred compensation. The
         Company is using the remainder of the proceeds primarily to expand and
         support sales and marketing efforts for CompuDent in the United States,
         , support the launch of the recently announced SafetyWand and CoolBlue
         Tooth Whitening product lines, including new marketing and advertising
         campaigns, expand international sales efforts and develop commercial
         models of products using other advanced injection technology, including
         the Single Tooth Anesthetic Delivery System (STA) and CompuFlo.

         PRIVATE PLACEMENTS

         On April, 4, 2005, Milestone completed a $2,999,996 private placement
         of 101,044 Units to accredited investors. Each Unit consists of 10
         shares of common stock and two warrants. Each warrant entitles the
         holder to purchase a share of common stock at $4.89 per share through
         the close of business on February 16, 2009. I-Bankers Securities, Inc.
         acted as placement agent for Milestone in this transaction and received
         a fee of $209,978 and 101,044 warrants identical in terms to those
         issued to the investors. Net proceeds from the private placement, after
         commissions and other offering expenses, were $2,655,659.

                                     F-13
<PAGE>

                            MILESTONE SCIENTIFIC INC.

                          NOTES TO FINANCIAL STATEMENTS


         On June 30, 2005, Milestone completed an $847,960 private placement of
         34,000 Units to accredited investors. Each Unit consists of 10 shares
         of common stock and two warrants. Each warrant entitles the holder to
         purchase a share of common stock at $4.89 per share through the close
         of business on February 16, 2009. Proceeds from this private placement
         were recorded net of a fee of $50,878 and 600 identical units to the
         investment advisor. Dynamic Decisions acted as investment advisor to
         Milestone in this transaction and received a fee of $50,878 and 600
         Units, which are substantially the same form as those issued to the
         investors. Net proceeds from this private placement, after commissions
         and other offering expenses, were $797,054.

              OTHER ISSUANCES OF COMMON STOCK

         In January 2005, Milestone issued 43,424 shares valued at $70,000 to
         the Company's outside director of clinical affairs pursuant to a
         technology agreement to provide Milestone with patent rights.

         In 2005, Milestone issued 139,362 shares valued at $372,000 to seven
         consultants for current and future services, of which $238,166 was
         recorded as expense in 2005. Milestone also issued options to various
         consultants and its outside general counsel for which it recorded
         expense of $110,557 in 2005.

         In 2005, Milestone issued 13,496 shares, of which 6,061 shares was
         bonus and 7,435 shares as part of annual compensation, valued at
         $30,000 (of which $21,668 was expensed in 2005) to two employees. We
         also issued 9,965 shares valued at $23,333 to a former employee as part
         of a severance agreement.

         In 2005, Milestone issued 156,098 shares to two vendors in satisfaction
         of $306,375 payables owed in connection with warehousing and
         fulfillment services and exhibition facilities.

         In June 2004, we issued 1,106 shares of common stock having a fair
         value of $2,500 in partial payment of services to be provided under 1
         year public relations consulting agreement which amount was charged to
         expense in 2004.

         In August 2004, we issued 36,331 shares of common stock having a fair
         value of $70,411 in payment of trade accounts payable related to the
         purchase of fixed assets valued at $70,411

         In November 2004, Milestone satisfied the $50,000 promissory note and
         accrued interest at 6% of $4,475 by issuing 58,200 shares of common
         stock.

         In December 2004, we issued 6,060 shares having a fair value of $10,000
         to two employees and 9,091 shares to a distributor having a fair value
         of $15,000.


         PREFERRED STOCK

         The 25,365 shares of 8% convertible preferred stock outstanding at
         December 31, 2004 were converted to 4,391 shares of common stock on
         November 1, 2005 based on a conversion factor of 1:0.1731.

         On November 1, 2005, the Company issued 2,683 common shares in
         satisfaction of cumulative dividends totaling $4,185 applicable to the
         8% convertible preferred stock.


         OUTSTANDING WARRANTS

         At December 31, 2005 there were 2,659,787 warrants exercisable at
         prices ranging from $3.75 to $6.00 per share expiring at various dates
         between January 29, 2006 through April 17, 2009.

