U.S.
        SECURITIES AND EXCHANGE COMMISSION
 Washington,
        D.C. 20549
 
 **FORM
        10-KSB**
 **(Mark
        One)**
 
 **[X]
        ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE**
 **SECURITIES
        EXCHANGE ACT OF 1934**
 
 For
        the
        fiscal year ended December 31, 2005
 Commission
        file number 0-12183
 
 **BOVIE
        MEDICAL CORPORATION**
  (Exact
        name of small business issuer as specified in its charter)
 
 Delaware
                  No.
              
              11-2644611(State
                  or other jurisdiction
              
              (IRS
                  Employer Identification No.)of
                  incorporation or organization)
 
 **734
        Walt Whitman Rd., Melville, New York 11747**
 (Address
        of principal executive offices)
 
 **(631)
        421-5452**
 (Issuer's
        telephone number)
 
 **Securities
        registered under Section 12(b) of the Exchange Act**
 Common
        Stock, $.001 Par Value
 (Title
        of
        class)
 
 **Securities
        registered under Section 12(g) of the Exchange Act**
 None
 
 Indicate
        by check mark whether the registrant (I) filed all reports required to be
        filed
        by Section 13 or 15(d) of the Exchange Act of 1934 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 in response to Item 405 of
        Regulation S-B is not contained in this form, and no disclosure will be
        contained, to the best of registrant’s knowledge, in definitive proxy or
        information statements incorporated by reference in Part III of this Form
        10-KSB
        any amendment to this Form 10-KSB. [ ]
 
 Issuer’s
        revenues for its most recent fiscal year were $20,211,141.
 
 The
        aggregate market value of the voting stock held by non-affiliates computed
        by
        reference to the price at which the stock was sold, or the average bid and
        asked
        prices of such stock, as of March 17, 2006 was approximately
        $37,445,121.
 
 The
        number of shares of the registrant's $.01 par value common stock
        outstanding as of March 17, 2006 was 14,115,068.
 
 Company
        Symbol-BVX Company SIC (Standard Industrial Code)-3841
  
  
 **DOCUMENTS
        INCORPORATED BY REFERENCE**
 There
        are
        no documents incorporated by reference.
 **Bovie
        Medical Corporation**
 **2005
        Form 10-KSB Annual Report**
 
 **Table
        of Contents**
 
 Part
                  IItem
                  1
              Description
                  of BusinessItem
                  2
              Description
                  of PropertyItem
                  3
              Legal
                  ProceedingsItem
                  4.
              Submission
                  of Matters to a Vote of Security
                  HoldersPart
                  IIItem
                  5.
              Markets
                  for Common Equity and Related Stockholders
                  MatterItem
                  6
              Management's
                  Discussion and AnalysisItem
                  7
              Financial
                  Statements (See Financial
                  Section)Item
                  8
              Changes
                  in and Disagreements with Accountants on Accounting
                  and Financial Disclosure.Item
                  8A
              DisclosureControls
                  and ProceduresItem
                  8B
              Other
                  InformationPart
                  IIIItem
                  9
              Directors,
                  Executive Officers, Promoters and Control
                  PersonsItem
                  10
              Executive
                  CompensationItem
                  11
              Section
                  16(a) Beneficial Ownership Reporting ComplianceItem
                  12.
              Certain
                  Relationships and Related TransactionsItem
                  13A
              ExhibitsIndexItem
                  13B
              8K’s
                  Filed in the Fourth QuarterItem
                  14
              Principal
                  Accountant Fees and Services
 
 
 
    **BOVIE
        MEDICAL CORPORATION**
  **Part
        I**
 
 **ITEM
        1. Description of Business**
 
 **Background**
 
 Bovie
        Medical Corporation (“the Company” or “Bovie”) was incorporated in 1982, under
        the laws of the State of Delaware and has its principal executive office
        at 734
        Walt Whitman Road, Melville, New York 11747.
 
 Bovie
        is
        actively engaged in the business of manufacturing and marketing medical products
        and developing related technologies. Aaron Medical Industries, Inc. (“Aaron”), a
        100% owned subsidiary based in St. Petersburg, Florida is engaged in marketing
        our medical products. Over the past several years, we changed our focus to
        the
        manufacture and marketing of generators and electrosurgical disposables,
        evidenced by the development of a broad range of electrosurgical generators
        designed for doctor’s offices, surgicenters and hospitals.
  We
        manufacture and market products both under private label and the Bovie/Aaron
        label to distributors worldwide. Additionally, Bovie/Aaron has original
        equipment manufacturing (OEM) agreements with other medical device
        manufacturers. These OEM and private label arrangements and our use of the
        Bovie/Aaron label allow us to gain greater market share for the distribution
        of
        our products.
 
 **Company
        Products**
 
 **Electrosurgery
        Products**
 
 We
        continue to expand our line of electrosurgery products, which include,
        generators, electrodes, electrosurgery pencils, and various ancillary disposable
        products. These products are used in surgery for the cutting and coagulation
        of
        tissue and constitute our largest product line. Our accessories for
        electrosurgery products are substantially compatible with most major
        manufacturers’ electrosurgery generator products. With the exception of OEM
        products, all of our electrosurgery generators and accessories are marketed
        using the internationally recognized Bovie trademark. It is estimated that
        80%
        of all surgical procedures performed worldwide are accomplished by
        electrosurgery, including laparoscopic, as well as general surgery and surgical
        procedures in gynecology, urology, plastic surgery and dermatology.
 
 **Bovie/Aaron
        800 and 900 High Frequency Generators**
 
 These
        products are low powered generators, designed primarily for dermatology and
        plastic surgery in a physician’s office. The units are 30-watt high frequency
        generators used mainly in doctors’ offices for removing small skin lesions and
        growths.
 
 **Bovie/Aaron
        950**
 
 Bovie
        has
        developed the first high frequency generator with cut capacity for outpatient
        surgical procedures. It was designed mainly for use in doctors’ offices and is
        utilized in a variety of specialties including dermatology, gynecology, and
        plastic surgery.
 
 **Bovie/Aaron
        1250**
 
 We
        have
        also developed a 120-watt multipurpose electrosurgery generator. The unit
        features monopolar and bipolar functions with pad sensing. The product is
        being
        produced in at least two private label formats in addition to the Bovie/Aaron
        label.
   -1-
  **Bovie/Aaron
        2250/IDS 300**
 
 Given
        the
        market interest in more powerful electrosurgical generators, we have developed
        a
        200-watt multipurpose digital electrosurgery generator designed for the rapidly
        expanding surgi-center market in the United States. This unit features both
        monopolar and bipolar functions, has pad and tissue sensing, plus nine blended
        cutting settings. This unit has the capability to do most procedures performed
        today in the surgi-center or outpatient settings and was introduced in 2003.
        The
        Bovie® IDS Series are the latest electrosurgical generators with fully digital
        implementation. Bovie is using dedicated digital hardware instead of a general
        purpose controller for processing data. The digital hardware allows very
        high
        parallel data processing throughout the operation. All data is sampled and
        processed digitally. While 200 watts is more than enough power to do most
        procedures in the operating room, 300 watts is considered the standard and
        believed to be what most hospitals and surgi-centers will require. The Bovie
        IDS-300 has been designed based on a digital feedback system. The unit has
        a
        tissue sensing capability 20 times faster than the market leader. For the
        first
        time in electrosurgery, through digital technology, we are able to measure
        tissue impedance in real time (5000 times a second). As the impedance varies,
        the power is adjusted to deliver a consistent clinical effect.
 
 **Battery
        Operated Cauteries**
 
 Battery
        operated cauteries constitute our second largest product line. Cauteries
        were
        originally designed for precise hemostasis (to stop bleeding) in ophthalmology.
        The current use of cauteries has been substantially expanded to include
        sculpting woven grafts in bypass surgery, vasectomies, evacuation of subungual
        hematoma (smashed fingernail) and for arresting bleeding in many types of
        surgery. Battery operated cauteries are primarily sterile one-time use products.
        Bovie manufactures the broadest line of cauteries in the world, including
        but
        not limited to, a line of replaceable battery and tip cauteries, which are
        popular in overseas markets.
 
 **Battery
        Operated Medical Lights**
 
 We
        manufacture a variety of specialty lighting instruments for use in ophthalmology
        as well as patented specialty lighting instruments for general surgery, hip
        replacement surgery and for the placement of endotracheal tubes in emergency
        and
        surgical procedures. We also manufacture and market physicians’ office use
        penlights.
 
 **Nerve
        Locator Stimulator**
 
 Bovie
        manufactures a nerve locator stimulator primarily used for identifying motor
        nerves in hand and facial reconstructive surgery. This instrument is a
        self-contained, battery-operated unit, used for single surgical
        procedures.
 
 **New
        Products**
 
 **Low
        Temperature Focused Plasma Technology (in development)**
 
 In
        February 2000, we entered into a Joint Venture Agreement with a non-affiliated
        German corporation, Jump Agentur Fur Elektrotechnik GMBH, wherein we have
        a 50%
        interest in the equity and a 50% interest in the profits of the joint venture.
        Pursuant to the agreement, Bovie initially advanced $200,000 to the partnership
        to cover costs of further research toward the production of two commercial
        prototypes. Bovie has made available its facilities in Florida for development,
        manufacturing and marketing of the products of the joint venture and is
        responsible to expend its best efforts to secure all necessary financing
        for the
        research, development and marketing of the products estimated to be an amount
        up
        to $1.5 million. To date we have expended approximately $.7 million for the
        development of the technology. Based upon our current cash position, cash
        flows
        and credit facility we believe we have the financial resources to satisfy
        our
        obligations.
  -2-
  
 Pursuant
        to agreement, the joint venture acquired an exclusive license to produce
        and
        market any surgical/medical devices utilizing this technology. In fiscal
        2005
        and 2004, Bovie made additional advances to the joint venture in the form
        of
        research and development of prototypes expending $161,190 and $39,286 in
        development and engineering costs, respectively.
  This
        technology utilizes a gas ionization process using only one working electrode.
        The device produces a stable thin focused beam of ionized gas that can be
        controlled in a wide range of temperatures and intensities, providing the
        surgeon with precision, minimal invasiveness and an absence of conductive
        currents during surgery substantially reducing overheating in the area or
        burning.
 
 The
        device has been developed and patented in both Europe and the United States.
        Bovie has constructed its first two pre-production prototypes for field-testing
        purposes as a prelude to eventual FDA submission and clearance for
        manufacturing. The initial intended uses are in the areas of veterinary
        medicine, dermatology, plastic surgery, cosmetology and gastroenterology.
 
 To
        date
        there have been no revenues recorded by the joint venture.
 
 **New
        Generator Platform**
 
 We
        have
        developed a new generator platform, which incorporates a flexible and simple
        user interface and allows for customization of the output modes for a variety
        of
        electrosurgical applications.
 
 ·
              ***GI
                  Device (Icon GI)-***
 
 The
        Icon
        GI (in development) is as a customized designed specialty electrosurgical
        product for the gastroenterological market. This product is designed to improve
        safety and convenience in performing GI procedures (a) by ensuring that the
        accessories are properly connected, thereby avoiding procedural mishaps,
        and (b)
        by allowing for the settings to be customized by the physician user. Available
        statistics indicate that during the period 1996 to 2000 colonoscopies performed
        in the United States increased 100%. We expect to file our 510K applications
        for
        clearance to market the Icon GI device in June 2006.
 
 ***·***
              ***Bovie
                  Button***
 
 After
        a
        review of time-motion studies and focus groups of gastroenterologists and
        GI lab
        assistants we have recently completed development of a new device designed
        to
        eliminate the foot pedal and cables which are associated with standard
        electrosurgical generators found in all gastrointestinal (“GI”) labs. On March
        1, 2006, subject to sterilization validation, we received clearance from
        the US
        Food and Drug Administration (“FDA”) to market the Bovie Button. We anticipate
        commencement of marketing of the Bovie Button during 2006.
 
 **Suture
        Removal Device (in development)**
 
 In
        October 2003 we entered into an exclusive worldwide license agreement with
        Emergency Medical Innovations, LLC., **** (EMI)
        a
        non-affiliated company, to manufacture and market a disposable suture removal
        device (patent pending). The device is expected to reduce time for removing
        stitches in a doctor’s office, medical clinic or emergency room. The device is
        designed to remove sutures with a tension free cut to be utilized in various
        medical procedures on humans and animals. We are presently developing
        pre-production prototypes and subject to FDA clearance for marketing, we
        have
        now targeted the last quarter of 2006 for release and marketing to medical
        professionals. We expended development funds of approximately $66,000 in
        2005
        and $50,000 in 2004. When the product begins selling we will pay a 6% royalty
        to
        EMI, the licensor.
  -3-
  
 The
        exclusive license agreement provides for, among other things, a term of 15
        years, with automatic 2-year renewals thereafter, subject to mutual agreement
        on
        minimum production and sales. Bovie has the right to terminate on 90-days
        notice
        to Licensor if it determines in its sole discretion that the product is
        non-competitive and not commercially viable. Licensor may terminate the
        agreement if Bovie violates a material term and does not cure the breach
        within
        60-days after receipt of notice of default. In addition, Bovie may lose
        exclusivity if there is a 10% decrease in sales over a consecutive two calendar
        year period.
 
 Bovie
        may
        elect to retain exclusivity by paying sufficient royalties to offset loss
        to
        Licensor resulting from the decreased sales.
 
 We
        expect
        to market this product in 2006
 
 **Endoscopic
        Modular Instruments**
 
 In
        January, 2006, pursuant to agreement to acquire technology from Henvil Corp.
        Ltd.(“Henvil”) and Steve Livneh, its principal, we acquired patent pending
        technology for new endoscopic disposable and reusable modular instruments
        (“the
        Product”). The innovative modular forceps are ergonomically designed to provide
        surgeons’ added comfort and improved safety while reducing per-procedure costs.
        The modular forceps offer a unique and simpler assembly process for laparoscopic
        procedures and is the first modular design for the arthroscopy market.
        Commercial prototypes have been developed and based on current projections
        we
        expect to commence marketing during fiscal 2006. The estimated annual worldwide
        market size for instruments of these categories is estimated to exceed $200
        million.
 
 The
        agreement requires us to purchase certain equipment and machinery ($400,000.00
        value) and to hire Henvil to develop the technology and complete the design
        of
        the arthroscopic and laparoscopic instruments. In addition we must also purchase
        tools and molds expected to cost approximately $120,000. Henvil and Steve
        Livneh
        have also been hired as consultants for the development of the technology.
        The
        consultants are to be paid $30,000 per month from the day of execution of
        the
        agreement. In addition, commencing with the year following the first sale
        or
        commercial delivery of the Product, Bovie shall pay to Henvil’s principal, Steve
        Livneh, an initial minimum royalty of the greater of $35,000 per year or
        3% of
        adjusted gross revenues received from the sale and marketing of the instruments.
        Thereafter, a royalty equal to 2.5% of adjusted gross sales for the life
        of the
        patents issuable for the technology.
 
 Mr.
        Livneh also shall receive 50,000 5-year restricted stock options to purchase
        Bovie common stock for each category of instrumentation (a total of 100,000
        stock options) exercisable at the closing price of Bovie common stock on
        the
        American Stock Exchange on the date of issuance of the options. The options
        shall vest immediately subject to Bovie’s prior application seeking FDA
        clearance for marketing the Product.
 
 **Manufacturing,
        Marketing and Distribution**
 
 Bovie
        manufactures the majority of its products on its premises in St. Petersburg,
        Florida. Labor-intensive sub-assemblies and labor-intensive products may
        be
        out-sourced to our specification. Although we sell through distributors,
        we
        market our products through national trade journal advertising, direct mail,
        distributor sales representatives and trade shows, under the Bovie name,
        the
        Bovie/Aaron name and private label. Major distributors include Allegiance
        (a
        Cardinal Company), IMCO, McKesson Medical Surgical, Inc., NDC (Abco, Cida
        and
        Starline), Owens & Minor, and Physician Sales & Service.
 
 We
        have a
        major OEM customer, Arthrex, Inc., for which we manufacture products on a
        private label basis, pursuant to agreement. The agreement provides, among
        other
        things, that we will be reimbursed for our expenses in developing products
        according to Arthrex’s specifications. Arthrex owns the technology and we may
        not generally compete with the product developed in Arthrex markets. The
        agreement further provides that Arthrex is not obliged to place any orders
        for
        the product developed, but if it does seek to place orders, it must place
        them
        with us. The agreement also generally provides for product warranties,
  -4-
  insurance,
        termination, and confidentiality. In fiscal 2005, Arthrex orders represented
        approximately 15% of revenues for us. As such, should Arthrex determine to
        reduce or cease placement of orders for the products, our business will be
        adversely affected.
 
 We
        are
        presently in the final stages of developing a new OEM product line based
        upon
        our own digital technology. We began shipping pilot production models during
        the
        first quarter of fiscal 2006. In addition, in order to foster growth and
        visibility in the marketplace: (a) We created two new regional sales
        managerships in 2005 and plan to add two additional regional sales managers
        in
        2006, and (b) We are currently formulating strategic partnerships with companies
        that have historically strong hospital sales relationships to improve our
        position in the acute care (hospital) market.
 
 **Competition**
 
 The
        medical device industry is highly competitive. Many competitors in this industry
        are well established, do a substantially greater amount of business, and
        have
        greater financial resources and facilities than we do.
 
 We
        believe we rank third in the field of electrosurgical generator manufacturing
        and we sell our products and compete with other manufacturers in various
        ways.
        In addition to advertising, attending trade shows and supporting our
        distribution channels, we strive to enhance product quality, improve user
        friendliness and expand product exposure.
 
 We
        also
        compete by private labeling our products for major distributors under their
        label. This allows us to have our product in the marketplace and thereby
        compete
        from two different approaches, our Aaron or Bovie label, and our customers’
private label. Our private label customers distribute our products under
        their
        name through their internal sales force. Our main competitors do not private
        label their products
 
 Lastly,
        we only sell our product through distributors. Since we never sell direct
        to the
        end user we are participating with our distribution partners, and never
        competing with them. Many of the companies we compete with sell direct, thus
        competing directly with distributors they sometimes use.
 
 Main
        competitors are Conmed, Valleylab (a division of Tyco) and Erbe Electromedizine,
        in the electrosurgery market and Xomed (a division of Medtronics) in the
        battery
        operated cautery market. We believe our competitive position did not change
        in
        2005.
  **Government
        Regulation**
 
 **United
        States**
 
 The
        Company’s products and research and development activities are subject to
        regulation by the FDA and other regulatory bodies. FDA regulations govern,
        among
        other things, the following activities:
 
 ·
              Product
                  development.·
              Product
                  testing.
 
 ·
              Product
                  labeling.·
              Product
                  storage.
 
 ·
              Pre-market
                  clearance or approval.·
              Advertising
                  and promotion.
 
 ·
              Product
                  traceability, and·
              Product
                  indications.
 
