U.S.
SECURITIES AND EXCHANGE COMMISSION


Washington,
D.C. 20549





FORM
10-K





[X]
ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE


SECURITIES
EXCHANGE ACT OF 1934





For the
fiscal year ended December 31, 2007


Commission
file number 0-12183





BOVIE
MEDICAL CORPORATION





(Exact
name of registrant as specified in its charter)


Delaware
      No.
            
            11-2644611(State
      or other jurisdiction of
      incorporation or organization)
            
            (IRS
      Employer Identification No.)





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 if the Company is a well-known seasoned issuer, as defined in Rule
405 of the Securities Act.


Yes:
      o
            No x








Indicate
by check mark if the Company is not required to file reports pursuant to Section
13 or Section 15(d) of the Act.


Yes: 
      o
            No x








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 o




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-K
any amendment to this Form 10-K. o




Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer.  See definition of
“accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange
Act (Check one):




Large
      accelerated filer o
            Accelerated
      filer o
            Non-accelerated
      filer x




Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Act).


Yes
      o
            No
      x




Issuer’s
revenues for its most recent fiscal year were $28,779,157





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 14, 2008 was approximately
$103,000,000





The
number of shares of the registrant's $.001 par value common stock
outstanding as of March 14, 2008 was 16,076,155


Company
Symbol-BVX Company SIC (Standard Industrial Code)-3841













DOCUMENTS
INCORPORATED BY REFERENCE


There are
no documents incorporated by reference.


Bovie
Medical Corporation


2007
Form 10-K Annual Report





Table
of Contents





Part I
            
            PageItem 1
            Business
            1Item
      1A
            Risk Factors
            5Item
      1B
            Unresolved Staff Comments
            9Item 2
            Description of
      Property
            9Item 3
            Legal
      Proceedings
            9Item 4.
            Submission of Matters to a Vote of
      Security Holders
            10Part IIItem 5.
            Market for Registrant’s
      Common Equity, Related Stockholder Matters
            10Item
      6.
            Selected Financial Data
            12Item
      7
            Management's Discussion and
      Analysis
            13Item
      7A
            Quantitative and Qualitative Disclosures about Market
      Risk
            24Item
      8
            Financial Statements and
      Supplementary Data
            24Item
      9
            Changes in and Disagreements with
      Accountants on Accounting and Financial
    Disclosure.
            24Item 9A
            Controls and
      Procedures
            24Item
      9B
            Other Information
            26Part IIIItem
      10
            Directors, Executive Officers,and Corporate Governance
            26Item
      11
            Executive
      Compensation
            28Item
      12
            Section 16(a) Beneficial Ownership Reporting
      Compliance
            36Item 13.
            Certain Relationships and Related
      Transactions
            38Item 14
            Principal Accountant Fees and
      Services
            39Part IVItem
      15
            ExhibitsIndex




Table of Contents




BOVIE
MEDICAL CORPORATION




Part
I





ITEM
1.  Business





Overview





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. Bovie Canada ULC, a 100% owned subsidiary located in
Windsor, Ontario, functions mainly as a product development and manufacturing
company focused on endoscopic devices. 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, surgi-centers and
hospitals.




We
manufacture and market products both under private label, the Bovie 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,
desiccators, 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 Desiccators





These
products are low powered desiccators, designed primarily for dermatology and
plastic surgery in a physician’s office. The units are 30-watt high frequency
desiccators used mainly for removing small skin lesions and
growths.





Bovie/Aaron
950





Bovie has
developed the first and only high frequency desiccator 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. This generator was
recently redesigned and will be sold under the name Bovie 1250U. The redesign
allows one unit to work with a line voltage ranging from 100 – 240 VAC and
replaces the previous need for three different versions.




1
 Table of Contents




Bovie/Aaron
2250 / 3250 and  Bovie IDS 200 / 300 / 400





Given the
market interest in more powerful electrosurgical generators, we have developed
the Bovie IDS platform, a 200-watt, 300-watt, and 400-watt multipurpose digital
electrosurgery generators designed for the rapidly expanding surgi-center
market. This unit features both monopolar and bipolar functions, has pad and
tissue sensing, plus nine blended cutting settings. This unit (Bovie IDS 200/
Aaron 2250) 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 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 400 is a 400 watt generator designed
primarily for sale in the overseas markets. The Bovie IDS 300, Aaron 3250 and
IDS 400 have been designed based on a digital feedback system. 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.





ICON
GI





The ICON
GI is an innovative, custom designed specialty electrosurgical generator for the
gastroenterological and other niche markets.  This product incorporates an
easy to use touch-screen interface which provides the user flexibility in
achieving a desired effect through different digitally built-in
modes.  The ICON GI is also designed to improve safety and convenience
by requiring the use of only split pads with digital technology to protect
against pad burns, it features specialized error messaging to prevent
misinterpretation and allow for quicker troubleshooting, and has specialized
audible alerts to indicate improper cable connections. The ICON line represents
a new foundation platform that can be readily expanded upon thereby reducing the
development time and cost for future new specialized generators and also allows
the user to easily upgrade existing units.