         In March 2005, as part of the March 2005 private placement, Milestone
         issued 303,132 warrants exercisable at $4.89 through 2009, of which
         202,088 were issued to investors and 101,044 were issued to
         consultants.

                                     F-14
<PAGE>

                            MILESTONE SCIENTIFIC INC.

                          NOTES TO FINANCIAL STATEMENTS


         In June 2005, as part of the private placement, Milestone issued 69,200
         warrants exercisable at $4.89 through 2009, of which 68,000 were issued
         to investors and 1,200 to consultants.

         In February 2004, Milestone issued 1,775,614 warrants, exercisable at
         $4.89 through 2009 including 1,440,000 warrants issued as part of the
         public offering, 304,939 warrants issued to an officer and a
         shareholder in satisfaction of notes payable, accrued interest and
         deferred compensation and 30,675 warrants issued to outside general
         counsel in satisfaction of accounts payable.

         In April 2004, Milestone issued 80,000 warrants exercisable at $4.89
         through 2009 to outside general counsel in consideration for services
         rendered in connection with the public offering.


         SHARES RESERVED FOR FUTURE ISSUANCE

         At December 31, 2005 there were 4,255,643 shares reserved for future
         issuance including 813,999 shares underlying stock options available
         under the Plans, 3,233,918 shares underlying other stock options and
         warrants that were outstanding at December 31, 2005 and 207,726 shares
         to be issued in settlement of deferred compensation.


         AGREEMENTS TO ISSUE COMMON STOCK AND STOCK OPTIONS

         On March 18, 2005, Milestone issued to Ionic White, Inc., its marketing
         partner for a consumer tooth whitening product, 3-year options to
         purchase 100,000 shares of Milestone common stock at $4.89 per share.
         The options are not exercisable unless the marketing partner purchases
         at least 2,000,000 starter kits for the registrant's consumer tooth
         whitening system during the twelve month period beginning July 1, 2005.
         If 2,000,000 starter kits are purchased during that period, options to
         purchase 10,000 shares become exercisable. If 2,500,000 starter kits
         are purchased during that period, options to purchase an aggregate of
         50,000 shares become exercisable. If 3,000,000 starter kits are
         purchased during that period, options to purchase all 100,000 shares
         become exercisable. Upon the options becoming exercisable, Milestone
         will recognize sales discounts based on the then fair value of the
         options.

         Under a previous agreement, Ionic White, Inc., agreed to purchase at
         $3.00 per share 500,000 shares of Milestone common stock in quarterly
         installments of 125,000 shares within 10 days after the end of each of
         the four fiscal quarters commencing July 1, 2005. Milestone is not
         required to sell these shares unless Ionic White has purchased at least
         625,000 starter kits in the first quarter, at least 1,250,000 starter
         kits in the first two quarters and at least 1,875,000 starter kits in
         the first three quarters. Further, at Milestone's option, all shares
         previously purchased must be returned to Milestone and all monies paid
         to Milestone returned to Ionic White if it has not purchased an
         aggregate of at least 3,000,000 starter kits for the twelve-month
         period ending June 30, 2006.

         On September 30, 2005, this agreement was amended to defer for an
         additional quarter the commencement date for Ionic White's commitment
         to purchase stock. On December 21, 2005, the commencement date for
         stock purchase was further deferred until January 1, 2006. At December
         31, 2005, no shares have been purchased.

         On August 12, 2005 Milestone engaged a special marketing and sales
         consultant to aid in the international sale and distribution of
         CoolBlue(TM) Wand dental enhancement system, particularly in its
         applications for professional tooth whitening. As part of the
         compensation for a two-year consulting service, Milestone issued 40,000
         shares of common stock valued at $100,000 to the consultant.