 In
        the
        United States, medical devices are classified on the basis of control deemed
        necessary to reasonably ensure the safety and effectiveness of the device.
        Class
        I devices are subject to general controls. These controls include registration
        and listing, labeling, pre-market notification and adherence to the FDA Quality
        System Regulation. Class II devices are subject to general and special controls.
        Special controls include
  -5-
  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. Currently, we only manufacture Class
        I
        and Class II devices. Pre-market notification clearance must be obtained
        for
        some Class I and most Class II devices when the FDA does not require pre-market
        approval.
 
 **Manufacturing**
 
 Manufacturing
        and distribution of our products may be subject to continuing regulation
        by the
        FDA. We will also be subject to routine inspections by the FDA to determine
        compliance with the following:
 
 ·
              Quality
                  System Regulations.·
              Medical
                  device reporting regulations, and
 
 ·
              FDA
                  restrictions on promoting products for unapproved or off-label
                  uses.
 
 In
        addition to regulations enforced by the FDA, we are also subject to regulations
        under the Occupational Safety and Health Act, the Environmental Protection
        Act
        and other federal, state and local regulations.
 
 **International**
 
 To
        market
        products in the European Union and countries other than the United States,
        we
        must obtain regulatory approval similar to that required by the FDA. All
        of our
        medical devices are classified as Class III devices under the European Medical
        Devices directive. Therefore, we were required to obtain the “CE Mark”
certification from a “Notified Body” in one of the member countries in the
        European Union. The CE Mark certification is an international symbol of
        adherence to quality assurance standards and compliance with the applicable
        European Medical Devices Directive.
 
 Approval
        by a Notified Body typically includes a detailed review of the following:
 
 ·
              Description
                  of the device and its components,·
              Safety
                  and performance of the device,
 
 ·
              Clinical
                  evaluations with respect to the device,·
              Methods,
                  facilities and quality controls used to manufacture the device,
                  and
 
 ·
              Proposed
                  labeling for the device.
 
 Manufacturing
        and distribution of a device is subject to continued surveillance by the
        Notified Body after CE Mark certification to ensure continued compliance
        with
        quality control and reporting requirements.
 
 Pre-market
        notification clearance must be obtained for some Class I and most Class II
        devices when the FDA does not require pre-market approval. A pre-market approval
        application is required for most Class III devices. A pre-market approval
        application must be supported by valid scientific evidence to demonstrate
        the
        safety and effectiveness of the device. The pre-market approval application
        typically includes:
 
 ·
              Results
                  of bench and laboratory tests, animal studies, and clinical studies,·
              A
                  complete description of the device and its components,
 
 ·
              A
                  detailed description of the methods, facilities and controls used
                  to
                  manufacture the device, and·
              Proposed
                  labeling.
 
 The
        approval process can be expensive, uncertain and lengthy. A number of devices
        for which FDA approval has been sought by other companies have never been
        approved for marketing. To date we have not experienced non-approval of any
        of
        our devices heretofore submitted to the FDA.
 
 We
        obtained CE Mark certification to market our products in the European Union
        in
        1999. In addition to CE Mark certification, each member country of the European
        Union maintains the right to impose additional regulatory requirements.
  -6-
  Outside
        of the European Union, regulations vary significantly from country to country.
        The time required to obtain approval to market products may be longer or
        shorter
        than that required in the United States or the European Union. Certain European
        countries outside of the European Union do recognize and give effect to the
        CE
        Mark certification. We are permitted to market and sell our products in those
        countries.
  **Patents
        and Trademarks**
 
 We
        own a
        total of twelve outstanding patents but do not believe our current patents
        have
        a material effect on our operations. The useful lives of our existing patents
        have substantially diminished. We can give no assurance that competitors
        will
        not infringe on our patent rights or otherwise create similar or non-infringing
        competing products that are technically patentable in their own right.
 
 We
        have
        recently filed new patent applications for the Bovie Button and a snare device
        (GI accessory products) and we will file later this year for our new Generator
        Platform and a Plasma Stream patent application relating to the plasma
        technology. We also plan to file new trademark applications relating to our
        GI
        products later this year.
 
 **Liability
        and Insurance**
 
 The
        manufacture and sale of medical products entail significant risk of product
        liability claims. Bovie currently maintains product liability insurance with
        combined coverage limits of $5 million on a claim made basis. There is no
        assurance that this coverage will be adequate to protect us from any liabilities
        we might incur in connection with the sale or testing of our products. In
        addition, we may need increased product liability coverage as products are
        commercialized. This insurance is expensive and in the future may not be
        available on acceptable terms, if at all.
 
 **Research
        and Development**
 
 The
        amount expended by us on research and development of our products during
        the
        years 2005 and 2004, totaled $985,807 and $907,389 respectively. We have
        not
        incurred any direct costs relating to environmental regulations or requirements.
        Our research and development costs for our products are not borne by our
        customers.
 
 **Employees**
 
 Presently
        Bovie has a total of approximately 140 full time employees. These consist
        of 4
        executive officers, 22 supervisory and managerial personnel, 8 sales, 106
        technical support administrative and factory employees.
 
 **Significant
        Subsidiary - Aaron Medical Industries, Inc.**
 
 Aaron
        Medical Industries, Inc., is a Florida Corporation with offices in St.
        Petersburg, Florida. It is principally engaged in the business of marketing
        our
        medical products.
  **ITEM
        2. Description of Properties**
 
 Bovie
        has
        executive office space at 734 Walt Whitman Road, Melville, New York and its
        St.
        Petersburg, Florida manufacturing facility located at 7100 30 th Ave N.
        Bovie leases the executive offices in New York for $1,450 per month through
        the
        year 2006. Bovie owns its main facility in Florida consisting of 28,000 square
        feet of office, warehousing and manufacturing space.
 
 On
        August
        20, 2003, Bovie signed an agreement to lease approximately 20,000 square
        feet of
        space located at 3200 Tyrone Blvd., St. Petersburg Florida for sixty-two
        months
        commencing on September 1, 2003 and terminating on October 31, 2008, with
        an
        option to renew for an additional five years. This additional space provides
        Bovie with a total of 48,000 square feet of manufacturing warehousing and
        office
        space in
  -7-
  Florida.
        The building leased is in close proximity to our present manufacturing facility
        in St. Petersburg, Florida. The base monthly rent is $8,750 commencing on
        November 1, 2003. The base rent increases by 3% for each year of the lease.
        We
        are responsible for common area maintenance, insurance and real estate taxes
        which have been established at $1,667 per month for the first year of the
        term
        of the lease.
  In
        October 2004 a hurricane damaged the roof of approximately 1500 square feet
        of
        office space at 7100 30 th Ave N,
        St. Petersburg causing extensive water damage. The offices had been used
        by
        several engineers which had to be moved to other space. An additional 4200
        square feet of office and warehouse space was leased on a month-to-month
        basis
        at 7191 30 th Ave N,
        St. Petersburg for $2,140 per month which continues into 2006.
 
 The
        damage to our building was $245,264 which the insurance company has paid
        to us.
        The City of St. Petersburg issued a permit and the contractor completed the
        repairs in 2005.
 
 **ITEM
        3. Legal Proceedings**
 
 We
        presently have no material litigation outstanding.
   **ITEM
        4. Submission of Matters to a Vote of Security
        Holders**
 
 There
        were no matters submitted to securities holders during the fourth quarter
        of the
        year ended December 31, 2005.
 
 **PART
        II**
 
 **ITEM
        5. Markets and Market Prices**
 
 Bovie’s
        common stock has been traded on the American Stock Exchange since November
        5,
        2003. Prior to that it was traded in the over-the-counter market on the OTC
        bulletin board. The table shows the reported high and low bid prices for
        the
        common stock during each quarter of the last eight respective quarters as
        reported by the OTC Bulletin Board (symbol “BOVI”) and the American Stock
        Exchange (symbol “BVX”). These prices do not represent actual transactions and
        do not include retail markups, markdowns or commissions.
 
 2005
              
              High
              
              Low1stQuarter
              $
              3.05
              $
              2.202ndQuarter
              
              2.54
              
              1.953rdQuarter
              
              2.44
              
              1.604thQuarter
              
              2.99
              
              2.05
 
 2004
              High
              Low1stQuarter
              $
              3.70
              $
              2.322ndQuarter
              
              3.10
              
              2.313rdQuarter
              
              3.00
              
              2.064thQuarter
              
              2.72
              
              2.25
 
 On
        March
        17, 2006, the closing bid for Bovie’s Common Stock as reported by the American
        Stock Exchange was $3.41 per share. As of March 17, 2006, the total number
        of
        shareholders of the Bovie’s Common Stock was approximately 1,500, of which
        approximately 700 are estimated to be shareholders
  -8-
  whose
        shares are held in the name of their broker, stock depository or the escrow
        agent holding shares for the benefit of Bovie Medical Corporation shareholders
        and the balance are shareholders who keep their shares registered in their
        own
        name.
 
 **ITEM
        6. Management’s Discussion and Analysis of Financial Condition
        and Results of Operations**
 
 ***Executive
        Level Overview***
 
 We
        are a
        medical device company engaged in the manufacturing and marketing of
        electrosurgical devices. Our medical products include a wide range of devices
        including electrosurgical generators and accessories, cauteries, medical
        lighting, nerve locators and other products.
 
 We
        divide
        our operations into three reportable business segments. 
Electrosurgical products, battery operated cauteries and other products.
        The electrosurgical segment sells electrosurgical products which include
        generators, electrodes, electrosurgical pencils and various ancillary disposable
        products. These products are used in surgery for the cutting and coagulation
        of
        tissue. Battery operated cauteries are used for precise hemostasis (to stop
        bleeding) in ophthalmology and in other fields. Our other revenues are derived
        from nerve locators, disposable and reusable penlights, medical lighting,
        license fees, development fees and other miscellaneous income.
 
 Domestic
        sales accounted for 83% of total revenues in 2005 as compared to 85% in 2004.
        Most of the Company’s products are marketed through medical distributors which
        distribute to more than 6,000 hospitals and to doctors and other health-care
        facilities.
 
 International
        sales accounted for 17% of total revenues in 2005 as compared to 15% in 2004.
        The Company’s products are sold in more than 150 countries through local
        dealers. Local dealer support is coordinated by sales and marketing personnel
        at
        the St. Petersburg, Florida facility. We have no manufacturing facilities
        branch
        offices other than the Florida facility. We sell our products to distributors
        that distribute them in the following countries: Argentina, Australia, Austria,
        Belgium, Brazil, Canada, Chile, Denmark, Finland, France, Germany, Greece,
        India, Italy, Japan, Korea, Mexico, The Netherlands, New Zealand, Norway,
        Poland, Portugal, Singapore, South Africa, Spain, Sweden, Switzerland, Taiwan
        and the United Kingdom, China, the CIS (former Soviet Union), Cyprus, Indonesia,
        Ireland, Korea, Latin America, Malaysia, the Philippines, Thailand, Turkey,
        and
        Vietnam. Our business is generally not seasonal in nature.
 
 ***Outlook
        for 2006***
 
 The
        Company’s outlook for the fiscal year ending December 31, 2006 is positive, as
        we expect revenues to be at a record level which should translate into improved
        net earnings when compared to fiscal year 2005. Our optimism is based on
        our
        sales during the first three months of fiscal year 2006 and on current budget
        estimates. The outlook excludes any sales which may be generated by Bovie’s new
        products (detailed in part I of this report), some of which we expect to
        begin
        marketing during the current calendar year. As part of our anticipated growth,
        we expect higher costs in selling, payroll, professional fees, administrative
        costs and added expenses for research and development of new products. Growth,
        to a significant degree, will be fueled by anticipated higher OEM sales and
        generally increased sales in most product areas. Foreign sales are also forecast
        to be higher. The markets for our products are highly competitive; however,
        we
        believe that our competitive advantage is rooted in our ability to offer
        products that meet changing demand. In addition, we offer the flexibility,
        quality of products and responsiveness that a smaller company can
        offer.
 
 Fiscal
        year 2006 should feature new product introductions either by Bovie alone,
        and/or
        in collaborations with other larger medical companies. Although there is
        no
        assurance that agreements will transpire, we view possible agreements (not
        strictly OEM) to be beneficial in certain niche market segments. The shifting
        away from being highly dependent on OEM contracts toward designing, developing
        and marketing our own brand of products, is accelerating and we anticipate
        that
        this will result in improved margins in the future.
  -9-
  The
        outlook is based on a number of assumptions which are subject to change;
        some of
        which are outside our control. A variation in our assumptions may result
        in a
        change in this outlook.
 
 **RESTATEMENT
        OF FINANCIAL STATEMENTS**
 
 We
        adopted ***FASB
        Interpretation No. 46R, Consolidation of Variable Interest Entities - An
        Interpretation of ARB51*** that
        requires the consolidation of legal structures, called *Variable
        Interest Entities (VIEs).* Our joint
        venture with Jump Agentur Fur Electrotechnik GMBH (“the Joint Venture”, “JAG”)
        qualified as a VIE. We had
        historically accounted for the investment in JAG on the equity basis. We
        have
        restated our balance sheets and consolidated JAG in the years ended December
        31,
        2004 and 2003. The most significant impact to our financial statements was
        to
        add the intangible assets of JAG, totaling approximately $350,000 in 2004
        and
        $360,000 in 2003, and minority interest of $150,000 in 2004 and $160,000
        in 2003
        to our balance sheets. The impacts on our consolidated statements of net
        income
        or cash flows was not material.
 
 We
        amended our statement of operations for the year ended December 31, 2004
        and
        reclassified a $245,264 gain from insured damages to our building from a
        hurricane as other income instead of an extraordinary item. The reclassification
        did not affect our taxable net income which remained at $1,511,997 nor did
        it
        affect our earnings per share and diluted earnings per share of $.11 and
        $.09,
        respectively.
 
 **Results
        of Operations** (to
        be
        read in conjunction with the profit and loss statement)
 
 The
        table
        below outlines the components of the consolidated statements of earnings
        as a
        percentage of net sales and the year-to-year percentage change in dollar
        amounts:
 
 Analysis
                  of 2005/2004
              
              
              
              Percentage
                  change in dollar amounts2005
              2004
              %
              2004/2005%
              %
              Change
              %Sales
              100.0
              100.0
              0
              (1.4)Cost
                  of sales
              62.6
              61.1
              1.5
              .1Gross
                  profit
              37.4
              38.9
              (1.5)
              (3.8)Other
                  costs:R
                  & D
              4.9
              4.4
              .5
              8.6Professional
                  fees
              2.2
              2.0
              .2
              7.6Labor
              9.9
              9.6
              .3
              1.7SGA
              17.6
              16.4
              1.2
              9.4Development
                  cost - joint venture
              .8
              .2
              .6
              310.3Total
                  other costs
              35.4
              32.6
              2.8
              8.6Income
                  from operations
              2.0
              6.2
              (4.2)
              (68.2)Other
                  income/expense
              .1
              1.2
              (1.1)
              (89.6)Net
                  income before taxes and minority expense
              2.1
              7.4
              (5.3)
              (71.9)
  -10-
  
 Income
                  tax expense
              (.8)
              (2.2)
              (1.4)
              (69.7)Income
                  tax benefit
              .7
              2.2
              1.5
              (75.6)Net
                  income after taxes
              2
              7.4
              (5.4)
              (73.1)
  
 The
        table
        below sets forth domestic/international and product line sales
        Information:
 
 Net
                  Sales (in thousands)
              
              
              
              
              
              
              
              
              
              PercentageIncrease
              
              
              Change2005
              2004
              
              
              (Decrease)
              
              
              2005/2004Domestic/international
                  sales in thousands)Domestic
              
              $
              16,830
              17,506
              
              
              (676
                  )
              
              
              (4)
              %International
              
              
              3,381
              2,989
              
              
              392
              
              
              13Total
                  net sales
              
              $
              20,211
              20,495
              
              
              (284)
              
              
              (1)Product
                  line sales:Electrosurgical
              
              $
              12,191
              12,684
              
              
              (493)
              
              
              (4)Cauteries
              
              
              5,462
              5,460
              
              
              2
              
              
              --Other
              
              
              2,558
              2,351
              
              
              207
              
              
              9Total
                  net sales
              
              $
              20,211
              20,495
              
              
              (284)
              
              
              (1)
 
 **2005
        Compared with 2004**
 
 Our
        net
        sales decreased 1% in 2005 to $20.2 million from $20.5 million in 2004($.3
        million decrease). Net sales remained relatively constant across our product
        lines. Approximately 4,500 generator units were shipped in 2004 as compared
        to
        4,600 for 2005. No sales of one particular electrosurgical product dominates
        the
        number of units sold. We increased prices for our products in 2005 by an
        average
        of 3.5%
  Arthrex
        sales of generators and accessories decreased 2.9 million or 50% from 5.9
        million in 2004 to 3.0 million in 2005. The decrease was offset by increase
        of
        generators sold through distributors.
 
 Domestic
        sales were $16.7 million for 2005, representing a decrease of 4% as a result
        of
        decreased shipments of generators and accessories to Arthrex. International
        sales were $3.5 million for 2005, representing an increase of 15% as a result
        of
        higher shipments of generators. Excluding the impact of foreign currency,
        international sales increased $.45 million in 2005.
  Cost
        of
        sales represented 63% of sales in 2005 compared to 61% in 2004. The 2% higher
        cost of sales in 2005 was mainly attributable to the increased payroll and
        overhead.
 
 Research,
        development and engineering expenses represented 4.9% and 4.4% of sales for
        2005
        and 2004, respectively. These expenses increased 1% in 2005 to $985,807,
        an
        increase over 2004 spending of $78,418. The higher spending level is the
        result
        of development spending in advance of our proposed product launches in 2006.
        New
        products under development by us are the suture removal device, GI Icon
        gastrointestinal device and various improvements to our line of electrosurgical
        generators.
  -11-
  
 Research
        and development for the J. Plasma device increased from $39,286 in 2004 to
        $161,190 in 2005, an increased of 310% or $121,904.
 
 Professional
        fees increased from $415,606 in 2004 to $447,346 in 2005, an increase of
        $31,740
        or 8%. Professional fees mostly increased as a result of the costs of filing
        and
        S-3 registration statement.
 
 Salaries
        and related costs increased by 1.7% from $1.98 million to $2.01 million.
        The
        number of sales and administrative employees and benefits remained approximately
        the same in 2005 as compared with 2004.
 Selling,
        general and administrative expenses increased by .3% million or 9.4% in 2004
        to
        $3.6 million in 2005. The 9.4% increase in selling, general and administrative
        expenses is primarily due to an increase in commission expense, increased
        general liability insurance, and increased repairs and maintenance.
 
 Net
        interest expense increased to $22,703 in 2005 from $15,090 in 2004, primarily
        as
        a result of a higher interest rate on our outstanding mortgage. An increase
        from
        4.75% to 7.5% during 2005.
 
 The
        effective income tax rate was 36.2% in 2005 and 2004. There was also a tax
        loss
        carryover benefit of 36.2% in 2004. An estimate of alternative minimum tax
        was
        $10,000 in 2005 and AMT paid for 2004 was $22,015. Income from operations
        was
        $403,968 in 2005 as compared to $1,268,556 in 2004. A decrease of 68% or
        $864,588. The main reasons for the decrease in earning was higher research
        and
        development of $200,322, a decrease in gross profit of $295,008 and an increase
        in SG&A of $303,972.
 
 In
        October 2004 a hurricane tore a portion of the roof off the office facility
        at
        7100 30 th Avenue
        North, St. Petersburg, Florida causing extensive water damage to that portion
        of
        the building. The cost of the building allocated to the loss was $63,749
        of
        which there was depreciation of $12,278 leaving a net cost of $51,471. As
        per
        Financial Accounting Standard Board interpretation number 30 we have recognized
        a gain of $245,264 from the non-monetary asset being involuntarily converted
        to
        a monetary asset through the payment by the insurance company of $296,735.
        This
        is reflected as other income on the consolidated statement of
        income.
 
 Net
        earnings, decreased 73% to $.4 million from $1.5 million in 2004. Basic net
        earnings per share, decreased by 73% to $.03 in 2005 from $.11 in 2005. Diluted
        earning per share in 2005 was $.03 as compared to $.09 for diluted earnings
        per
        share for 2004.
  We
        sell
        our products through distributors both overseas and in US markets. New
        distributors are contacted through responses to our advertising in international
        and domestic medical journals and domestic or international trade shows.
 
 We
        have
        arrangements with various sales representatives to develop markets for our
        new
        products and to maintain customer relations. Our current representatives
        receive
        an average commission of approximately 4% of sales in their market areas.
        In
        2005 and 2004, commissions paid were $442,373 and $367,299 respectively,
        an
        increase of 20%. The increase was due to increased sales upon which we pay
        commissions. This increase was offset by the decrease in OEM sales.
 
 An
        adequate supply of raw materials is available from both domestic and
        international suppliers. The relationship between our suppliers and us is
        generally limited to individual purchase order agreements, supplemented by
        contractual arrangements with key vendors to ensure availability of certain
        products. We have developed multiple sources of supply where possible.
 
 In
        order
        to provide additional working capital, we have secured a $1.5 millions credit
        facility with a local commercial bank. This facility is payable on demand.
        For
        the year ended December 31, 2005, we had zero funds drawn down on this credit
        facility.
 
  -12-
  
 Our
        ten
        largest customers accounted for approximately 65% of net revenues for 2005
        as
        compared to 70% in 2004. For both years December 31, 2005 and 2004, our ten
        largest trade receivables accounted for approximately 66% of outstanding
        receivables in both years. In 2005 and 2004 one customer accounted for 15%
        and
        29% of total sales, respectively.
 
 **Product
        Development**
 
 Most
        of
        our products and product improvements have been developed internally. Funds
        for
        this development have come from internal cash flow and the sale of common
        stock
        upon the exercise of stock options. We maintain close working relationships
        with
        physicians and medical personnel in hospitals and universities who assist
        in
        product research and development. New and improved products play a critical
        role
        in our sales growth. We continue to place emphasis on the development of
        proprietary products and product improvements to complement and expand our
        existing product lines. We have a centralized research and development focus,
        with its one manufacturing location responsible for new product development
        and
        product improvements. Our research, development and engineering units at
        the
        manufacturing location maintain relationships with distribution locations
        and
        customers in order to provide an understanding of changes in the market and
        product needs. During 2005 we invested in the J Plasma technology, the suture
        removal technology, the Gastrointestinal “GI” device and undertook development
        of Cardio and Urological Electrosurgical devices for a contractual partner.
        The
        suture removal device and the GI device are slated to be marketed during
        2006.
        The ongoing cost for this development will be paid from operating cash
        flows.
 
 In
        the
        next year we do not contemplate any material purchase or acquisition of assets
        which our ordinary cash flow and or credit line would not be able to
        sustain.
 
 We
        believe that Bovie has the financial resources needed to meet business
        requirements in the foreseeable future, including capital expenditures needed
        for the expansion of our manufacturing site, working capital requirements,
        and
        product development programs, subject to Bovie maintaining compliance with
        our
        credit facility.
 
 **Non-Medical
        Products**
 
 We
        discontinued our non-medical product line in 2003 by selling our inventory
        at
        cost, and licensing our customer list and manufacturing technology to our
        largest customer in that field for $500,000 payable in equal installments
        over 5
        years. The transaction is being accounted for as a licensing agreement over
        five
        years and in 2005 and 2004 we received income of $100,000 and $100,000,
        respectively, from the licensing.
 
 **Reliance
        on Collaborative, Manufacturing and Selling Arrangements**
 
 We
        are
        dependent on certain contractual OEM customers for product development wherein
        we are to provide the manufacturing of the product developed. However, the
        customer has no legal obligation to purchase the developed products. Should
        the
        collaborative customer fail to give us purchase orders for the product after
        development, our future business and value of related assets could be negatively
        affected. Furthermore, no assurance can be given that a collaborative customer
        may give sufficient high priority to our products. In addition, disagreements
        or
        disputes may arise between Bovie and its contractual customers which could
        adversely affect production of our products. We also have informal collaborative
        arrangements with two foreign suppliers where in we request the development
        of
        certain items and components and we purchase them pursuant to purchase orders.
        Our purchase orders are never for more than one year and are supported by
        orders
        from our customers.
 
 In
        January 2006 we entered into an agreement to acquire patents and technology
        for
        endoscopic disposable and reusable modular instruments requiring us to purchase
        equipment, tools and molds valued at $520,000. As part of the agreement,
        we
        retained the services of the seller and its principal at rate of $30,000
        per
        month for one year to develop commercial prototypes for
        marketing.
  -13-
  
 **Liquidity
        and Capital Resources**
 
 Our
        working capital at December 31, 2005 was $5.5 million as it was at December
        31,
        2004. Accounts receivable days sales outstanding were 45 days and 41 days
        at
        December 31, 2005 and 2004 respectively. Days sales in inventory increased
        28
        days to 86 days at December 31, 2005 from 58 days at December 31, 2004. The
        higher days sales in inventory is due to increased inventories resulting
        from
        additional orders to be shipped and products to be manufactured under a new
        OEM
        contract.
 
 We
        applied cash of $.2 million to operations in 2005 compared with generating
        cash
        of $2.04 million in 2004. The decrease in cash from operations in 2005 compared
        to the prior year is primarily due to the increase of inventory of $.9 million
        and trade receivables of .4 million.
 
 In
        2005
        we used $.9 million for the purchase of fixed assets. Total borrowing declined
        by $31,665 which is the amount we reduced our first mortgage by. Employees
        and
        others exercised options and purchased shares for $138,861.
 
 We
        had
        1.3 million in cash and cash equivalents at December 31, 2005. We also had
        outstanding borrowings totaling $.348 million at that date. Current maturities
        of long-term debt at December 31, 2005 were $.348 million. We believe our
        cash
        on hand, as well as anticipated cash flows from operations, will be sufficient
        to fund future operating capital requirements, future manufacturing facility
        construction and other capital expenditures and future acquisitions to
        supplement our current product offerings. Should additional funds be required,
        we have $1.5 million of additional borrowing capacity available under our
        existing credit facility.
 
 The
        Company’s future contractual obligations for agreements with initial terms
        greater than one year, including agreements to purchase materials in the
        normal
        course of business, are summarized as follows (in thousands):
 
 Payment
                  Period2006
              2007
              2008
              2009Long-term
                  debt
              348
              -0-
              -0-
              -0-Operating
                  leases
              142
              135
              115
              -0-Unconditional
                  purchase obligations
              2,587
              -0-
              -0-
              -0-
 
 The
        Company’s additional borrowing capacity, along with the expected expiration
        period of the commitments, is summarized as follows (in millions):
 
 Amount
                  of CommitmentTotal
              
              Expiration
                  Per PeriodAmount
              
              Less
                  than
              
              In
                  excess ofCommitted
              
              1
                  year
              
              1
                  yearSecured
                  revolving credit agreement and other lines of credit
              
              $
              1.5
              
              $
              1.5
              
              
              -0-
 
 As
        of
        December 2005 the total amount is available.
 
 Our
        future results of operations and the other forward-looking statements contained
        herein, particularly the statements regarding growth in the medical products
        industry, capital spending, research and development, and marketing and general
        and administrative expenses, involve a number of risks and uncertainties.
        In
        addition to the factors discussed above, there are other factors that could
        cause actual results to differ materially, such as business conditions and
        the
        general economies; competitive factors including rival manufacturers’
availability of components at reasonable prices; risk of nonpayment of accounts
        receivable; risks associated with foreign operations; and litigation involving
        intellectual property and consumer issues.
  -14-
  
 We
        believe that we have the product mix, facilities, personnel, competitive
        edge,
        operating cash flows and financial resources for business success in the
        immediate (1 year) future and distant future (after 1 year), but future
        revenues, costs, margins, product mix and profits are all subject to the
        influence of a number of factors, as discussed above.
 
 **Critical
        Accounting Estimates**
 
 We
        have
        adopted various accounting policies to prepare the consolidated financial
        statements in accordance with accounting principles generally accepted (GAAP)
        in
        the United States of America (U.S.). Our most significant accounting policies
        are disclosed in Note 1 to the consolidated financial statements.
 
 The
        preparation of the consolidated financial statements, in conformity with
        U.S.
        GAAP, requires us to make estimates and assumptions that affect the amounts
        reported in the consolidated financial statements and accompanying notes.
        Our
        estimates and assumptions, including those related to bad debts, inventories,
        intangible assets, property, plant and equipment, minority investment, legal
        proceedings, research and development, warranty obligations, product liability,
        pension obligations, sales returns and discounts, and income taxes are updated
        as appropriate, which in most cases is at least quarterly. We base our estimates
        on historical experience, actuarial valuations, or various assumptions that
        are
        believed to be reasonable under the circumstances and the results form the
        basis
        for making judgments about the reported values of assets, liabilities, revenues
        and expenses. Actual results may materially differ from these
        estimates.
 
 Estimates
        are considered to be critical if they meet both of the following criteria:
        (1)
        the estimate requires assumptions about material matters that are uncertain
        at
        the time the accounting estimates are made, and (2) other materially different
        estimates could have been reasonably made or material changes in the estimates
        are reasonably likely to occur from period to period. Our critical accounting
        estimates include the following:
 
 Allowance
        for doubtful accounts
 
 We
        maintain an allowance for doubtful accounts for estimated losses in the
        collection of accounts receivable. We make estimates regarding the future
        ability of our customers to make required payments based on historical credit
        experience and expected future trends. If actual customer financial conditions
        are less favorable than projected by management, additional accounts receivable
        write-offs may be necessary, which could unfavorably affect future operating
        results.
 
 Inventory
        Reserves
 
 We
        maintain reserves for excess and obsolete inventory resulting from the potential
        inability to sell our products at prices in excess of current carrying costs.
        The markets in which we operate are highly competitive, with new products
        and
        surgical procedures introduced on an ongoing basis. Such marketplace changes
        may
        cause our products to become obsolete. We make estimates regarding the future
        recoverability of the costs of these products and record a provision for
        excess
        and obsolete inventories based on historical experience, and expected future
        trends. If actual product life cycles, product demand or acceptance of new
        product introductions are less favorable than projected by management,
        additional inventory write-downs may be required, which could unfavorably
        affect
        future operating results.
 
 Income
        Taxes
 
 We
        operate in multiple tax jurisdictions both inside and outside the United
        States.
        Accordingly, management must determine the appropriate allocation of income
        to
        each of these jurisdictions. Tax audits associated with the allocation of
        this
        income and other complex issues may require an extended period of time to
        resolve and may result in income tax adjustments if changes to the income
        allocation are required between jurisdictions with different tax rates. Because
        tax adjustments in certain jurisdictions can be
  -15-
  significant,
        we record accruals representing our best estimate of the probable resolution
        of
        these matters. To the extent additional information becomes available, such
        accruals are adjusted to reflect the revised estimated probable
        outcome.
 Other
        Matters
 
 We
        distribute our products throughout the world. As a result, our financial
        results
        could be significantly affected by factors such as changes in foreign currency
        exchange rates or weak economic conditions in foreign markets. Our operating
        results are primarily exposed to changes in exchange rates among the United
        States dollar and European currencies, in particular the euro and the British
        pound. When the United States dollar weakens against foreign currencies,
        the
        dollar value of sales denominated in foreign currencies increases. When the
        United States dollar strengthens, the opposite situation occurs. We manufacture
        our products in the United States, China and Bulgaria and incur the costs
        to
        manufacture in US dollars. This worldwide deployment of factories serves
        to
        partially mitigate the impact of the high costs of manufacturing in the US.
 
 In
        December 2004, the Financial Accounting Standards Board (FASB) issued a revision
        to Statement No. 123, *Share-Based
        Payment* *.* This
        revision supersedes Accounting Principles Board (APB) Opinion N o.
        25, *Accounting
        for Stock Issued to Employees* ,
        and its
        related implementation guidance. This revision requires companies to recognize
        the cost of stock options based on the grant-date fair value pursuant to
        their
        employee stock option plans over the period during which the recipient is
        required to provide services in exchange for the options, typically the vesting
        period. Effective with our fiscal year 2006 that commenced on January 2,
        2006 we
        will expense stock options, that are granted after January 1, 2006. This
        is in
        accordance with Statement of Financial Accounting Standards No. 123R “Share
        Based Payment.” No employee stock options were granted during the first three
        months of fiscal year 2006.
 
 (See
        Note
        1. Significant Accounting Policies)
   **ITEM
        7. Financial Statements.**
 
 The
        information required by this item may be found on pages F-1 through F-29
        of this
        Annual Report on Form 10-KSB.
 
 (See
        Attached)
 
 **ITEM
        8. Changes in and Disagreements with Accountants on Accounting
        and Financial Disclosure**
 
 There
        are
        no disagreements with, or changes in, accountants.
 
 **ITEM
        8A. Disclosure Controls And
        Procedures**
 
 (a)
        Evaluation of disclosure controls and procedures
 
 An
        evaluation of the effectiveness of the design and operation of Bovie’s
        disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e)
        and 15d-15(e) as of December 31, 2005 was carried out under the supervision
        and
        with the participation of Bovie’s management, including the President and Chief
        Executive Officer and the Chief Financial Officer (“the Certifying Officers”).
        Based on that evaluation, the Certifying Officers concluded that Bovie’s
        disclosure controls and procedures are effective.
 
 Disclosure
        controls and procedures are designed to ensure that information required
        to be
        disclosed in our reports filed or submitted under the Securities Exchange
        Act is
        recorded, processed, summarized and reported within the time periods specified
        in the SEC’s rules and forms. Disclosure controls and procedures include,
        without limitation, controls and procedures designed to ensure that information
        required to be disclosed in our reports filed or submitted under the Securities
        Exchange Act is accumulated and communicated to management, including our
        President and Chief Financial Officer, as appropriate, to allow timely decisions
        and timely reporting regarding required disclosure.
  -16-
  
 (b)
        Changes in internal controls
 
 There
        was
        no change to Bovie’s internal control over financial reporting during the
        quarter ended December 31, 2005 that materially affected, or is reasonably
        likely to materially affect, Bovie’s internal control over financial
        reporting.
 
 **ITEM
        8B. Other Information**
 
 There
        was
        no information to be disclosed on Form 8K that was not reported.
 
 **Part
        III**
 
 **ITEM
        9. Directors, Executive Officers, Promoters and Control
        Persons**
 
 Bovie’s
        Executive Officers and directors are as follows:
 
 Name
              Position
              Director
                  SinceAndrew
                  Makrides
              Chairman
                  of the Board, President, CEO and
              December
                  1982Chief
                  Financial OfficerJ.
                  Robert Saron
              President
                  of Aaron Medical Industries,Inc. and Director
              August
                  1994George
                  Kromer
              Director
              October
                  1995Brian
                  Madden
              Director
              September
                  2003Moshe
                  Citronowicz
              Executive
                  Vice President and Chief Operating Officer
              --Michael
                  Norman
              Director
              September
                  2004Randy
                  Rossi
              Director
              September
                  2004
 
 Directors
        serve for one-year terms and are elected at the annual shareholders
        meeting.
 
 Andrew
        Makrides, Esq. Age 64, Chairman of the Board and President, member of the
        Board
        of Directors, received a Bachelor of Arts degree in Psychology from Hofstra
        University and a Juris Doctor Degree from Brooklyn Law School. He is a member
        of
        the Bar of the State of New York and practiced law from 1968 until joining
        Bovie
        Medical Corporation as Executive Vice President and director, in 1982. Mr.
        Makrides became President of the Company in 1985 and the CEO in December
        1998
        and has served as such to date. Mr. Makrides employment contract extends
        to
        December 31, 2009.
 
 J.
        Robert
        Saron, age 53, Director, holds a Bachelor degree in Social and Behavioral
        Science from the University of South Florida. From 1988 to present Mr. Saron
        has
        served as a director of Aaron Medical Industries, Inc. (formerly Suncoast
        Medical Manufacturing, Inc.). Mr. Saron served as CEO and chairman of the
        Board
        of the Company from 1994 to December 1998. Mr. Saron is presently the President
        of Aaron Medical Industries, Inc., which serves as the Company’s marketing
        subsidiary, and he is also a member of the Board of Directors of the Company.
        Mr. Saron serves on two industry boards, the Health Industry Distributors
        Association Education Foundation and the Health Care Manufacturing Marketing
        Council. Mr. Sarons employment contract extends to December 31,
        2009.
 
 George
        Kromer, Jr., age 65, became a director on October 1, 1995. Bovie Medical
        Corporation has also retained Mr. Kromer on a month-to-month basis as a
        consultant in addition to his capacity as a director. He has been writing
        for
        business publications since 1980. In 1976, he received a Master’s Degree in
        health administration from Long Island University. He was engaged as a Senior
        Hospital Care Investigator for the City of New York Health & Hospital
        Corporation from 1966 to 1986. He also holds a Bachelor of Science Degree
        from
        Long Island University’s Brooklyn Campus and an Associate in Applied Science
        Degree from New York City Community College, Brooklyn, New York.
  -17-
  
 Moshe
        Citronowicz, age 53, is a graduate of the University of Be’er Sheva, Be’er
        Sheva, Israel, with a Bachelor of Science Degree in electrical engineering.
        Since coming to the United States in 1978, Mr. Citronowicz has worked in
        a
        variety of manufacturing and high tech industries. In October 1993, Mr.
        Citronowicz joined the Company as Vice President of Operations. He is
        responsible for all areas of manufacturing, purchasing, product redesign,
        as
        well as new product design. In September 1997, Mr. Citronowicz was appointed
        by
        the Board of Directors to the position Executive Vice President and Chief
        Operating Officer. Mr. Citronowicz’s employment contract extends to December 31,
        2009.
 
 Charles
        Peabody, CPA, resigned his position in August 2005.
 
 Brian
        Madden, age 51, graduated from Iona College in 1976 with a Bachelor of Business
        Administration degree. Mr. Madden is married with two children and is currently
        the President of Liberty Title Agency. He has been a member of the boards
        of
        various professional and civic organizations such as: Long Island Housing
        Partnership, chairman of NYS Land Title Assoc-Agents Committee, Elwood School
        Board, Good Samaritan Hospital Board of Governors, Long Island Children’s Museum
        and various others. Mr. Madden presently sits on our audit
        committee.
 