         In addition, if as a result of the consultant's efforts, Milestone is
         able to establish distribution relationships, on terms and conditions
         satisfactory to Milestone, with one of the four top world-wide
         distributors of dental products, or other major distributors as are
         acceptable to Milestone, and Milestone sells such distributors
         $3,000,000 of product within 18 months commencing August 12, 2005,
         Milestone will pay the consultant a $20,000 bonus, in shares of
         Milestone common stock, valued based on the then current market value.

                                     F-15
<PAGE>

                            MILESTONE SCIENTIFIC INC.

                          NOTES TO FINANCIAL STATEMENTS


         NOTE K -- STOCK OPTION PLANS

         In 1997, the Board of Directors approved the adoption of the 1997 Stock
         Option Plan. The 1997 Stock Option Plan provides for the grant of
         options to purchase up to 166,667 shares of Milestone's common stock.
         In 1999, the Plan was amended, providing for the grant of options to
         purchase up to 333,333 shares of Milestone's common stock. Options may
         be granted to employees, officers, and directors of Milestone for the
         purchase of common stock of Milestone at a price not less than the fair
         market value of the common stock on the date of the grant. In general,
         options become exercisable over a three-year period from the grant date
         and expire five years after the date of grant.

         In July 2004, the Board of Directors approved the adoption of the 2004
         Stock Option Plan. The 2004 Stock Option Plan provides for the grant of
         options to purchase up to 500,000 shares of Milestone's common stock.
         Options may be granted to employees, officers, directors and
         consultants of Milestone for the purchase of common stock of Milestone
         at a price not less than the fair market value of the common stock on
         the date of the grant. In general, options become exercisable over a
         three-year period from the grant date and expire five years after the
         date of grant. However, options issued in 2005 under the 2004 Option
         Plan are vested immediately.

         Activity for employee stock options during 2005 and 2004 is summarized
below:

<TABLE>
<CAPTION>
                                                          SHARES OF                WEIGHTED
                                                        COMMON STOCK                AVERAGE
                                                        ATTRIBUTABLE               EXERCISE
                                                         TO OPTIONS            PRICE OF OPTIONS
                                                      ------------------       ------------------
<S>                                                             <C>                        <C>
Options outstanding at January 1, 2004                          234,782                    $4.66
Granted                                                          81,333                     3.84
Forfeited                                                       (59,999)                    7.63
                                                      ------------------       ------------------
Options outstanding at December 31, 2004                        256,116                     3.70
                                                      ------------------       ------------------
Granted                                                         272,000                     1.89
Exercised                                                          (333)                    2.25
Forfeited                                                       (74,616)                    3.62
                                                      ------------------       ------------------
Options outstanding at December 31, 2005                        453,167                    $2.63
                                                      ==================       ==================
</TABLE>

         The following table summarizes information concerning outstanding and
         exercisable employee stock options at December 31, 2005. The
         weighted-average exercise price of employee stock options exercisable
         at December 31, 2005 was $2.40.


                                     F-16
<PAGE>

                            MILESTONE SCIENTIFIC INC.

                          NOTES TO FINANCIAL STATEMENTS


<TABLE>
<CAPTION>
                                                Weighted
                                                 Average
                                                Remaining
 Exercise                Number                Contractual               Number
  Prices               Outstanding             Life (years)            Exercisable
------------         ----------------         ---------------         --------------
<S>                        <C>                        <C>                      <C>
      $0.87                   16,667                     2.0                      0
       0.90                    8,333                     2.7                  5,555
       1.25                  112,000                     5.0                112,000
       1.40                   80,000                     4.9                 80,000
       1.50                   26,668                     2.2                 26,668
       1.65                   16,667                     1.0                      0
       2.25                   13,166                     1.0                 13,166
       3.27                   80,000                     4.2                 80,000
       3.60                    8,333                     1.5                  8,333
       4.92                   51,333                     3.4                 17,111
       6.00                   16,667                     0.0                      0
       7.50                   23,333                     0.6                 23,333
                     ----------------                                 --------------
                             453,167                                        366,166
                     ================                                 ==============
</TABLE>


         Activity for stock options issued to consultants during 2005 and 2004
is summarized below:

<TABLE>
<CAPTION>
                                                              SHARES OF                     WEIGHTED
                                                            COMMON STOCK                     AVERAGE
                                                            ATTRIBUTABLE                    EXERCISE
                                                             TO OPTIONS                PRICE OF OPTIONS
                                                          -----------------            ------------------
<S>                                                           <C>                             <C>
Options outstanding at January 1, 2004                             202,496                         $6.59
Granted                                                            260,801                          3.48
                                                          -----------------            ------------------
Options outstanding at December 31, 2004                           463,297                          4.84
                                                          -----------------            ------------------
Granted                                                            199,999                          4.21
Forfeited                                                          (89,165)                         8.12
                                                          -----------------            ------------------
Options outstanding at December 31, 2005                           574,131                         $4.11
                                                          =================            ==================
</TABLE>


         The following table summarizes information concerning outstanding and
         exercisable stock options held by consultants at December 31, 2005. The
         weighted-average exercise price of exercisable stock options held by
         consultants at December 31, 2005 was $4.30.

                                     F-17
<PAGE>

                            MILESTONE SCIENTIFIC INC.

                          NOTES TO FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
                                         Remaining
                                         Contractual
 Exercise              Number                Life                Number
   Price            Outstanding            (Years)            Exercisable
------------       ---------------       -------------        -------------
<S>                     <C>                   <C>                <C>
      $1.50                 8,333                 4.9                8,333
       1.77                16,666                 3.9                5,555
       2.25                40,000                 3.4               13,333
       2.40                 1,133                 3.2                  755
       2.46                 8,333                 4.5                8,333
       3.26               160,000                 3.3               53,333
       3.60                50,000                 6.5               50,000
       3.75                11,666                 1.8               11,666
       4.37                66,667                 7.6                    0
       4.89               100,000                 2.2                    0
       4.92                59,668                 3.4               19,889
       7.50                51,665                 0.6               51,665
                   ---------------                            -------------
                          574,131                                  222,862
                   ===============                            =============
</TABLE>


         NOTE L -- EMPLOYMENT CONTRACT AND DEFERRED COMPENSATION

         On December 20, 2003, Milestone entered into a new employment agreement
         with the CEO for a five-year term commencing January 1, 2004. Under the
         new agreement, the CEO will receive base compensation of $300,000 per
         year, payable one half in cash and one half in common stock valued at
         the average closing price of the common stock during the first 15
         trading days in the month of December during each year of the term.
         While the number of shares to be issued will be determined each year,
         the stock will not be issuable until the end of the term of the
         agreement. In addition, the CEO may earn annual bonuses up to an
         aggregate of $300,000, payable one half in cash and one half in common
         stock, contingent upon Milestone achieving predetermined annual
         operating cash flow, revenue and earning targets as defined in the
         employment agreement. No bonuses were earned in 2004 or 2005.

         In addition, if during any year of the term of the agreement the CEO
         earns a bonus, he shall also be granted 5-year stock options to
         purchase twice the number of shares earned. Each such option is to be
         exercisable at a price per share equal to the fair market value of a
         share on the date of grant (110% of fair market value if the CEO is a
         10% or greater stockholder on the date of grant). The options shall
         vest and become exercisable to the extent of one-third of the shares
         covered at the end of each of the first three years following the date
         of grant, but shall only be exercisable while the CEO is employed by
         Milestone or within 30 days after the termination of his employment.

         In accordance with the employment contract, as of December 31, 2005,
         207,726 shares of common stock are to be paid out at the end of the
         contract in settlement of $300,000 of accrued deferred compensation
         and, accordingly, such amount has been classified in stockholders'
         equity with the common shares classified as to be issued.

         NOTE M -- INCOME TAXES

         The federal income tax benefit computed at the statutory rate (34%) on
         the pre-tax loss amounted to $936,000 in 2005 and $1,019,000 in 2004.
         Such benefit is attributable to net operating loss carryforwards for
         which no benefit was recognized in the accompanying financial
         statements due to the company's history of past operating losses.


                                     F-18
<PAGE>

                            MILESTONE SCIENTIFIC INC.