 Randy
        Rossi, age 46, has over 14 years of experience in medical manufacturing.
        Most
        recently, he was President of the Patient Care Division, Kendall/TYCO which
        specialized in Wound Care, Urology and Incontinent Care with revenues in
        excess
        of $500M.
 
 Michael
        Norman, CPA age 49, manages a CPA firm specializing in business financial
        planning as well as governmental and financial auditing. Mr. Norman is a
        member
        of the Nassau County Board of Assessors, Treasurer of the Don Monti Memorial
        Research Foundation and a Glen Cove City Councilman, all located on Long
        Island,
        New York. He also serves as the expert member of Bovie’s audit
        committee.
 
 We
        have a
        3-member audit committee consisting of three independent members of the Board
        of
        Directors, George Kromer Chairman, Brian Madden and Michael Norman CPA. One
        of
        the independent members, Michael Norman serves as a financial expert for
        the
        Committee.
 
 On
        March
        30, 2004 Bovie adopted an executive employee ethics code.
 
 A
        copy of
        the code of ethics which expressly relates to the CEO and CFO (Andrew Makrides)
        will be provided without charge to any person upon request to Bovie Medical
        Corporation, 734 Walt Whitman Road, Melville, NY 11747, Attn: Andrew Makrides.
  -18-
  **ITEM
          10. Executive Compensation**
 
 The
          following table sets forth the compensation paid to the executive officers
          of
          the registrant for the three years ended December 31,
          2005:
 Long
                  TermAnnual
                  Compensation
              Compensation(a)
              (b)
              I
              (d)
              (g)Name
                  and Principal Position
              Year
              Salary($)
              Bonus($)
              Securities
                  Underlying Options/ SARs(#)Andrew
                  Makrides
                President,
                  CEO,
                Chairman
                  of
                the
                  Board and Chief Financial Officer (B)
              2005
              $186,418
              3,428
              25,0002004
              $167,320
              3,189
              25,0002003
              $158,406
              2,967
              110,000J.
                  Robert Saron
                President
                  of Aaron
                Medical
                  and
                Director
              2005
              $256,173
              4,854
              25,0002004
              $233,036
              4515
              25,0002003
              $219,786
              4,200
              110,000Moshe
                  Citronowicz
                Executive
                Vice
                  President-
                Chief
                  Operating
                Officer
              2005
              $193,451
              3,567
              25,0002004
              $170,766
              3,318
              25,0002003
              $158,637
              3,086
              110,000Charles
                  Peabody (A)
              2005
              $50,515
              
              25,000Chief
                  Financial
              2004
              $81,825
              1,579
              25,000Officer
              2003
              $77,221
              1,532
              60,000
 
 
 In
        2003,
        2004 and 2005, a total of 585,000, 225,000, 225,000 and options were granted
        to
        executive officers and directors, respectively of which the 225,000 options
        granted in 2005 were not pursuant to qualified shareholder approved plan
        and are
        restricted.
  (A)
        Resigned on August 9, 2005.
 
 (B)
        Assumed the office of CFO upon the resignation of Charles
        Peabody.
  -19-
  
 Option
        Grants Table:
 
 The
        following table sets forth, with respect to grants of stock options made
        during
        2005 to each of the Named Executive Officers: (I) the name of the executive
        officer (column (a)); (ii) the number of securities underlying options granted
        (column (b)); (iii) the percent the grant represents of the total options
        granted to all employees during 2005; (iv) the per share exercise price of
        the
        options granted (column (d)); (v) the expiration date of the options (column
        (e)); and (vi) the potential realizable value of each grant, assuming the
        market
        price of the Common Stock appreciates in value from the date of grant to
        the end
        of the option term at a rate of (A) 5% per annum (column (f)) and (B) 10%
        per
        annum (column (g)).
 
 Option
        Grants in 2005:
 
 Individual
                  Grants
              Potential
                  Realizable
                Value
                  at Assumed Annual Rates of Stock Price Appreciation for Option
                  TermName
                (a)
              Number
                  of Securities
                Underlying
                  Options Granted
                (b)(1)
              %
                  of Total Options
                Granted
                  to Employees in 2005
                (c)
              Exercise
                  or Base Price per Share
                (d)
              Expiration
                  Date
                (e)
              5%($)
                (f)
              10%($)
                (g)Charles
                  Peabody(CFO)(3)
              25,000
              5.85%
              2.25Moshe
                  Citronowicz(COO)
              25,000
              5.85%
              2.25
              05/05/15
              35,375
              89,648J.
                  Robert Saron(2)
              25,000
              5.85%
              2.25
              05/05/15
              35,375
              89,648Andrew
                  Makrides(CEO)(CFO)
              25,000
              5.85%
              2.25
              05/05/15
              35,375
              89,648
 
 Total
        options granted were 427,500 which represents 100% of the options granted
        in
        2005, all of which are restricted.
 
 (1)
        Such
        options were granted at 100% of fair market value on the date of grant
 (2)
        President of Aaron Medical Industries, Inc., our subsidiary.
 (3)
        Resigned his position on August 9, 2005.
  -20-
  
 Equity
        Compensation Plan Information:
 
 Plan
                  category
              Number
                  of Securities
                to
                  be issued upon
                exercise
                  of
                outstanding
                  options,
              Weighted-average
                exercise
                  price of
                outstanding
                  options,
                warrants
                  and rights
              Number
                  of securities
                remaining
                  available
                for
                  future issuance
                under
                  equity
                compensation
                  plansEquity
                  compensation Plans approved by Security holders3,751,370
              $1.14
              483,300Total
              4,168,870
              $1.25
              483,300
  The
        following table summarizes: 1. The options granted in the last fiscal year
        2005
        and 2. The aggregated option exercises in the last fiscal year and the fiscal
        year-end option values.
 
 Aggregate
        Option/SAR Exercises in the Fiscal Year Ended December 31, 2005 Option/SAR
        Values
 (a)
              (b)
              (c)
              (d)
              (e)Name
              Shares
                  Acquired on Exercise (#)
              Value
                  Realized ($)
              Number
                  of Securities Underlying Unexercised Options/SARs at December 31,
                  2005
                  (#)
              Value
                  of Unexercised In-the Money Options/SARs at December 31,
                  2005($)Exercisable
              Unexercisable
              Exercisable
              UnexercisableAndrew
                  Makrides
              -
              -
              535,000
              -
              1,080,800
              -Alfred
                  Greco (2)
              -
              -
              
              -
              
              -George
                  Kromer
              -
              -
              440,000
              -
              868,325
              -Moshe
                  Citronowicz
              25,000
              72,500
              465,000
              -
              952,200
              -Rob
                  Saron
              -
              -
              555,000
              -
              1,141,650
              -Brian
                  Madden
              -
              -
              85,000
              -
              66,300
              -Michael
                  Norman
              -
              -
              60,000
              -
              46,800
              -Charles
                  Peabody(3)
              -
              -
              
              -
              
              -Randy
                  Rossi
              -
              -
              50,000
              -
              39,500
              -Total
              25,000
              72,500
              2,190,000
              -
              4,195,575
              -
  
 (1)
        Assumes $2.98 per share fair market value on December 31, 2005 which was
        the
        closing price on December 30, 2005, the last day of trading in 2005.
 
 (2)
        Mr.
        Greco resigned his position on the board on May 9, 2005 but still remains
        corporate counsel.
 
 (3)
        Mr.
        Peabody resigned his position as CFO on August 9, 2005.
  -21-
  
 In
        2003,
        the Board of Directors adopted and shareholders approved Bovie’s 2003 Executive
        and Employee Stock Option Plan covering a total of one million two hundred
        thousand (1,200,000) shares of common stock issuable upon exercise of options
        to
        be granted under the Plan. In 2005, the Board of Directors granted 25,000
        restricted, nonqualified options to each Executive Officer and Director totaling
        225,000 shares.
 
 Outside
        Directors are compensated in their capacities as Board members through option
        grants. Our Board of Directors presently consists of J. Robert Saron, Andrew
        Makrides, Chairman CEO, and President, George Kromer, Jr., Randy Rossi, Michael
        Norman and Brian Madden. For the past years, pursuant to a written agreement,
        Mr. Kromer has been retained by Bovie Medical Corporation as a business and
        public relations consultant on a month-to-month basis at the current average
        monthly fee of $2,000.
 
 Mr.
        Greco
        is the managing director of Alfred V. Greco PLLC, a partner of Sierchio,
        Greco
        and Greco counsel to Bovie, to which Bovie paid legal fees of $80,400 during
        2005.
 
 There
        have been no changes in the pricing of any options previously or currently
        awarded.
 
 In
        January, 2004, we extended employment contracts with certain of our officers
        for
        six years. The employment agreements provide, among other things, that the
        Executive may be terminated as follows:
 
 (a)
              Upon
                  the death of the Executive and the Executive’s estate shall be paid the
                  basic annual compensation due the Employee pro-rated through the
                  date of
                  termination.
 
 (b)
              By
                  the Resignation of the Executive at any time upon at least thirty
                  (30)
                  days prior written notice to Bovie; and Bovie shall be obligated
                  to pay
                  the Employee the basic annual compensation due him pro-rated to
                  the
                  effective date of termination,
 
 (c)
              By
                  Bovie, for cause if during the term of the Employment Agreement
                  the
                  Employee violates the provisions of Paragraph 12 hereof, or is
                  found
                  guilty in a court of law of any crime of moral
                  turpitude.
 
 (d)
              By
                  Bovie, without cause, with the majority approval of the Board of
                  Directors, at any time upon at least thirty (30) days prior written
                  notice
                  to the Executive: and Bovie shall be obligated to pay the Executive
                  compensation currently in effect including all bonuses, accrued
                  or
                  prorate, and expenses up to the date of termination. Thereafter,
                  for the
                  period remaining under the contract, Bovie shall pay the Executive
                  the
                  salary then in effect at the time of termination payable weekly.
                  Employee
                  shall not have to account for other compensation other sources
                  or
                  otherwise mitigate his damages due to such
                  termination.
 
 (e)
              If
                  Bovie terminates the agreement, without cause, or fails to meet
                  its
                  obligations to the Executive on a timely basis, or if there is
                  a change in
                  the control of Bovie, the Executive may elect to terminate his
                  employment
                  agreement. Upon any such termination or breach of any of its obligations
                  under the Employment Agreement, Bovie shall pay the Executive a
                  lump sum
                  severance equal to three times the annual salary and bonus in effect
                  the
                  month preceding such termination or breach as well as any other
                  sums which
                  may be due under the terms of the Employment Agreement up to the
                  date of
                  termination.
 
  -22-
  The
        following schedule shows all contracts and terms with officers of Bovie.
 
 Bovie
                  Medical CorporationDecember
                  31, 2005Contract
              Expiration
              Current
              AutoDate
              Date(1)
              Base
                  Pay
              AllowanceAndrew
                  Makrides
              01/01/98
              1/31/2009(1)
              $178,274
              $
                  6,067J.
                  Robert Saron
              01/01/98
              1/31/2009(1)
              252,410
              6,067Moshe
                  Citronowicz
              01/01/98
              1/31/2009(1)
              185,482
              6,067
 
 (1)
              Includes
                  total extensions for six years- Salaries increase annually pursuant
                  to a
                  contract formula. In the event of a change in control, each officers’
                  contract contains an option for each respective officer to resign
                  and
                  receive 3 years salary.
  **ITEM
        11. Section 16(a) Beneficial Ownership Reporting
        Compliance**
 
 The
        following table sets forth certain information as of December 31, 2005, with
        respect to the beneficial ownership of the Company’s common stock by all persons
        known by the Company to be the beneficial owners of more than 5% of its
        outstanding shares, by directors who own common stock and/or options to levy
        common stock and by all officers and directors as a group.
 Number
                  of SharesNature
                  of
              Percentage
                  ofName
                  and Address
              Title
              Owned
                  (i)
              Ownership
              Ownership(i)The
                  Frost National Bank
              Common
              1,000,000
              Beneficial
              5.5%FBO
                  RenaissanceUS
                  Growth InvestmentTrust
                  PLC.Trust
                  no. W00740100The
                  Frost National Bank
              Common
              1,000,000
              Beneficial
              5.5%FBO,
                  BFS US SpecialOpportunities
                  Trust PLC.Trust
                  no. W00118000Directors
                  and OfficersAndrew
                  Makrides
                734
                  Walt Whitman Road
                Melville,
                  NY 11746
              Common
              850,800(ii)
              Beneficial
              5.8%George
                  Kromer
                P.O.
                  Box 188
                Farmingville,
                  NY 11738
              Common
              440,000(iii)
              Beneficial
              3.0%
 
 J.
                  Robert Saron
                7100
                  30thAvenue North
                St.
                  Petersburg, FL 33710
              Common
              799,363(iv)
              Beneficial
              5.5%
  -23-
  
 Moshe
                  Citronowicz
                7100
                  30thAvenue North
                St.
                  Petersburg, FL 33710
              Common
              639,591
                  (v)
              Beneficial
              4.4%Brian
                  Madden
                300
                  Garden City Plaza
                Garden
                  City, NY 11530
              Common
              85,000
                  (vi)
              Beneficial
              .6%Mike
                  Norman
              Common
              60,000(vii)
              Beneficial
              .4%410
                  Jericho Tpke,Jericho,
                  NYRandy
                  Rossi
              Common
              60,000(viii)
              Beneficial
              .4%2641
                  Kelliwood CircleShrevesport,
                  LAOfficers
                  and Directors as a group(7 Persons)
              
              2,934,754(ix)
              
              18%
 
  (i)
        Based
        on 14,040,728 outstanding shares of Common Stock and 4,168,870 outstanding
        options to acquire a like number of shares of Common Stock as of December
        31,
        2005, of which officers and directors owned a total of 2,190,000 options
        and
        744,753 shares at December 31, 2005. We have calculated the percentages on
        the
        basis of the amount of outstanding securities plus, for each person or group,
        any securities that person or group has the right to acquire within 60 days
        pursuant to options, warrants, conversion privileges or other
        rights.
 
 (ii)
        Includes 315,800 shares reserved and 535,000 ten year options owned by Mr.
        Makrides to purchase shares of Common Stock of the Company. Exercise prices
        for
        his options range from $.50 for 155,000 shares to $3.25 for 25,000 shares.
 
 (iii)
        Includes 440,000 shares reserved pursuant to ten year options owned by Mr.
        Kromer to purchase shares of the Company. Exercise prices for his options
        range
        from $.50 for 100,000 shares to $3.25 for 25,000 shares.
 
 (iv)
        Includes 555,000 shares reserved pursuant to 10 year options owned by Mr.
        Saron,
        exercisable at prices ranging from $.50 per share for 155,000 shares, and
        $3.25
        per share for 25,000 shares.
 
 (v)
        Includes 465,000 shares reserved pursuant to 10 year options owned by Mr.
        Citronowicz exercisable at prices ranging from $.50 for 155,000 shares to
        $3.25
        for 25,000 shares.
 
 (vi)
        Includes 85,000 shares reserved pursuant to 10 year options owned by Mr.
        Madden
        exercisable at prices ranging from $3.25 for 25,000 to $2.13 for 25,000 options
        to purchase Common Stock. Mr. Madden has no financial interest in 25,000
        shares
        of Bovie owned by his wife.
 
 (vii)
        Includes 60,000 shares reserved pursuant to 10 year options owned by Mr.
        Norman
        exercisable at prices ranging from $2.13 for 25,000 shares to $2.25 for 35,000
        shares.
 
 (viii)
        Includes 50,000 share reserved pursuant to 10 year options owned by Mr. Rossi
        exercisable at price ranging from $2.13 for 25,000 to $2.25 for 25,000
        shares.
 
 (ix)
        Includes 2,190,000 shares reserved for outstanding options owned by all
        Executive Officers and directors as a group. The last date options can be
        exercised is May 5, 2015.
  -24-
  
 **ITEM
        12. Certain Relationships and Related
        Transactions**
 
 **Recent
        Developments**
 
 In
        1998,
        Maxxim Medical Corporation (“Maxxim”) a then publicly owned corporation,
        acquired 3,000,000 shares of our common stock from us pursuant to a certain
        agreement in exchange for assets and equipment, the ownership of the trade
        name
“Bovie” and other future business to be conducted between our corporations. As
        part of the agreement, Maxxim was granted rights to demand that we register
        the
        shares with the SEC. Maxxim later becgvame a privately owned corporation.
        Maxxim
        allegedly sold the Bovie common stock to ACMI Corporation (“ACMI”) in 2000.
        After a continuing dispute between Maxxim and ACMI, in May, 2004 a bankruptcy
        court declared ACMI the owner of the 3,000,000 Bovie shares
 
 In
        September 2004, ACMI Corporation privately sold the 3,000,000 shares to a
        limited number of sophisticated accredited investors. As part of the sale,
        ACMI
        Corporation assigned the demand registration rights to the accredited investors.
        Shortly after completion of the sale by ACMI Corporation, the accredited
        investors exercised their registration rights and demanded that we file the
        registration statement with the SEC covering the 3,000,000 shares of common
        stock. We filed the registration statement as requested for the 3,000,000
        shares
        of common stock and listed the accredited investors as selling stockholders
        (the
“Selling Stockholders”). The registration statement became effective in
        September, 2005. All proceeds from any sale of shares of our Company pursuant
        to
        the registration statement are for the benefit of the Selling Stockholders
        and
        not Bovie. However, pursuant to separate agreement with ACMI and the Selling
        Stockholders, we are in the process of being reimbursed for our legal,
        accounting and other expenses incurred in connection with the
        offering. .
 
 In
        2005,
        the Executive Officers and directors were awarded a total of 225,000
        non-qualified options to purchase our Common Stock at an exercise price of
        $2.25
        per share expiring on May 5, 2015. (See Executive Compensation)
 
 A
        former
        director, Alfred V. Greco Esq. is the principal of Alfred Greco PLLC, a partner
        of Sierchio, Greco and Greco the Company’s counsel. Alfred V. Greco PLLC
        received $80,400 and $63,650 in legal fees for the years 2005 and 2004,
        respectively.
 
 A
        director, George Kromer also serves as a consultant to us with consulting
        compensation of $22,906 and $20,751 for 2005 and 2004, respectively.
 