                          NOTES TO FINANCIAL STATEMENTS


         Deferred tax attributes resulting from differences between financial
         accounting amounts and tax bases of assets and liabilities at December
         31, 2005 and 2004 are as follows:

<TABLE>
<CAPTION>
Current assets                                              2005                  2004
                                                       ------------               ------------
<S>                                                    <C>                        <C>
Allowance for doubtful accounts                        $     11,000               $     10,000
Inventory allowance                                          11,000                     11,000
Deferred compensation                                       120,000                     60,000
                                                       ------------               ------------
Subtotal                                                    142,000                     81,000
Valuation allowance                                        (142,000)                   (81,000)
                                                       ------------               ------------
Current deferred tax asset                             $          -               $          -
                                                       ============               ============

Non-current assets
Net operating loss carryforward                        $ 15,800,000               $ 12,800,000
Valuation allowance                                    $(15,800,000)               (12,800,000)
                                                       ------------               ------------
Non-current deferred tax asset                         $          -               $          -
                                                       ============               ============
</TABLE>

                  The allowance increased by $3,061,000 and $615,000 for the
         years ended December 31, 2005 and 2004, respectively.

         As of December 31, 2005, Milestone has Federal net operating loss
         carryforwards of approximately $39,500,000 that will be available to
         offset future taxable income, if any, through December 2025. The
         utilization of Milestone's net operating losses may be subject to a
         substantial limitation due to the "change of ownership provisions"
         under Section 382 of the Internal Revenue Code and similar state
         provisions. Such limitation may result in the expiration of the net
         operating loss carryforwards before their utilization. Milestone has
         established a 100% valuation allowance for all of its deferred tax
         assets due to uncertainty as to their future realization.

         NOTE N -- PRODUCT SALES AND SIGNIFICANT CUSTOMERS

              Milestone's sales by product and by geographical region are as
follows:

<TABLE>
<CAPTION>
                                                        Year Ended December 31,
                                                     2005                  2004
                                                 -----------           -----------
<S>                                              <C>                   <C>
CompuDent                                        $ 1,869,841           $ 1,496,318
Handpieces                                         3,617,662             3,017,265
Other                                                287,891               237,603
                                                 -----------           -----------
                                                 $ 5,775,394           $ 4,751,186
                                                 ===========           ===========

United States                                    $ 4,323,058           $ 3,378,534
Canada                                               338,255               267,678
Other Foreign Countries                            1,114,081             1,104,974
                                                 -----------           -----------
                                                 $ 5,775,394           $ 4,751,186
                                                 ===========           ===========
</TABLE>

         During the years ended December 31, 2005 and 2004, Milestone had sales
         to one customer (a worldwide distributor of Milestone's products based
         in South Africa) of approximately $893,435 and $1,073,000,
         respectively. This represented 16% and 23% of the total net product
         sales for 2005 and 2004, respectively. Accounts receivable from this
         customer amounted to approximately $219,094 representing 63% of net
         accounts receivable at December 31, 2005.

         During 2005, Milestone earned royalty income of $657,754 from United
         Systems, Inc, the licensee of Milestone's proprietary consumer dental
         whitening product, which is sold under Milestone's distributor's
         trademark, Ionic White.


                                     F-19
<PAGE>

                            MILESTONE SCIENTIFIC INC.

                          NOTES TO FINANCIAL STATEMENTS


         NOTE O -- COMMITMENTS AND OTHER

         (1) Lease Commitments

         Milestone leases office space under a noncancelable operating lease
         with a base rental of $87,808 per annum which was amended in April 2004
         to extend the lease expiration date through June 30, 2009. This lease
         provides for escalations of Milestone's share of utilities and
         operating expenses. Milestone also leases office and telecom equipment
         under operating leases.

              Aggregate minimum rental commitments under noncancelable operating
         leases are as follows:

                    YEAR ENDING DECEMBER 31,
                    ------------------------
         2006                           $   94,480
         2007                               91,768
         2008                               91,768
         2009                               47,204
                                        ----------
                                        $  325,220
                                        ==========

         For the years ended December 31, 2005 and 2004, rent expense amounted
         to approximately $107,404 and $79,000, respectively.