 Two
        relatives of the chief operating officer of the Company are employed by the
        Company. Yechiel Tsitrinovich, an engineering consultant received compensation
        for 2005 and 2004 of $79,776 and $79,776 respectively. The other relative,
        Arik
        Zoran, is an employee of the Company in charge of the engineering department.
        He
        had a two year contract providing for a salary of $90,000 per year plus living
        expenses and benefits which has been extended. For 2005 and 2004 he was paid
        $157,045 and $144,314 which includes living expenses and benefits. The Company
        is attempting at this time to secure a permanent work visa for Mr. Zoran.
  -25-
  **ITEM
        13A.  Exhibit s List and Reports on Form
        8K**
 
 Exhibit
                  4.2
              Registration
                  Rights Agreement dated May 8, 1998Exhibit
                  4.3
              Assignment
                  of Registration Rights Agreement dated September, 2004Exhibit
                  10.1
              Joint
                  Venture Agreement dated February 25, 2000
                Between
                  Bovie Medical Corporation and Jump Agentur fur
                Elektrotechnik
                  GmBHExhibit
                  10.2
              Agreement
                  between Bovie Medical Corporation and Arthrex Inc. dated June
                  2002Exhibit
                  10.3
              Distribution
                  and Service Center Agreement  between Bovie Medical Corp and
                  SymbolMedical
                  Limited dated December 31, 2004Exhibit
                  10.4
              Employment
                  Agreement- Andrew MakridesExhibit
                  10.5
              Employment
                  Agreement-Robert J. SaronExhibit
                  10.6
              Employment
                  Agreement-Moshe CitronowiczExhibit
                  10.7
              Amended
                  Employment Agreement between Bovie and Andrew Makrides dated as
                  of January
                  6, 2004.Exhibit
                  10.8
              Amended
                  Employment Agreement between Bovie and J. Robert Saron dated as
                  of January
                  6, 2004.Exhibit
                  10.9
              Amended
                  Employment Agreement between Bovie and Moshe Citronowciz dated
                  as of
                  January 6, 2004.Exhibit
                  10.10
              License
                  Agreement between Bovie and Emergency Medicine Innovations, LLC
                  dated
                  October 22, 2004.Exhibit
                  10.11
              Consulting
                  and Intellectual Property Assignment
                  Agreement dated January 12, 2006 among Bovie, Henvil Corp. Ltd
                  and Steve
                  Livneh.Exhibit
                  21.1
              Consent
                  of Bloom & Co., LLPExhibit
                  31.1
              Certification
                  pursuant to Section 302 of Sarbanes-Oxley
                  Act of 2002.Exhibit
                  31.2
              Certification
                  pursuant to Section 302 of Sarbanes-Oxley
                  Act of 2002.Exhibit
                  32.1
              Certification
                  pursuant to Section 906 of Sarbanes-Oxley
                  Act of 2002.Exhibit
                  32.2
              Certification
                  pursuant to Section 906 of Sarbanes-Oxley
                  Act of 2002._____________________
  **ITEM
        13B.****8K’s
        Filed in the Fourth Quarter**
 
 **No
        Form 8-K was filed in the fourth quarter of 2005.**
  -26-
  
 **ITEM
        14. Principal Accountant Fees And
        Services**
 
 The
        following table sets forth the aggregate fees billed to us for fiscal years
        ended December 31, 2005 and 2004 by Bloom & Co., LLP, our
        auditors:
 
 
 2005
              
              2004Audit
                  Fees (1)
              
              $
              130,027
              
              $
              133,442Non-Audit
                  Fees:Related
                  Fees(2)
              
              
              25,000
              
              
              --Tax
                  Fees(3)
              
              
              5,000
              
              
              5,000All
                  other Fees(4)
              
              
              --
              
              
              --Total
                  Fees paid to Auditor
              
              $
              160,027
              
              $
              138,442
 
 
 (1)
        Audit
        fees consist of fees billed for professional services rendered for the audit
        of
        Bovie’s annual financial statements and review of the interim consolidated
        financial statements included in quarterly reports and services that are
        normally provided by Bloom & Co., LLP in connection with statutory and
        regulatory filings or engagements.
 
 (2)
        Audit-Related fees consist of fees billed for assurance and related services
        that are reasonably related to the performance of the audit or review of
        Bovie’s
        consolidated financial statements and are not reported under “Audit Fees”.
        During 2005 services related to the filing of a Form S3 with the SEC were
        performed.
 
 (3)
        Tax
        fees consist of fees billed for professional services rendered for tax
        compliance, tax advice and tax planning (domestic and international). These
        services include assistance regarding federal, state and international tax
        compliance, acquisitions and international tax planning.
 
 (4)
        All
        other fees consist of fees for products and services other than the services
        reported above. In the past the Board of Directors had considered the role
        of
        Bloom & Co., LLP in providing certain tax services to Bovie and had
        concluded that such services were compatible with Bloom & Co., LLP’s
        independence as our auditors. In addition, since the effective date of the
        SEC
        rules stating that an auditor is not independent of an audit client if the
        services it provides to the client are not appropriately approved (which
        was
        previously done by the Board of Directors). Now the Audit Committee will
        pre-approve all audit and permissible non-audit services provided by the
        independent auditors.
  **Audit
        Committee**
 
 The
        Audit
        Committee has adopted a policy for the pre-approval of services provided
        by the
        independent auditors, pursuant to which it may pre-approve any service
        consistent with applicable law, rules and regulations. Under the policy,
        the
        Audit Committee may also delegate authority to pre-approve certain specified
        audit or permissible non-audit services to one or more of its members, including
        the Chairman. A member to whom pre-approval authority has been delegated
        must
        report its pre-approval decisions, if any, to the Audit Committee at its
        next
        meeting, and any such pre-approvals must specify clearly in writing the services
        and fees approved. Unless the Audit Committee determines otherwise, the term
        for
        any service pre-approved by a member to whom pre-approval authority has been
        delegated is twelve months.
  Prior
        to
        September 29, 2003 the audit committee consisted of the board of directors.
        On
        September 29, 2003 the board of directors appointed Brian Madden, George
        Kromer
        (both independent directors) and Andrew Makrides as audit committee members.
        Mr.
        Madden was considered audit committee financial expert until Mr. Michael
        Norman
        CPA was made a board member on September 23, 2004. The audit committee is
        presently made up of three members, George Kromer (Chairman), Michael Norman,
        CPA (Financial Expert) and Brian Madden.
  -27-
  **SIGNATURES**
 
 Pursuant
        to the requirements of the 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, in the Melville, New York on
        March
        28, 2006.
 
 Bovie
                  Medical CorporationBy:
                  /s/ Andrew MakridesAndrew
                  MakridesPresidentChairman
                  of the BoardChief
                  Financial Officer
 
 
 
 
 
    **PART
        II**
 
 **ITEM
        7. FINANCIAL STATEMENTS**
 
 **BOVIE
        MEDICAL CORPORATION INDEX**
 **TO
        FINANCIAL STATEMENTS**
 
 ContentsIndependent
                  Auditors' ReportConsolidated
                  Balance Sheet at December 31, 2005 and 2004Consolidated
                  Statements of Operations for the years ended December 31, 2005
                  and
                  2004Consolidated
                  Statements of Shareholders' Equity for the years ended December
                  31, 2005
                  and 2004Consolidated
                  Statements of Cash Flows for the years ended December 31, 2005
                  and
                  2004Notes
                  to Consolidated Financial StatementsConsent
                  of Certified Public
                  Accountant
 
 
   
  
 BLOOM
                  & CO., LLP 50 CLINTON STREET. HEMPSTEAD. NEW YORK 11550:
              TEL:
                  516 - 486-5900CERTIFIED
                  PUBLIC ACCOUNTANTS
              FAX:
                  516 - 486-5476STEVEN
                  BLOOM, CPA
                FREDERICK
                  PAUKER, CPA
                SIROUSSE
                  TABRIZTCHI, Ph.D. CPA
              MEMBER
                  OF AMERICAN INSTITUTE OF
                CERTIFIED
                  PUBLIC ACCOUNTANTS
 
 **REPORT
        OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING
        FIRM**
 
 To
        the
        Board of Directors
 and
        Shareholders of
 Bovie
        Medical Corporation
 
 We
        have
        audited the accompanying consolidated balance sheets of Bovie Medical
        Corporation as of December 31, 2005 and 2004, and the related consolidated
        statements of operations, stockholders’ equity, and cash flows for the years
        then ended. These financial statements are the responsibility of the Company’s
        management. Our responsibility is to express an opinion on these financial
        statements based on our audits.
 
 We
        conducted our audits in accordance with 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 consolidated financial position of Bovie Medical
        Corporation as of December 31, 2005 and 2004, and the consolidated results
        of
        its operations and its cash flows for the years then ended in conformity
        with
        accounting principles generally accepted in the United States of America.
 
 /s/Bloom
        and Company LLP
 Hempstead,
        New York
 March
        28,
        2006
  
 
 
 
 
 
   
   **BOVIE
        MEDICAL CORPORATION**
 **CONSOLIDATED
        BALANCE SHEET**
 **DECEMBER
        31, 2005 AND 2004**
 
 **ASSETS**
 
 2005
              
              2004Current
                  assets:Cash
              
              $
              1,295,266
              
              $
              2,294,746Trade
                  accounts receivable, net
              
              
              2,316,761
              
              
              1,954,287Inventories
              
              
              2,996,832
              
              
              2,001,637Prepaid
                  expenses
              
              
              335,492
              
              
              328,765Deferred
                  tax asset
              
              
              386,200
              
              
              386,200Total
                  current assets
              
              
              7,330,551
              
              
              6,965,635Property
                  and equipment, net
              
              
              2,595,641
              
              
              2,116,324Other
                  assets:Repair
                  parts
              
              
              --
              
              
              124,363Brand
                  name/Trademark
              
              
              1,509,662
              
              
              1,509,662Purchased
                  technology (net)
              
              
              33,663
              
              
              88,572License
                  rights
              
              
              280,000
              
              
              350,000Deposits
              
              
              21,215
              
              
              14,4451,844,540
              
              
              2,087,042Total
                  Assets
              
              $
              11,770,732
              
              $
              11,169,001The
                  accompanying notes are an integral part of the financial
                  statements.
 
   F-1
  **BOVIE
        MEDICAL CORPORATION**
 **CONSOLIDATED
        BALANCE SHEET**
 **DECEMBER
        31, 2005 AND 2004**
 **(Continued)**
 
 **LIABILITIES
        AND STOCKHOLDERS' EQUITY**
 
 **LIABILITIES**
 
 Current
                  liabilities:
              
              
              2005
              
              
              2004Accounts
                  payable
              
              $
              868,212
              
              $
              620,151Accrued
                  expenses and other liabilities
              
              
              471,006
              
              
              568,482Customers
                  deposits
              
              
              --
              
              
              36,000Deferred
                  Revenue
              
              
              141,586
              
              
              157,844Current
                  maturities of long term debt
              
              
              348,328
              
              
              31,668Total
                  current liabilities
              
              
              1,829,132
              
              
              1,414,145Mortgage
                  Payable-Non current
              
              
              --
              
              
              348,325Minority
                  interest
              
              
              140,000
              
              
              150,000Stockholders'
                  equity:Preferred
                  stock 10,000,000 shares
                authorized,
                  none outstandingCommon
                  stock par value $.001;
                40,000,000
                  shares authorized,
                14,040,728
                  and 13,862,128
                issued
                  and outstanding
                on
                  December 31, 2005 and
                December
                  31, 2004 respectively,
              
              
              14,059
              
              
              13,881Additional
                  paid in capital
              
              
              20,530,090
              
              
              20,391,407Accumulated
                  deficit
              
              
              (10,742,549
              )
              
              (11,148,757
              )Total
                  stockholders' equity
              
              
              9,801,600
              
              
              9,256,531Total
                  liabilities and stockholders' equity
              
              $
              11,770,732
              
              $
              11,169,001The
                  accompanying notes are an integral part of the financial
                  statements.
 
 
 
  F-2
  **BOVIE
        MEDICAL CORPORATION**
 **CONSOLIDATED
        STATEMENT OF OPERATIONS**
 **FOR
        THE YEARS ENDED DECEMBER 31, 2005 AND 2004**
 2005
              
              2004Sales
              
              $
              20,211,141
              
              
              20,495,101Cost
                  of sales
              
              
              12,649,209
              
              
              12,638,161Gross
                  Profit
              
              
              7,561,932
              
              
              7,856,940Other
                  costs:Research
                  and development
              
              
              985,807
              
              
              907,389Professional
                  services
              
              
              447,346
              
              
              415,606Salaries
                  and related costs
              
              
              2,010,599
              
              
              1,977,053Selling,
                  general and administration
              
              
              3,553,022
              
              
              3,249,050Development
                  cost - joint venture
              
              
              161,190
              
              
              39,286Total
                  other costs
              
              
              7,157,964
              
              
              6,588,384Income
                  from operations
              
              
              403,968
              
              
              1,268,556Other
                  income and (expense):Gain
                  from involuntary conversion of fixed assets
              
              
              
              
              
              245,264Interest
                  income
              
              
              46,959
              
              
              3,263Interest
                  expense
              
              
              (22,703
              )
              
              (
                  15,090
              )24,256
              
              
              233,437Net
                  income before income tax and minority expense
              
              
              428,224
              
              
              1,501,993Minority
                  Interest in expense
              
              
              10,000
              
              
              10,000Income
                  tax expense
              
              
              (164,016
              )
              
              (541,000
              )Income
                  tax benefit
              
              
              132,000
              
              
              541,000Net
                  income
              
              $
              406,208
              
              $
              1,511,993The
                  accompanying notes are an integral part of the financial
                  statements.
 
 
  F-3
  **BOVIE
        MEDICAL CORPORATION**
 **CONSOLIDATED
        STATEMENT OF OPERATIONS**
 **FOR
        THE YEARS ENDED DECEMBER 31, 2005 AND 2004**
 **(CONTINUED)**
 
 2005
              
              2004Basic
                  earnings per common share
              
              $
              .03
              
              $
              .11Diluted
                  earnings per common share
              
              
              .03
              
              
              .09Weighted
                  average numberof
                  common shares outstanding
              
              
              13,923,134
              
              
              13,755,552Incremental
                  items:Stock
                  options
              
              
              1,827,150
              
              
              2,422,329Diluted
                  weighted averagecommon
                  shares outstanding
              
              
              15,750,284
              
              
              16,177,881The
                  accompanying notes are an integral part of the financial
                  statements.
 
 
   F-4
  **BOVIE
        MEDICAL CORPORATION**
 **CONSOLIDATED
        STATEMENT OF SHAREHOLDERS
        EQUITY**
 **FOR
        THE YEARS ENDED DECEMBER 31, 2005 AND 2004**
 Options
              Common
              Paid-Outstanding
              Shares
              Value
              in
                  Capital
              Deficit
              TotalJanuary
                  1, 2004
              3,988,800
              13,464,528
              $13,482
              $20,097,095
              $(12,660,750)
              $7,449,827Options
                  granted
              370,000
              --
              --
              --
              --
              --Options
                  exercised
              (397,600)
              397,600
              399
              294,312
              --
              294,711Options
                  forfeited
              (10,000)
              --
              --
              --
              --
              --Income
                  for period
              --
              --
              --
              --
              1,511,993
              1,511,993December
                  31, 2004
              3,951,200
              13,862,128
              $13,881
              $20,391,407
              $(11,148,757)
              $9,256,531Options
                  granted
              427,500Options
                  exercised
              (178,600)
              178,600
              178
              138,683
              
              138,861Options
                  foreited
              (31,230)Income
                  for period
              
              
              
              
              406,208
              406,208December
                  31, 20054,168,870
              14,040,728
              $14,059
              $20,530,090
              $(10,742,549)
              $9,801,600
 
 
  F-5
  **BOVIE
        MEDICAL CORPORATION**
 **CONSOLIDATED
        STATEMENT OF CASH FLOWS**
 **FOR
        THE YEARS ENDED DECEMBER 31, 2005 AND
        2004**
 
 2005
              
              2004Cash
                  flows from operating activities:Net
                  income
              
              $
              406,208
              
              $
              1,511,993Adjustments
                  to reconcilenet
                  income to net cash providedby
                  operating activities:Depreciation
                  and amortization
              
              
              545,876
              
              
              395,119Write
                  down of inventories and parts
              
              
              
              
              
              303,872Write
                  down development costInvoluntary
                  conversion of fixed assets
              
              
              
              
              
              (
                  245,264
              )Change
                  in assets and liabilities:Trade
                  receivables
              
              
              (362,474
              )
              
              (322,106
              )Prepaid
                  expenses
              
              
              (
                  6,727
              )
              
              61,260Inventories
                  and parts
              
              
              (870,832
              )
              
              249,503Accounts
                  payable
              
              
              248,061
              
              
              (59,641
              )Accrued
                  expenses
              
              
              (133,476
              )
              
              149,251Deferred
                  Revenue
              
              
              (
                  16,258
              )Total
                  adjustments
              
              
              (595,830
              )
              
              531,994Net
                  cash (applied to) provided by operations
              
              $
              (189,622
              )
              $
              2,043,987The
                  accompanying notes are an integral part of the financial
                  statements.
 
 
 
 
 
   F-6
  **BOVIE
        MEDICAL CORPORATION**
 **CONSOLIDATED
        STATEMENT OF CASH FLOWS**
 **FOR
        THE YEARS ENDED DECEMBER 31, 2005 AND 2004**
 **(Continued)**
 
 2005
              
              2004Net
                  cash (applied to) provided by operating activities
              
              $
              (189,622
              )
              $
              2,043,987Cash
                  flows from investing activities:(Increase)
                  in fixed assets
              
              
              (908,283
              )
              
              (606,505
              )Decrease(Increase)in
                  security deposits
              
              
              (
                  6,770
              )
              
              (
                  4,975
              )Purchase
                  of technology
              
              
              (
                  2,001
              )
              
              --Involuntary
                  conversion of fixed assets
              
              
              
              
              
              296,735Net
                  cash (used in) investing activities
              
              
              (917,054
              )
              
              (314,745
              )Cash
                  flows from financing activities;Sale
                  of common stock
              
              
              138,861
              
              
              290,425Reduction
                  in subscription receivable
              
              
              
              
              
              4,286Reduction
                  in mortgage
              
              
              (31,665
              )
              
              (35,344
              )Net
                  cash (provided by) financing activities
              
              
              107,196
              
              
              259,367Net
                  increase(decrease) in cash
              
              
              (999,480
              )
              
              1,988,609Cash
                  at beginning of year
              
              
              2,294,746
              
              
              306,137Cash
                  at end of year
              
              $
              1,295,266
              
              $
              2,294,746Cash
                  paid during the twelve months ended December 31:2005
              
              
              2004Interest
              
              $
              22,703
              
              $
              11,625Income
                  Taxes
              
              
              22,015
              
              
              --The
                  accompanying notes are an integral part of these financial
                  statements.
 
 
   F-7
  **BOVIE
        MEDICAL CORPORATION AND SUBSIDIARY**
 **CONSOLIDATED
        STATEMENT OF CASH FLOWS**
 **INCREASE
        (DECREASE) IN CASH AND CASH EQUIVALENTS**
 **FOR
        THE YEAR ENDED DECEMBER 31, 2005 AND 2004**
 
 **SUPPLEMENTAL
        SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:**
 
 **FOR
        THE TWELVE MONTHS ENDED DECEMBER 31, 2005 AND 2004:**
 
 In
        October 2004 a hurricane tore a portion of the roof off the office facility
        at
        7100 30 th Avenue
        North, St. Petersburg, Florida causing extensive water damage to that portion
        of
        the building. The cost of the building allocated to the loss was $63,749
        of
        which there was depreciation of $12,278 leaving a net cost of $51,471. As
        per
        Financial Accounting Standard Board interpretation number 30 we have recognized
        a gain of $245,264 from the non-monetary asset being involuntarily converted
        to
        a monetary asset through the payment by the insurance company of
        $296,735.
 
 There
        were no non-cash transactions reported in 2005.
 
   F-8
  **BOVIE
        MEDICAL CORPORATION**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 
 **NOTE
        1. SIGNIFICANT ACCOUNTING POLICIES**
 
 **Use
        of Estimates in the Preparation of Financial Statements**
 
 The
        preparation of consolidated financial statements in conformity with generally
        accepted accounting principles requires management to make estimates and
        assumptions that affect the reported amounts of assets and liabilities and
        disclosure of contingent assets and liabilities at the date of the financial
        statements and the reported amounts of revenues and expenses during the
        reporting period. Actual results could differ from those estimates.
 
 **Consolidated
        Financial Statements**
 
 The
        accompanying consolidated financial statements include the accounts of Bovie
        Medical Corporation and its wholly owned subsidiary Aaron Medical Industries,
        Inc. Intercompany transaction accounts have been eliminated in
        consolidation.
 
 The
        equity method of accounting is used when the Company has a 20% to 50% interest
        in other companies. Under the equity method, original investments are recorded
        at cost and adjusted by the company's share of undistributed earnings or
        losses
        of these companies.
 
 **Cash
        and cash equivalents**
  Holdings
        of highly liquid investments with maturities of three months or less, when
        purchased, are considered to be cash equivalents. The carrying amount reported
        in the balance sheet for cash and cash equivalents approximates its fair
        values.
        The amount of federally insured cash deposits was $100,000 as of December
        31,
        2005.
  **Fair
        Values of Financial Instruments**
 
 The
        carrying amount of trade accounts receivable, accounts payable, prepaid and
        accrued expenses, bonds and notes payable, and amounts due to shareholders,
        as
        presented in the balance sheet, approximates fair value.
 
 **Accounts
        Receivable**
 
 Accounts
        for which no payments have been received for three consecutive months are
        considered delinquent and a reserve is setup for them. Customary collection
        efforts are initiated and an allowance for uncollectible accounts is set
        up and
        the related expense is charged to operations. We give negotiated sales volume
        discounts which amounted to $397,950 and $382,433 for 2005 and 2004,
        respectively. Sales as shown on the profit and loss statement are net of
        all
        discounts.
 
 **Inventories
        and Repair Parts**
 
 Inventories
        are stated at the lower of cost or market. Cost is determined principally
        on the
        average actual cost method. Finished goods and work-in-process inventories
        include material, labor, and overhead costs. Factory overhead costs are
        allocated to inventory manufactured in-house based upon cost of materials.
        Bovie
        monitors usage reports to determine if the carrying value of any items should
        be
        adjusted due to lack of demand for the item. Bovie adjusts down the inventory
        for estimated obsolescence (inventory judged to be unused in the manufacturing
        process for 2 years and is eventually discarded) or unmarketable inventory
        equal
        to the difference between the cost of inventory and the estimated market
        value
        based upon assumptions about future demand and market conditions. If actual
        market conditions are less favorable than those projected by management,
        additional inventory write-down may be required.
  F-9
  **BOVIE
        MEDICAL CORPORATION**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 
 **NOTE
        1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)**
 
 **Inventories
        and Repair Parts (Continued)**
 
 Inventory
        at December 31, 2005 and 2004 was as follows:
 
 2005
              
              2004Raw
                  materials (net of reserves)
              
              $
              1,139,730
              
              $
              705,188Work
                  in process
              
              
              1,267,991
              
              
              742,289Finished
                  goods
              
              
              589,111
              
              
              554,160Total
              
              $
              2,996,832
              
              $
              2,001,637
 
 Reserves
        for obsolescence of raw materials were $670,802 and $817,808 at December
        31,
        2005 and 2004, respectively. There were no reserves for finished goods or
        work
        in progress.
  Obsolete
        raw material inventory charged to operations was $213,944 and $303,872 for
        2005
        and 2004, respectively.
 
 Repair
        Parts. We acquired the inventory of repair parts in conjunction with the
        purchase of the Bovie line of generators and Bovie trade name, on May 8,
        1998.
        Bovie has maintained the inventory to service the previously sold generators.
        The useful life of repair parts is estimated to be five to seven years and
        the
        Company has set up an allowance for excess and obsolete parts.
 
 As
        of
        December 31, 2005 and 2004 the inventory of parts were as follows:
 
 2005
              
              2004Raw
                  materials
              
              $
              317,614
              
              $
              317,615Allowance
                  for excess or obsolete parts
              
              
              (
                  317,614
              )
              
              (193,252
              )Total
              
              $
              --
              
              $
              124,363
 
 **Notes
        Payable**
 
 We
        account for all note liabilities that are due and payable in one year as
        short
        term notes for example: Our line of credit with a commercial bank and our
        insurance premium financing arrangement had zero balances at December 31,
        2005.
 
 **Property,
        plant and equipment**
 
 These
        assets are recorded at cost less depreciation and amortization. Depreciation
        and
        amortization are accounted for on the straight-line method based on estimated
        useful lives. The amortization of leasehold improvements is based on the
        shorter
        of the lease term or the life of the improvement. Betterments and large
        renewals, which extend the life of the asset, are capitalized whereas
        maintenance and repairs and small renewals are expenses, as incurred. The
        estimated useful lives are: machinery and equipment, 7-15 years; buildings,
        30
        years; and leasehold improvements, 10-20 years.
 
 
   F-10
  **BOVIE
        MEDICAL CORPORATION**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 
 **NOTE
        1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)**
 
 **Goodwill
        and Other Intangible Assets**
 
 These
        assets consist of licenses, purchased technology and brand name. The licenses
        and purchased technology (other intangibles) are being amortized by the
        straight-line method over a 5-20 year period. The brand name
        (goodwill) qualifies as an indefinite-lived intangible asset and is not
        subject to amortization.
  Goodwill/brand
        name/trademark represents the excess of purchase price over fair value of
        identifiable net assets of acquired businesses.  Other intangible assets
        primarily represent allocations of purchase price to identifiable intangible
        assets of acquired businesses.  Goodwill/brand name/trademark and other
        intangible assets had been amortized over periods ranging from 5 to 40 years
        through December 31, 2001.
  In
        June
        2001, the Financial Accounting Standards Board issued statement of Financial
        Accounting Standards No. 142 "Goodwill and other Intangible Assets" ("SFAS
        142").  We adopted SFAS 142 effective January 1, 2002.  As a result of
        the adoption of this standard, amortization of goodwill and certain intangibles
        has been discontinued.
  **Impairment
        of Long-Lived Assets**
  We review
        long-lived assets consisting of intangible assets subject to and not subject
        to
        amortization and property, plant and equipment subject to depreciation. 
Our brand name is tested for impairment annually, or more frequently if events
        or changes in circumstances indicate that the asset may have been impaired.
        In
        the event of impairment of any intangible asset, the excess of the carrying
        amount over the fair value is recognized as impairment loss. The impairment
        losses are not restored in the future. We assess the recover- ability of
        goodwill and other intangible assets based on an independent appraisal and
        or
        undiscounted cash flows that measures the impairment, if any.
 
 **Revenue
        recognition**
 
 Revenue
        is recognized when title has been transferred to the customer, which is
        generally at the time of shipment. The following policies apply to our major
        categories of revenue transactions:
 
 Sales
        to
        customers are evidenced by firm purchase orders. Title and the risks and
        rewards
        of ownership are transferred to the customer when product is shipped. Payment
        by
        the customer is due under fixed payment terms.
 
 Product
        returns are only accepted at our discretion and in accordance with our “Returned
        Goods Policy”. Historically, the level of product returns has not been
        significant. We accrue for sales returns, rebates and allowances based upon
        an
        analysis of historical customer returns and credits, rebates, discounts and
        current market conditions.
 
 Our
        terms
        of sale to customers generally do not include any obligations to perform
        future
        services. Limited warranties are generally provided for sales and provisions
        for
        warranty are provided at the time of product sale based upon an analysis
        of
        historical data.
 
 Amounts
        billed to customers related to shipping and handling have been included in
        net
        sales. Shipping and handling costs included in cost of sales expense were
        $124,159, and $132,752 for 2005 and 2004, respectively.
 
 We
        have
        no consignment inventory with customers but we do have inventory consigned
        to
        contract manufactures who produce components for us. For December 31, 2005
        and
        2004 we had consigned work in progress of $288,112 and $62,452,
        respectively.
  F-11
  **BOVIE
        MEDICAL CORPORATION**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 
 **NOTE
        1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)**
 
 We
        sell
        to a diversified base of customers around the world and, therefore, believe
        there is no material concentration of credit risk.
 
 We
        assess
        the risk of loss on accounts receivable and adjust the allowance for doubtful
        accounts based on this risk assessment. Historically, losses on accounts
        receivable have not been material. Management believes that the allowance
        for
        doubtful accounts of $119,490 and $112,392 at December 31, 2005 and 2004,
        respectively, is adequate to provide for probable losses resulting from accounts
        receivable.
 
 **Advertising
        Costs**
 
 All
        advertising costs are expensed, as incurred. The amounts of advertising costs
        were $468,716 and $452,121 for 2005 and 2004, respectively.
  **Net
        Earnings Per Common share**
 
 Basic
        earnings per share ("EPS") is computed based on the weighted average number
        of
        common shares outstanding for the period. Diluted EPS gives effect to all
        dilutive potential shares outstanding (i.e., options and warrants) during
        the
        period. (See Significant Accounting Policies - Stock Based
        Compensation)
  **Research
        and Development Costs**
 
 Research
        and development expenses are charged to operations. Only the development
        costs
        that are purchased from another enterprise and have alternative future use
        are
        capitalized and are amortized over the estimated useful life of the asset,
        generally five years.
 
 **Research
        and Development Costs for Others**
 
 For
        research and development activities that are partially or completely funded
        by
        other parties and the obligation is incurred solely to perform contractual
        services all expenses are charged to cost of sales and all revenues are shown
        as
        sales.
 
 We
        will
        only develop electrosurgical products for others that use our product as
        the
        base for their instrument. Our development agreements provide that the customer
        must pay the costs for the development as it progresses and further provide
        that
        any future purchases of the developed product must be purchased from us.
        We
        assume no contractual risk and operate as the customer’s original equipment
        manufacturer. Our agreements call for no minimum order, but the customer
        may not
        manufacture or purchase this product from any other manufacturer.
 
 **Income
        Taxes**
 
 Bovie
        and
        its wholly owned subsidiary file a consolidated federal income tax return.
        Income taxes are accounted for under the asset and liability method. Deferred
        tax assets and liabilities are recognized for the future tax consequences
        attributable to differences between the financial statement carrying amounts
        of
        existing assets and liabilities and their respective tax bases and operating
        loss and tax credit carryforwards. Deferred tax assets and liabilities are
        measured using enacted tax rates expected to apply to taxable income in the
        years in which those temporary differences are expected to be recovered or
        settled. The effect on deferred tax assets and liabilities of a change in
        tax
        rates is recognized in income in the period that includes the enactment date.
  F-12
  **BOVIE
        MEDICAL CORPORATION**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 
 **NOTE
        1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)**
 
 **Non-monetary
        Transactions**
 
 The
        accounting for non-monetary assets is based on the fair values of the assets
        involved. Cost of a non-monetary asset acquired in exchange for another
        non-monetary asset is recorded at the fair value of the asset surrendered
        to
        obtain it. The difference in the costs of the assets exchanged is recognized
        as
        a gain or loss. The fair value of the asset received is used to measure the
        cost
        if it is more clearly evident than the fair value of the asset surrendered.
 
 **Stock-Based
        Compensation**
 
 The
        Company had adopted SFAS 123 and has adopted the amendments to SFAS 123
        disclosure provisions required under SFAS 148. Bovie will continue to account
        for stock-based compensation utilizing the intrinsic value method pursuant
        to
        Accounting Principles Board Opinion No. 25 (APB 25), Accounting for Stock
        Issued
        to Employees. Under this policy:
 
 1.
        Compensation costs are recognized as an expense over the period of employment
        attributable to any employee stock options. 2. Stocks issued in accordance
        with
        a plan for past or future services of an employee are allocated between the
        expired costs and future costs. Future costs are
 charged
        to the periods in which the services are performed.
 
 In
        December 2002, the FASB issued Statement No. 148, Accounting for Stock-Based
        compensation - Transition and Disclosure - an amendment of FASB Statement
        No.
        123. Statement No. 148 amends Statement No. 123, Accounting for Stock-Based
        Compensation, to provide alternative methods of transition for a voluntary
        change to the fair-value based method of accounting for stock-based employee
        compensation. In addition, Statement No. 148 amends the disclosure requirements
        of Statement No. 123 to require disclosure in interim financial statements
        regarding the method of accounting for stock-based employee compensation
        and the
        effect of the method used on reported results. Bovie does not intend to adopt
        a
        fair-value based method of accounting for stock-based employee compensation
        until a final standard is issued by the FASB that addresses concerns related
        to
        the applicability of current option pricing models to non-exchange traded
        employee stock option plans. SFAS 148 also amends the disclosure requirements
        of
        SFAS 123 to require prominent disclosures in both annual and interim financial
        statements about the method of accounting for stock-based employee compensation
        and the effect of the method used on reported results. SFAS 148 is effective
        for
        financial statements for annual periods ending after December 15, 2002 and
        interim periods beginning after December 31, 2002.
 
 Bovie adopted
        the amendments to SFAS 123 disclosure provisions required under SFAS 148
        and
        continued to use intrinsic value method under APB 25 to account for stock-based
        compensation. As such, the adoption of this statement did not have a
        significant impact on Bovie’s financial position, results of operations or cash
        flows.
  F-13
  **BOVIE
        MEDICAL CORPORATION**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 
 **NOTE
        1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)**
 
 At
        December 31, 2005, we had key employee and director stock option plans, which
        are described more fully in Note
        8 . 
        The Company follows Accounting Principles Board (APB) Opinion No. 25, *Accounting
        for Stock Issued to Employees* ,
        in
        accounting for its stock option plans.  Under Opinion No. 25, no
        compensation expense is recognized because the exercise price of the Company's
        stock options equals the market price of the underlying stock on the measurement
        date (date of grant).  Had compensation expense for the Company's
        stock-based compensation plans been determined based on the fair value at
        the
        grant dates for awards under those plans consistent with the method of FASB
        Statement No. 123, *Accounting
        for Stock-Based Compensation* ,
        the
        Company's net earnings and net earnings per share would have been as follows:
        (in thousands)
 
 2005
              
              2004Net
                  earnings:As
                  reported
              
              $
              406
              
              $
              1,512Deduct:
                  Compensation expense --fair
                  value method
              
              
              (372
              )
              
              (522
              )Pro
                  forma
              
              $
              34
              
              $
              990
  Basic
                  net earnings per share:As
                  reported
              
              $
              .03
              
              $
              .11Pro
                  forma
              
              $
              .00
              
              $
              (.07
              )Diluted
                  net earnings per share:As
                  reported
              
              $
              .03
              
              $
              .09Pro
                  forma
              
              $
              .00
              
              $
              (.06
              )
  The
        weighted-average fair value per share of options granted during 2005 and
        2004,
        estimated on the date of grant using the Black-Scholes option-pricing model,
        was
        $1.41 and $1.00, respectively.  The fair value of options granted was
        estimated on the date of grant using the following assumptions:
  2005
              2004Risk-free
                  interest rate
              4.5%
              4.18%Expected
                  dividend yield
              0.00%
              0.00%Expected
                  stock price volatility
              30%
              43%Expected
                  option life
              5
                  years
              10
                  years
   F-14
  **BOVIE
        MEDICAL CORPORATION**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 
 **NOTE
        1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)**
 
 **New
        Accounting Pronouncements**
 
 In
        December 2004, the Financial Accounting Standards Board (FASB) issued Statement
        of Accounting Standard (SFAS) 123R, Share-Based Payment: This statement is
        a
        revision of SFAS 123, Accounting for Stock-Based Compensation and supersedes
        APB
        25, Accounting for Stock Issued to Employees. SFAS 123R requires all share-based
        payments to employees, including grants of employee stock options, to be
        recognized in the financial statements based at their fair values beginning
        with
        the first fiscal year beginning after June 15, 2005, with early adoption
        encouraged. Under the current rules, the Company will be required to adopt
        SFAS
        123R in the first quarter of fiscal 2006, beginning December 1,
        2005.
 
 Under
        SFAS 123R, the pro forma disclosures previously permitted will no longer
        be an
        alternative to financial statement cognition. Bovie must determine the
        appropriate fair value model to be used for valuing share-based payments
        to
        employees, the amortization method for compensation cost and the transition
        method to be used at the date of adoption. The transition methods include
        modified prospective and modified retrospective adoption options. Under the
        modified retrospective options, prior periods may be restated either as of
        the
        beginning of the year of adoption or for all periods presented. The modified
        prospective method requires that compensation expense be recorded for all
        unvested stock options and restricted stock at the beginning of the first
        of
        adoption of SFAS 123R, while the modified retrospective method would record
        compensation expense for all unvested stock options and restrictive stock
        beginning with the first period restated.
 
 Additionally,
        SFAS 123R clarifies the timing for recognizing compensation expense for awards
        subject to acceleration of vesting on retirement. This compensation expense
        must
        be recognized over the period from the date of grant to the date retirement
        eligibility is met if it is shorter than the vesting term. The effect on
        future
        earnings is dependent upon a number of factors including the number of options
        granted, the vesting period, the exercise price of the options, the Company
        stock price and volatility, and other factors and therefore cannot be
        determined. However, while the adoption of FAS 123R will have no effect on
        the
        Company's cash flows or financial position, the Company believes that it
        will
        have an adverse effect on future results of operations.
 
 In
        March
        2005, the U.S. Securities and Exchange Commission, or SEC, released Staff
        Accounting Bulletin 107, Share-Based Payments, ("SAB 107"). The interpretations
        in SAB 107 express views of the SEC staff, or staff, regarding the interaction
        between SFAS 123R and certain SEC rules and regulations, and provide the
        staff's
        views regarding the valuation of share-based payment arrangements for public
        companies. SAB 107 provides guidance related to share-based payment transactions
        with non-employees, the transition from nonpublic to public entity status,
        valuation methods (including assumptions such as expected volatility and
        expected term), the accounting for certain redeemable financial instruments
        issued under share-based payment arrangements, the classification of
        compensation expense, non-GAAP financial measures, first-time adoption of
        SFAS
        123R in an interim period, capitalization of compensation cost related to
        share-based payment arrangements, the accounting for income tax effects of
        share-based payment arrangements upon adoption of SFAS 123R, the modification
        of
        employee share options prior to adoption of SFAS 123R and disclosures in
        Management's Discussion and Analysis subsequent to adoption of SFAS 123R.
        SAB
        107 requires stock-based compensation be classified in the same expense lines
        as
        cash compensation is reported for the same employees. We will apply the
        principles of SAB 107 in conjunction with our adoption of SFAS
        123R.
 