         (2) Contract Manufacturing Agreement

         Milestone has informal arrangements for the manufacture of its
         products. CompuDent and CompuMed units are manufactured for Milestone
         by Tricor Systems, Inc. pursuant to specific purchase orders. The Wand
         disposable handpiece is manufactured for Milestone in Mexico by Nypro
         Precision Assemblies ("NPA"), a subsidiary of Nypro Inc., pursuant to
         scheduled production requirements. The Wand Handpiece with Needle is
         supplied to Milestone by United Systems, which arranges for its
         manufacture by manufacturers in China. Milestone may expand its
         relationship with this supplier to include production of other types of
         handpieces.

         The termination of the manufacturing relationship with any of the above
         manufacturers could have a material adverse effect on Milestone's
         ability to produce and sell its products. Although alternate sources of
         supply exist and new manufacturing relationships could be established,
         Milestone would need to recover its existing tools or have new tools
         produced. Establishment of new manufacturing relationships could
         involve significant expense and delay. Any curtailment or interruption
         of the supply, whether or not as a result of termination of such a
         relationship, would adversely affect Milestone.

         Milestone entered into a purchase agreement with Tricor Systems, Inc.
         to supply Milestone with units of CompuDent and CompuMed. Milestone
         expects to receive units in 2006 with a cost to Milestone of $400,000
         to $600,000, starting from the third quarter of 2006

         (3) Other Commitments

         The technology underlying our SafetyWand, the CompuFlo and an
         improvement to the controls for CompuDent were developed by our
         Director of Clinical Affairs and assigned to us. We purchased this
         technology pursuant to an agreement dated January 1, 2005, for, 43,424
         shares of restricted common stock and $145,000 in cash, payable on
         April 1, 2005. In addition, he will receive additional payments of 2.5%
         of our total sales of products using certain of these technologies, and
         5% of our total sales of products using certain other of the
         technologies. In addition, he is granted, pursuant to the agreement, an
         option to purchase, at fair market value on the date of the grant,
         8,333 shares of our common stock upon the issuance of each additional
         patent relating to these technologies. If products produced by third
         parties use any of these technologies (under license from us) then he
         will receive the corresponding percentage of the consideration received
         by us for such sale or license. In 2005 Milestone paid the Director
         royalty expenses of $49,160 and granted him 16,666 options for new
         patents approved.

                                     F-20
<PAGE>

                            MILESTONE SCIENTIFIC INC.

                          NOTES TO FINANCIAL STATEMENTS


         The technology underlying our CoolBlue Professional Whitening and Ionic
         White Consumer Whitening Products was acquired from DaVinci Systems.
         Under the terms of a licensing agreement with a third party
         manufacturer, we will receive licensing fees resulting from the sales
         of the consumer whitening product. A royalty of 7% of licensing fees
         resulting from the sales of the consumer whitening product will be paid
         to DaVinci Systems. In 2005 Milestone paid royalty expenses of $53,397
         to DaVinci. In addition, Milestone committed to pay royalty of 5% of
         our licensing fees generated from the sale of the consumer whitening
         product to Strider Inc. Royalty paid to Strider was $36,143 for the
         year ended December 31, 2005. Strider assisted in bringing the CoolBlue
         and Ionic White product lines to Milestone.

         (4) Other Income

         Other income in 2005 consists of $400,000 paid to the Company for the
         purchase of certain rights held by the Company.


         NOTE P -- RELATED PARTY TRANSACTIONS

         For the years ended December 31, 2005 and 2004, the Company paid
         $28,830 and $25,773 to the wife of Milestone's CEO, for professional
         services, principally related to income tax compliance.

         In February 2004, Milestone issued 246,044 units in consideration for
         notes payable and accrued interest due to an officer and a shareholder
         of $1,604,204. Each unit consisted of 2 shares of Milestone's common
         stock (492,088 shares of common stock) and a warrant.






                                     F-21