 In
        May
        2005, the FASB issued SFAS 154, Accounting Changes and Error Corrections,
        a
        replacement of APB 20, Accounting Changes and SFAS 3 Reporting Accounting
        Changes in Interim Financial Statements. SFAS 154 requires retrospective
        application to prior periods' financial statements of a voluntary change
        in
        accounting principle unless it is impracticable. SFAS 154 improves financial
        reporting because its requirements enhance the consistency of financial
        information between periods. SFAS 154 is effective for
  F-15
  
 **BOVIE
        MEDICAL CORPORATION**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 
 **NOTE
        1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)**
 
 accounting
        changes and corrections of errors made in fiscal years beginning after December
        15, 2005. The Company is required to adopt the provisions of SFAS 154 in
        its
        first fiscal quarter of fiscal 2006. We do not expect the adoption of this
        statement to have a material impact on our financial position or results
        of
        operations.
 
 The
        adoption of SFAS 151, *Inventory
        Costs,* an
        amendment of ARB No. 43, Chapter 4; had no effect on the Company's financial
        position or results of operations.
 
 ***FASB
        Interpretation No. 46R, Consolidation of Variable Interest Entities - An
        Interpretation of ARB51*** The FASB
        finalized FIN 46R in December 2003. FIN 46R expands the scope of ARB51 and
        various EITFs and can require consolidation of legal structures, called *Variable
        Interest Entities (VIEs)* .
        Companies with investments in *Special
        Purpose Entities (SPEs)* were
        required to implement FIN 46R in 2003; however, companies with VIEs are
        permitted to implement in the first quarter of 2004. While we do not have
        SPEs,
        we do have a VIE that we have determined will qualify for consolidation.
        The
        entity is our joint
        venture with Jump Agentur Fur Electrotechnik GMBH (“the Joint Venture”,
“JAG”). We have
        consolidated this entity in the years ended December 31, 2005 and 2004.
 
 Reclassifications:
        Certain prior year amounts have been reclassified to conform with the
        presentation used in 2005.
 
 **RESTATEMENT
        OF FINANCIAL STATEMENTS**
 
 We
        adopted ***FASB
        Interpretation No. 46R, Consolidation of Variable Interest Entities - An
        Interpretation of ARB51*** that
        requires the consolidation of legal structures, called *Variable
        Interest Entities (VIEs).* Our joint
        venture with Jump Agentur Fur Electrotechnik GMBH (“the Joint Venture”, “JAG”)
        qualifies as a VIE. We had
        historically accounted for the investment in JAG on the equity basis. We
        have
        restated our balance sheets and consolidated JAG in the years ended December
        31,
        2004 and 2003. The most significant impact to our financial statements is
        to add
        the intangible assets of JAG, totaling approximately $350,000 in 2004 and
        $360,000 in 2003, and minority interest of $150,000 in 2004 and $160,000
        in 2003
        to our balance sheets. The impacts on our consolidated statements of net
        income
        or cash flows are not material.
 
 We
        amended our statement of operations for the year ended December 31, 2004
        and
        reclassified a $245,264 gain from insured damages to our building from a
        hurricane as other income instead of an extraordinary item. The reclassification
        did not effect our taxable net income which remained at $1,511,997 nor did
        it
        effect our earnings per share and diluted earnings per share of $.11 and
        $.09,
        respectively.
 
 
 
 
 
 
 
 
 
 
 
 
  F-16
  **BOVIE
        MEDICAL CORPORATION**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
  
 **NOTE
        2. DESCRIPTION OF BUSINESS**
 
 **Background**
 
 Bovie
        Medical Corporation (“Bovie”) was incorporated as An-Con Genetics, Inc. in 1982,
        under the laws of the State of Delaware and has its principal executive office
        at 734 Walt Whitman Road, Melville, New York 11747.
 
 Bovie
        is
        actively engaged in the business of manufacturing and marketing medical products
        and developing related technologies. Aaron Medical Industries, Inc. ("Aaron"),
        a
        100% owned subsidiary based in St. Petersburg, Florida is engaged in marketing
        our medical products. Previously Bovies largest product line was
        battery-operated cauteries, we have shifted our focus to the manufacture
        and
        marketing of generators and electrosurgical disposables. This new focus on
        high
        frequency generators is evident in the development of the Aaron 800 and Aaron
        900 high frequency desiccators, the Aaron 950- the first high frequency
        desiccator with cut capability, the Aaron 1250 and the Aaron 2250. The Aaron
        1250 and Aaron 2250 are designed for today’s rapidly expanding surgi-center
        market.
 
 Additionally,
        our new 200-watt electrosurgical unit and our new 300-watt electrosurgical
        unit
        are being marketed under the Bovie name.
 
 Bovie
        also manufactures a variety of specialty lighting instruments for use in
        ophthalmology, general surgery, hip replacement surgery, and for the placement
        of endotracheal tubes.
 
 Bovie
        manufactures and markets its products both under private label and the
        Bovie/Aaron label to distributors worldwide. Additionally, Bovie/Aaron has
        original equipment manufacturing (OEM) agreements with other medical device
        manufacturers. These OEM arrangements combined with private label and the
        Bovie/Aaron label allows us to gain greater market share for the distribution
        of
        its products.
 
 **Joint
        Venture Agreement**
 
 In
        February 2000, Bovie entered into a Joint Venture Agreement with a German
        corporation, Jump Agentur Fur Elektrotechnik GMBH. Pursuant to the agreement,
        Bovie advanced $200,000 to the partnership to cover costs of further research
        toward the production of two commercial prototypes for our contribution we
        received a 50% equity interest and 50% interest in the profits. Bovie has
        made
        available its facilities in Florida for development, manufacturing and marketing
        of the products of the joint venture and is responsible to expend its best
        efforts to secure all necessary financing for the research, development and
        marketing of the products estimated to be an amount up to $1,500,000, as
        per
        contract.
 
 Pursuant
        to agreement, the joint venture acquired an exclusive license to produce
        and
        market any surgical/medical devices utilizing this technology. In fiscal,
        2005
        and 2004, Bovie made additional advances to the joint venture in the form
        of
        research and development of prototypes expending $161,090 and $39,286 in
        development costs and engineering costs, respectively.  Bovie has charged
        these costs to operations as equity in net loss of unconsolidated affiliate.
        To
        date the joint venture has no revenues and is not considered by us to be
        a
        significant subsidiary.
 
 
 
 
 
 
 
  F-17
  **BOVIE
        MEDICAL CORPORATION**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 
 **NOTE
        2. DESCRIPTION OF BUSINESS(CONTINUED)**
 
 The
        device has been developed and patented in both Europe and the United States.
        Bovie has constructed two pre-production prototypes for field-testing purposes
        as a prelude to eventual submission to the FDA for clearance to manufacture.
        The
        initial intended uses are in the areas of dermatology and plastic surgery.
        Other
        contemplated surgical uses for the technology are cardiovascular, thoracic,
        gynecological, trauma and other surgeries.
 
 FASB
        finalized Interpretation No. 46R, Consolidation of Variable Interest Entities-An
        Interpretation of ARB51 (FIN 46R) in December 2003, making the new guidance
        applicable to us in the first quarter of 2004. FIN 46R expands the scope
        of
        ARB51 and can require consolidation of “variable interest entities (VIEs)” Once
        an entity is determined to be VIE, the party with the controlling financial
        interest, the primary beneficiary , is required to consolidate it.
 
 We
        have
        an investment in a joint venture with Jump Agentur Fur Electrotechnik GMBH
        (“the
        Joint Venture”, “JAG”) of which we are the primary beneficiary. We had
        previously recorded our interest in the Joint Venture on the equity basis.
        Under
        FIN 46R, as the primary beneficiary we have consolidated the Joint Venture
        and
        restated our balance sheet as of December 31, 2004.
 
 The
        impact of consolidating JAG on our balance sheets was replacement of our
        $200,000 previously recorded investment in the Joint Venture by license rights
        of $350,000 in 2004 and $360,000 in 2003 and a minority interest of $150,000
        in
        2004 and $160,000 in 2003, for JAG . Consolidating the Joint Venture did
        not
        materially affect our statements of operations or cash flows, for the years
        ended December 31, 2004, and 2003.
 
 **NOTE
        3. TRADE ACCOUNTS RECEIVABLE**
 
 As
        of
        December 31, 2005 and 2004 the trade accounts receivable were as follows:
 
 2005
              
              2004Trade
                  accounts receivable
              
              $
              2,495,457
              
              $
              2,131,445Less:
                  allowance for doubtful accts
              
              
              (
                  119,490
              )
              
              (
                  112,392
              )allowance
                  for discounts
              
              
              (
                  59,207
              )
              
              (
                  64,766
              )Trade
                  accounts receivable, net
              
              $
              2,316,760
              
              $
              1,954,287
 
 Bad
        debt
        expense charged to operations was $16,808 in 2005 and $5,477 in
        2004.
 
 At
        December 31, 2005 trade accounts receivable were pledged as collateral in
        connection with bank loans.
  
 
 
 
 
 
 
 
 
 
  F-18
  
 **BOVIE
        MEDICAL CORPORATION**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 
 **NOTE
        4. PROPERTY, PLANT AND EQUIPMENT**
 
 As
        of
        December 31, 2005 and 2004 property, plant and equipment consisted of the
        following:
  2005
              
              2004Equipment
              
              $
              1,297,261
              
              $
              992,542Building
              
              
              791,618
              
              
              573,736Furniture
                  and Fixtures
              
              
              1,045,835
              
              
              969,948Leasehold
                  Improvements
              
              
              731,001
              
              
              626,804Molds
              
              
              661,462
              
              
              516,6894,527,177
              
              
              3,679,719Less:accumulated
                  depreciation
              
              
              (1,931,536
              )
              
              (1,563,395
              )Net
                  property, plant, and equipment
              
              $
              2,595,641
              
              $
              2,116,324
 
 Depreciation
        expense for the years ended December 31, 2005 and 2004 were $428,966 and
        $338,724, respectively.
 
 **Property
        and Rental Agreements**
 
 The
        following is a schedule of future minimum rental payments as of December
        31,
        2004 and for the next five years.
 
 
 2006
              
              $
              141,9522007
              
              
              135,3082008
              
              
              115,1502009
              
              
              -0-2010
              
              
              -0-$
              392,410
  
 Total
        consolidated rent expense for the Company was $185,314 in 2005 and $152,442
        in
        2004.
 
 
 
  F-19
  **BOVIE
        MEDICAL CORPORATION**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 
 **NOTE
        6. INTANGIBLE ASSETS**
 
 At
        December 31, 2005 and 2004 intangible assets consisted of the following:
 
 
 2005
              
              2004Indefinite
                  life assets:Brand
                  name/Trademark (life indefinite)
              
              $
              1,509,662
              
              $
              1,509,662Other
                  intangibles:License
                  rights (20yr life)
              
              
              280,000
              
              
              350,000Purchased
                  technology (5 yr life)
              
              $
              280,764
              
              $
              278,763Less:
                  Accumulated amortization
              
              
              (247,101)
              
              
              (190,191
              )Net
                  carrying amount
              
              $
              33,663
              
              $
              88,572
 
 Trademark
        and brand name were recognized in connection with the 1998 acquisition of
        Bovie Medical Corporation.  We continue to market products, release new
        products and product extensions and maintain and promote these trademarks
        and
        brand names in the marketplace through legal registration and such methods
        as
        advertising, medical education and trade shows.  It is our belief that
        these trademarks and brand names will generate cash flow for an indefinite
        period of time.  Therefore, in accordance with SFAS 142, our trademarks and
        tradenames intangible assets are not amortized.
  The
        cost
        of licenses, trademarks, patent rights, technologies and copyrights acquired
        are
        being amortized on the straight-line method over five to twenty years.
        Amortization expense charged to operations in 2005 and 2004 was $74,910 and
        $56,395, respectively.
 
 **NOTE
        7. LONG-TERM DEBT AND LINE OF CREDIT**
 
 The
        long-term debt of the Company at December 31, 2005 and 2004 includes a mortgage
        and notes payable.
 
 2005
              
              2004Mortgage
                  payable
              
              $
              348,328
              
              $
              379,994Term
                  loan
              
              
              --
              
              
              --Line
                  of credit- bank
              
              
              --
              
              
              --$
              348,328
              
              $
              379,994
 
 **Mortgage
        Payable**
 
 In
        2001,
        Bovie paid off its existing mortgage on its premises at 7100 30 th Avenue
        North, St. Petersburg, Florida, and replaced it with a new first mortgage
        of
        $475,000, from its commercial lender. The interest Bovie pays on the mortgage
        is
        variable at the banks base rate which is 7.5%, presently. Bovie makes principal
        payments of $2,639 per month plus interest. The mortgage has a balloon payment
        of $320,562 due in November of 2006.
 
  F-20
  
 **BOVIE
        MEDICAL CORPORATION**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 
 **NOTE
        7. LONG-TERM DEBT AND LINE OF CREDIT (Continued)**
 
 **Mortgage
        Payable(Continued)**
 
 The
        scheduled principal payments for the next five years are as follows:
 
 Year
              
              Amount2006
              
              $
              348,3282007
              
              
              02008
              
              
              02009
              
              
              02010
              
              
              0$
              348,328
 
 
 **Line
        of Credit - Commercial Bank**
 
 Advances
        under the new line of credit secured in May of 2001 are limited to the lesser
        of
        $1,500,000 or 80% of net accounts receivable from non-affiliated parties.
        Availability was $1,500,000 on December 31, 2005. The annual interest rate
        on
        the loan is variable and is based on the bank's base rate. The line has no
        expiration date and is due on demand by the bank. The bank has a security
        interest in inventory, accounts receivable and equipment of the Company (the
        collateral). The balance due the bank on the credit line at December 31,
        2005
        was zero.
 
 **NOTE
        8. OPTIONS**
 
 **Stock-Based
        Compensation**
 
 The
        Company has an employee incentive compensation plan (the “Plan”) pursuant to
        which the Company’s board of directors may grant stock options to officers and
        key employees. Stock options are granted with an exercise price equal to
        the
        stock’s fair market value at the date of grant. All stock options have a ten
        year term and vest upon schedule on the date of the grant. During 2005 and
        2004,
        a total of 427,500 and 370,000 options were granted at prices between $2.25
        and
        $2.15, respectively. The 5,597,500 authorized and there were a total of 483,300
        additional shares available for grant under the various plans.
 
  F-21
  
 **BOVIE
        MEDICAL CORPORATION**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 
 **NOTE
        8. OPTIONS (CONTINUED)**
 
 Stock-option
        activity during the periods indicated was as follows:
 2005
              2004Weighted
              
              Weightedaverage
              
              averageNumber
                  of
              exercise
              Number
                  of
              exerciseShares
              price
              Shares
              priceBalance
                  January 1,
              3,951,200
              1.15
              3,988,800
              1.00Exercised
              (178,600)
              .77
              (397,600)
              .74Cancelled
                  & forfeited
              (31,230)
              .50
              (
                  10,000)
              .50Granted
              427,500
              2.25
              370,000
              2.32Balance
                  December 31,
              4,168,870
              1.25
              3,951,200
              1.13
 
 **Stock-Based
        Compensation**
 
 Stock
        options consisted of the following at December 31, 2005:
 
 Number
                  of Options
                Currently
                  Exercisable
              Weighted
                  Average
                Remaining
                  Estimated Life
              Exercise
                  Price456,000
              7.5
              $
                  3.2595,000
              7.5
              1.30113,000
              2.0
              1.12550,000
              2.0
              1.151,238,400
              2.5
              .75475,000
              7.0
              .701,013,970
              5.5
              .5035,000
              8.5
              2.95215,000
              8.5
              2.1360,000
              8.5
              2.41417,500
              4.6
              2254,168,870
              4.6
              1.25(a)
 
 (a)
        The
        amount of $1.25 represents the weighted average exercise price of the
        outstanding options.
 
 At
        December 31, 2005 and 2004, the number of options exercisable was 4,168,870
        and
        3,951,.200, respectively, and the weighted-average exercise prices of those
        options were $1.25 and $1.13, respectively.
 
 During
        the year 2005 Bovie cancelled 31,230 options issued prior to December 31,
        2002
        at an exercise price of .50 per share (the “cancelled options”). The cancelled
        options were not replaced. In addition, we issued 427,500 options during
        the
        year at exercise price of $2.25.  The options issued in 2005 did not affect
        the fiscal year 2005 statement of operations as the market value for Bovie’s
        common stock was the same as the exercise price on the day granted. Had the
        compensation cost for Bovie’s three stock option issuances
  F-22
  **BOVIE
        MEDICAL CORPORATION**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 
 **NOTE
        8. OPTIONS (CONTINUED)**
 
 been
        determined based on the fair value at the grant date for awards in 2005
        consistent with the provisions of SFAS No.123, the Company's net earnings
        and
        earnings per share would have been reduced by $372,000 as per the pro forma
        amounts indicated in Note 1 under Significant Accounting Policies.
 
 Effective
        with our fiscal year 2006 that commenced on January 2, 2006 we will expense
        stock options, that are granted after January 1, 2006. This is in accordance
        with Statement of Financial Accounting Standards No. 123R “Share Based Payment.”
No employee stock options were granted during the first three months of fiscal
        year 2006.
 
  **NOTE
        9. TAXES AND NET OPERATING LOSS CARRYFORWARDS**
 
 As
        of
        December 31, 2005, the components of deferred tax assets were as follows:
 Deferred
        tax assets:
 2005
              
              2004Accounts
                  receivable(allowances)
              
              $
              178,697
              
              $
              177,158Inventories(reserves)
              
              
              990,314
              
              
              1,011,060Net
                  operating loss carry forwards
              
              
              2,220,000
              
              
              2,392,000Patent
                  rights, primarily due toAmortization
              
              
              (163,245)
              
              
              (118,439
              )Total
                  gross deferred tax assets
              
              
              3,225,766
              
              
              3,461,779Less:
                  Valuation allowance
              
              
              (2,839,566
              )
              
              (3,075,579
              )Net
                  deferred tax assets - current
              
              $
              386,200
              
              $
              386,200
 
 Bovie
        had
        net operating losses (NOLs) of approximately $6,872,000 at December 31, 2005.
        These NOLs and corresponding estimated tax assets, computed at a 35% tax
        rate,
        expire as follows:
 
 Year
                  loss
              Expiration
              Loss
              EstimatedIncurred
              Date
              Amount
              Tax
                  Asset1992
              2012
              797,000
              $
                  279,0001993
              2013
              465,000
              163,0001994
              2014
              1,197,000
              419,0001995
              2015
              637,000
              223,0001998
              2018
              548,000
              192,0001999
              2019
              2,184,000
              764,0002002
              2022
              515,000
              180,000Total
              
              $
                  6,343,000
              $
                  2,220,000
  Under
        the
        provisions of SFAS 109, NOLs represent temporary differences that enter into
        the
        calculation of deferred tax assets. Realization of deferred tax assets
        associated with the NOL is dependent upon generating sufficient taxable income
        prior to their expiration.
  F-23
  
 **BOVIE
        MEDICAL CORPORATION**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 
 **NOTE
        9. TAXES AND NET OPERATING LOSS CARRYFORWARDS(Continued)**
 
 Management
        believes that there is a risk that certain of these NOLs may expire unused
        and,
        accordingly, has established a valuation allowance against them. Although
        realization is not assured for the remaining deferred tax assets, based on
        the
        historical trend in sales and profitability, sales backlog, and budgeted
        sales
        of Bovie’s wholly owned and consolidated subsidiary, Aaron Medical Industries,
        Inc., management believes it is likely that they may not be totally realized
        through future taxable earnings. In addition, the net deferred tax assets
        could
        be reduced in the near term if management's estimates of taxable income during
        the carryforward period are significantly reduced.
 
 The
        valuation allowance of $2,839,566 as of December 31, 2005 decreased by $236,013
        from December 31, 2004. The change in valuation allowance was a consequence
        of
        decreasing tax assets of $172,000 and reserving for additional allowances
        for
        accounts receivable and inventory loss of $19,207, and patent amortization
        of
        $(44,806). The Company believes it is possible that the benefit of these
        additional assets may not be realized in the future. A reconciliation of
        the
        Federal statutory tax rate to Bovie’s effective tax rate is as follows:
 
 Tax
                  at statutory rate
              35.0%State
                  income taxes, net of U.S. federal benefit
              2.4%Tax
                  benefit of loss carry forward
              (37.2%)Effective
                  tax rate
              -0-%
 
 **NOTE
        10. RETIREMENT PLANS**
 
 Bovie
        and/or its subsidiary provides a tax-qualified profit-sharing retirement
        plan
        under section 401k of the Internal Revenue Code the ("Qualified Plans") for
        the
        benefit of eligible employees with an accumulation of funds for retirement
        on a
        tax-deferred basis and provides for annual discretionary contribution to
        individual trust funds.
 
 All
        employees are eligible to participate if they have one year of service in
        Bovie.
        The employees may make voluntary contributions to the plan of up to 15% of
        their
        annual compensation. Bovie’s contributions to the plan are discretionary but may
        not exceed 50% of the first 4% of an employees annual compensation if he
        contributes 4% or more to the plan. Vesting is graded and depends on the
        years
        of service. After six years of service, the employees are 100% vested.
 
 Bovie
        has
        made a contribution during 2005 and 2004 of $67,838 and $61,177 respectively,
        for the benefit of its employees. The Company also maintains a group health
        and
        dental insurance plan. The employees are eligible to participate in the plan
        after three months of full-time service.
   F-24
  
 **BOVIE
        MEDICAL CORPORATION**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 
 
 **NOTE
        11. RELATED PARTY TRANSACTIONS**
 
 **Professional
        Services and Employment Agreements**
 
 A
        former
        director, Alfred V. Greco Esq. is the principal of Serchio Greco & Greco
        LLP,, Bovie’s counsel. The legal fees paid to Serchio Greco & Greco LLP were
        $80,400 and $63,650 for the years 2005 and 2004, respectively. Alfred V.
        Greco,
        PLLC of which Mr. Greco is a principal, was counsel during 2005.
 
 A
        director, George W. Kromer, Jr. also serves as a consultant to us. The
        consulting fees paid to Mr. Kromer were $22,906 and $20,751 for 2005 and
        2004,
        respectively.
 
 Two
        employees of the Engineering Department of Bovie are related to the chief
        operating officer. Yechiel Tsitrinovich served as an engineering consultant
        and
        was paid fees of $79,776 and $86,764, for 2005 and 2004 respectively. Bovie
        entered into a two-year contract with Mr. Arik Zoran for him to assume
        supervision of the engineering department, for a salary of $90,000 per year
        plus
        living expenses and benefits. During 2005 Mr. Zorans salary was $157,045.
        Bovie
        agreed to secure a permanent work visa for Mr. Zoran.
 
 **Employment
        Agreement**
 
 Bovie
        has
        employment agreements with five key employees. These agreements are for terms
        extending to December 31, 2009.
 
 **Employee
        Benefit Plans**
 
 In
        1996,
        1998, 2001 and 2003, Bovie established stock option plans under which officers,
        key employees and non-employee directors may be granted options to purchase
        shares of Bovie's authorized, but unissued, Common Stock. Under its existing
        Employee Stock Option Plans, the Company has Options outstanding as of December
        31, 2005 for employees to purchase 4,168,870 shares of common stock at exercise
        prices ranging from $.50 to $3.25.
 
 **NOTE
        12. COMMITMENTS AND CONTINGENCIES**
 
 **Legal
        Proceedings**
 
 We
        have
        no material legal proceeding pending against us at this time. During 2005
        and
        2004 legal fees associated with the deductible on our insurance policy were
        $-0-
        and $ -0-, respectively.
 
 **Product
        Liability**
 
 Bovie
        currently has product liability insurance which it believes to be adequate
        for
        its business. The Company's existing policy expires December 31, 2006. During
        2005 our legal fee deductible was $10,000 per case up to $50,000. In 2005
        that
        legal fee deductible went from $10,000 to $50,000 per case and the maximum
        out
        of pocket went from $50,000 to $250,000. In 2005 we will set up a reserve
        for
        the cost of legal fees on a monthly bases equal to an estimate based on past
        product liability cases and legal costs.
   F-25
  
 **BOVIE
        MEDICAL CORPORATION**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 
 **NOTE
        12. COMMITMENTS AND CONTINGENCIES(Continued)**
 
 **Bank
        Line of Credit and Term Loan**
 
 The
        financial covenants of the bank are:
 
 Maximum
        Liability to Net Worth Ratio: On a consolidated basis, Bovie shall maintain
        a
        Maximum Liability to Tangible Net Worth Ratio of 1.00: 1.00 defined as liability
        (total liabilities, including any subordinated debt) divided by Adjusted
        Tangible Net Worth.
 
 Minimum
        Adjusted Tangible Net Worth: Bovie shall maintain Minimum Tangible Adjusted
        Net
        Worth of $5,000,000 at all times, defined as total net worth minus intangibles
        and related party receivables.
 
 Minimum
        Fixed Charge Coverage: Bovie shall maintain a Minimum Fixed Charge Coverage
        of
        2:00:1:00 measured at Bovie’s fiscal year end, defined as (After tax income +
        depreciation + amortization + lease expense + interest expense) divided by
        (lease expense + interest expense + current maturities of long term debt).
        We
        believe we are in compliance with all the bank’s covenants.
 
 **Joint
        Venture - J Plasma Technology**
 
 The
        agreement provides that we shall be responsible to expend our best efforts
        to
        obtain additional capital if required up to a total estimated amount of $1.5
        million. As of December 31, 2005 we have expended approximately $700,000
        for
        product development and are additionally obligated to expend our best efforts
        to
        finance up to 800,000 million more.
 
 **Deferred
        Revenue**
 
 During
        the past two years we have sold generators and guaranteed to replace hand
        pieces
        for 5 years. A portion of the sale associated with the future delivery of
        the
        additional hand pieces are considered deferred revenue.
  **NOTE
        13. EARNINGS PER SHARE**
 
 In
        2005
        and 2004, basic earnings per share were $.03 and $.11 per share, respectively.
        The weighted average common shares outstanding at December 31, 2005 and 2004
        were 13,923,134 and 13,755,552, **** respectively. ****
 
 Diluted
        basic earnings per share for 2005 and 2004 were $.03 and $.09, respectively.
        Diluted weighted average common shares outstanding at December 31, 2005 and
        2004
        were 15,750,284 and 16,177,881, respectively.
  F-26
  
 **BOVIE
        MEDICAL CORPORATION**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 
 **NOTE
        14. INDUSTRY SEGMENT REPORTING**
 
 **Disclosures
        about Reportable Segments - Types of products and
        services.**
 
 Bovie
        has
        three reportable segments: electrosurgical generator and accessories, battery
        operated cauteries and other medical products. The electrosurgical segment
        sells
        electrosurgical products which includes generators, electrodes, electrosurgical
        pencils and various ancillary disposable products. These products are used
        in
        surgery for the cutting and coagulation of tissue. Battery operated cauteries
        are used for precise hemostasis (to stop bleeding) in ophthalmology and in
        other
        fields. Our other revenues are derived from nerve locators, disposable and
        reusable penlights, medical lighting, license fees, development fees and
        other
        miscellaneous income.
 
 **Measurement
        of segment profit or loss and segment assets**
 
 The
        accounting policies of the segments are the same as those described in the
        summary of significant accounting policies. Bovie evaluates performance based
        on
        profit or loss from operations before income taxes not including non-recurring
        gains and losses. There were no intersegment sales and transfers in 2005
        and
        2004.
 
 Bovie
        now
        operates in three reportable segments, electrosurgical products, cauteries
        and
        other medical products.
 
 Bovie’s
        principal markets are the United States, Europe, Asia and Latin America,
        with
        the U.S. and Europe being the largest markets based on revenues. Bovie's
        major
        products include cauteries, electrosurgery generators, nerve locators,
        disposable penlights and electrodes. Electrosurgical products, cauteries,
        accounted for 60% and 62%, 27% and 27% of our sales for 2005 and 2004,
        respectively.
 
 In
        2005
        and 2004, one significant customer accounted for 15% and 29% of total sales,
        respectively.
 
 Bovie’s
        ten largest customers accounted for approximately 65% of net revenues for
        2005
        and 70% of revenue in 2004.
 
 At
        December 31, 2005 and 2004, receivables from Bovie’s 10 largest customers
        accounted for approximately 66% and 66% of outstanding accounts receivable,
        respectively.
  F-27
  
 **BOVIE
        MEDICAL CORPORATION**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 
 **NOTE
        14. INDUSTRY SEGMENT REPORTING(Continued)**
 
 Summary
                  information by segment area for years ended December 31, 2005 and
                  2004
                  were as follows:(in
                  thousands)Cauteries
              Electrosurgical
              Other
              TotalYear
                  ended December 31, 2005Net
                  sales
              5,462
              12,191
              2,558
              20,211Interest
                  income
              13
              28
              6
              47Interest
                  expense
              6
              14
              3
              23Depreciation
                  & Amortization
              160
              356
              78
              594Income
                  taxes
              44
              98
              22
              164Income
                  tax benefit
              35
              79
              18
              132Segment
                  net earnings(basic)
              109
              244
              53
              406Total
                  Assets
              3,178
              7,063
              1,530
              11,771Capital
                  expenditures
              245
              545
              118
              908Year
                  ended December 31, 2004Net
                  sales
              5,460
              12,684
              2,351
              20,495Interest
                  income
              1
              2
              --
              3Interest
                  expense
              4
              9
              1
              14Depreciation
                  & amortization
              158
              186
              51
              395Income
                  taxes
              194
              216
              46
              456Income
                  tax benefit
              (194)
              (216)
              (46)
              (456)Segment
                  net earnings(basic)
              538
              602
              127
              1,267Total
                  assets
              2,975
              6,832
              1,212
              11,019Capital
                  expenditures
              164
              375
              67
              606Other
                  Income
              66
              152
              27
              245
 
   F-28
  **BOVIE
        MEDICAL CORPORATION**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 
 **NOTE
        14. INDUSTRY SEGMENT REPORTING(CONTINUED)**
 
 Information
        by geographic area is as follows (in thousands):
 
 
 Net
                  Sales
              
              Long
                  Lived AssetsYear
                  ended December 31, 2005United
                  States
              
              $
              16,830
              
              $
              2,545Europe
              
              
              1,460
              
              
              50Asia
              
              
              759South
                  America
              
              
              558Other
              
              
              604Total
              
              $
              20,211
              
              $
              2,595Year
                  ended December 31, 2004United
                  States
              
              $
              17,506
              
              $
              2,107Europe
              
              
              1,222
              
              
              60Asia
              
              
              635South
                  America
              
              
              586Other
              
              
              546Total
              
              $
              20,495
              
              $
              2,167
 
 
 Assets
        and liabilities outside the U.S.A. (in thousands)
 
 2005
              
              2004Total
                  assets
              
              $
              622
              
              $
              411Total
                  liabilities
              
              
              10
              
              
              -0-Net
                  property, plant and equipment
              
              
              100
              
              
              29
 
 Bovie
        had
        no assets (other than certain trade receivables, equipment, molds and inventory)
        outside the United States, in the years ended December 31, 2005 and 2004.
 
   F-29
  **BOVIE
        MEDICAL CORPORATION**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 
 **NOTE
        14. INDUSTRY SEGMENT REPORTING(CONTINUED)**
 
 During
        2005 and 2004, a portion of Bovie’s consolidated net sales and consolidated gain
        from operations was derived from foreign operations. Foreign operations are
        subject to certain risks inherent in conducting business abroad, including
        price
        and exchange controls, limitations on foreign participation in local
        enterprises, possible nationalization or expropriation, potential default
        on the
        payment of government obligations with attendant impact on private enterprise,
        political instability and health care regulations and other restrictive
        governmental actions. Changes in the relative value of currencies take place
        from time to time and could adversely affect Bovie’s results of operations and
        financial condition. The future effects of these fluctuations on the operations
        of Bovie and its subsidiaries are not predictable.
 
 **NOTE
        15. RESEARCH AND DEVELOPMENT PERFORMED FOR OTHERS**
 
 Bovie
        has
        entered into several manufacturing and development agreements to produce
        electrosurgical products for medical equipment companies. The agreements
        are
        considered Original Equipment Manufacturing (OEM) contracts that call for:
        (1)
        Bovie to develop specific use devices and components (2) the customer is
        not
        committed to a certain dollar amount of purchases and (3) Bovie charges what
        it
        believes will be its costs for the development of the product. If the customer
        rejects or terminates the contract then it forfeits the development payments
        we
        have incurred. The customer must fulfill its agreement if Bovie delivers
        its
        working prototypes timely.
 
 The
        following is research and development revenue and costs related to specific
        contracts, for 2005 and 2004:
 
 Contracted
        Development Payments Received:
 2005
              
              2004Amounts:Revenue
                  from development in progress
              
              $
              368,334
              
              $
              230,120Revenues
                  included in Gross Sales
              
              $
              368,334
              
              $
              230,120Cost
                  of Research and Development contractsincluded
                  in gross profit
              
              $
              368,334
              
              $
              230,120
 
 **NOTE
        16. RESEARCH AND DEVELOPMENT COSTS CAPITALIZED**
 
 During
        the years 2005 and 2004 we had capitalized development costs, performed by
        third
        parties for our line of electrosurgical generators of $ 2,001 and $-0-,
        respectively.
 
   F-30
  **BOVIE
        MEDICAL CORPORATION**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 
 **NOTE
        17. SUBSEQUENT EVENT**
 
 **Endoscopic
        Modular Instruments**
 
 In
        January, 2006, pursuant to agreement to acquire technology from Henvil Corp.
        LTD
        and Steve Livneh, its principal, we acquired patent pending technology for
        new
        endoscopic disposable and reusable modular instruments (“the Product”) from
        Henvil Corp. LTD. (‘Henvil”). The innovative modular forceps are ergonomically
        designed to provide surgeons’ added comfort and improved safety while reducing
        per-procedure costs. The modular forceps offer a unique and simpler assembly
        process for laparoscopic procedures and is the first modular design for the
        arthroscopy market. Commercial prototypes have been
 developed
        and based on current projections we expect to commence marketing during fiscal
        2006. The estimated annual worldwide market size for instruments of these
        categories is estimated to exceed $200 million.
 
 The
        agreement requires us to purchase certain equipment and machinery ($400,000.00
        value) and to hire Henvil to develop the technology and complete the design
        of
        the arthroscopic and laparoscopic instruments. In addition we must also purchase
        tools and molds expected to cost approximately $120,000. Henvil and Steve
        Livneh
        have also been hired as consultants for the development of the technology.
        The
        consultants are to be paid $30,000 per month from the day of execution of
        the
        agreement. In addition, commencing with the year following the first sale
        or
        commercial delivery of the Product, Bovie shall pay to Henvil’s principal, Steve
        Livneh, an initial minimum royalty of the greater of $35,000 per year or
        3% of
        adjusted gross revenues received from the sale and marketing of the instruments.
        Thereafter, a royalty equal to 2.5% or adjusted gross sales for the life
        of the
        patents issuable for the technology.
 
 Mr.
        Livneh also shall receive 50,000 5-year restricted stock options to purchase
        Bovie common stock for each category of instrumentation (a total of 100,000
        stock options) exercisable at the closing price of Bovie common stock on
        the
        American Stock Exchange on the date of issuance of the options. The options
        shall vest immediately subject to Bovie’s prior application seeking FDA
        clearance for marketing the Product.
  F-31
 
  **EXHIBIT
        INDEX**
 
 Exhibit
                  4.2
              Registration
                  Rights Agreement dated May 8, 1998 (1)Exhibit
                  4.3
              Assignment
                  of Registration Rights Agreement dated September, 2004 (2)Exhibit
                  10.1
              Joint
                  Venture Agreement dated February 25, 2000
                Between
                  Bovie Medical Corporation and Jump Agentur fur
                Elektrotechnik
                  GmBH(3)Exhibit
                  10.2
              Agreement
                  between Bovie Medical Corporation and Arthrex Inc. dated June 2002
                  (4)Exhibit
                  10.3
              Distribution
                  and Service Center Agreement  between Bovie Medical Corp and
                  SymbolMedical
                  Limited dated December 31, 2004(5)Exhibit
                  10.4
              Employment
                  Agreement- Andrew Makrides (6)Exhibit
                  10.5
              Employment
                  Agreement-Robert J. Saron (7)Exhibit
                  10.6
              Employment
                  Agreement-Moshe Citronowicz (8)Exhibit
                  10.7
              Amended
                  Employment Agreement between Bovie and Andrew Makrides dated as
                  of January
                  6, 2004 (9)Exhibit
                  10.8
              Amended
                  Employment Agreement between Bovie and J. Robert Saron dated as
                  of January
                  6, 2004 (10)Exhibit
                  10.9
              Amended
                  Employment Agreement between Bovie and Moshe Citronowciz dated
                  as of
                  January 6, 2004 (11)Exhibit
                  10.10
              License
                  Agreement between Bovie and Emergency Medicine Innovations, LLC
                  dated
                  October 22, 2004 (12)Exhibit
                  10.11
              Consulting
                  and Intellectual Property Assignment
                  Agreement dated January 12, 2006 among Bovie, Henvil Corp. Ltd
                  and Steve
                  LivnehExhibit
                  21.1
              Consent
                  of Bloom & Co., LLPExhibit
                  31.1
              Certification
                  pursuant to Section 302 of Sarbanes-Oxley
                  Act of 2002.Exhibit
                  31.2
              Certification
                  pursuant to Section 302 of Sarbanes-Oxley
                  Act of 2002.Exhibit
                  32.1
              Certification
                  pursuant to Section 906 of Sarbanes-Oxley
                  Act of 2002.Exhibit
                  32.2
              Certification
                  pursuant to Section 906 of Sarbanes-Oxley
                  Act of 2002._____________________