Bovie
Button


After a
review of time-motion studies and focus groups of gastroenterologists and GI lab
assistants we developed a device designed to eliminate the foot pedal and cables
which are associated with standard electrosurgical generators found in all
gastrointestinal (“GI”) labs.





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 one of 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 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.




2
 Table of Contents




New
Products





ICON
GP/VS





This
generator expands upon our recently developed ICON platform which incorporates a
flexible and simple user interface and allows for customization of the output
modes for a variety of electrosurgical applications. This product, like the ICON
GI its predecessor generator, is designed to add safety features and improve
convenience in performing general purpose procedures and includes a vessel
sealing component.





To date
we have expended approximately $0.2 million for the development of the
technology.








ICON
GS (J-Plasma)





In
February 2000, we entered into a Joint Venture Agreement with a non-affiliated
German corporation, Jump Agentur Fur Elektrotechnik GMBH (“JUMP”), wherein we
owned a 50% interest in the equity and a 50% interest in the profits of the
joint venture.  On April 30, 2007 we acquired the remaining 50%
interest in our J-Plasma co-venture for total consideration of $500,000 (of
which $200,000 is to be held in escrow for two years), resulting in the Company
having 100% ownership of the medical device technology. The technology utilizes
a gas ionization process producing a stable thin focused beam of ionized gas
that can be controlled in a wide range of temperatures and intensities,
providing the surgeon greater precision, minimal invasiveness and an absence of
conductive currents during surgery. Recent engineering improvements include
increases in power and efficiency and component miniaturization, making
manufacturing easier and less costly. Production prototypes have been developed
for testing purposes.





This
J-Plasma technology is the foundation for our new product, the ICON GS plasma
system, which is currently in development. The development of this new gas
system generator also includes the design of a new proprietary
handpiece.





To date
we have expended approximately $0.9 million (not including the purchase price)
for the development of the technology.





Prior to
our contracting with JUMP Agentur and prior to the formation of the joint
venture, JUMP Agentur had licensed its J-Plasma technology to Soring, a German
company.  The agreement was terminated but Soring has filed its own
patent possibly using the plasma technology as its basis.  Management
of both JUMP and Bovie believes Soring may have breached its agreement with JUMP
and may be liable for its actions.  As a result there is no assurance
that there will not be future litigation involving the joint venture and/or JUMP
Agentur with Soring or the loss of our competitive advantage.








Endoscopic
Modular Instruments





MEG
Handle and Accessories





In
January, 2006, pursuant to an 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.  The estimated annual worldwide market size
for instruments of these categories is estimated to exceed $200
million.





Pursuant
to this agreement, 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, Mr. Livneh will be paid a royalty equal to 2.5% of adjusted gross
sales for the life of the patents issuable
for the technology. As additional consideration for the acquisition of the
technology, Mr. Livneh received 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 execution of the Agreement, January
11, 2006.  The options vest upon FDA clearance for marketing the
product. Mr. Livneh later became an officer of Bovie on October 1, 2006. See
“Management” below.




3
 Table of Contents




Polarian
Handle and Accessories





In
October 2006 we acquired assets of Lican Developments LTD (Lican), an Ontario,
Canada Corporation.  The assets acquired include proprietary patent
pending technologies, working prototypes in various stages of development and
production equipment.  Lican is a product development and
manufacturing company focused on endoscopic devices (see Note 9 of Notes to
Consolidated Financial Statements).





Technologies
in development include:





-
            Tip-On-Tube
      a disposable tip technology complementary to Bovie’s previously acquired
      and announced Modular Ergonomic Grip (MEG) forceps.  Bovie
      acquired the MEG technology in January 2006.-
            A
      new surgical handle platform called the Polarian. The Polarian handle
      supports a plurality of electrical and mechanical modes to be used in
      conjunction with disposable, Seal-N-Cut bipolar cartridges. This is an
      advanced entrant into the growing vessel and tissue sealing and cutting
      market.





Bovie
formed the wholly owned subsidiary, Bovie Canada, which will continue the
further development of these technologies as well as manufacturing the new
devices and other Bovie products. Bovie Canada’s facility features
state-of-the-art manufacturing equipment such as computerized multi-axis
machinery, micro-laser welding equipment and electro-discharge drilling
machinery.





Endoscopic
instruments (and their continued development), acquired in the January 2006
agreement with Henvil, have become part of the Bovie Canada subsidiary’s
operations and are included in the Bovie Canada array of
technologies.  Patent applications have been filed.





Boston
Scientific Agreement





In
October 2006, we entered into an Agreement with Boston Scientific Corporation
(“Boston Scientific”) whereby Bovie will manufacture, offer and sell on an
exclusive worldwide basis a certain electrosurgical oncology device (Product) to
and for Boston Scientific.  The agreement provides, among other
things, for minimum purchase requirements and that the Product will be
co-labeled with the names Bovie and Boston Scientific..





In
November 2007, Boston Scientific gave notice of its decision to terminate the
Agreement and the parties are currently in the process of concluding an
agreement to resolve any and all issues and obligations of or to either party
under the Agreement.




Suture
Removal Device





Based on
feedback from initial studies, this device is currently undergoing a redesign,
and is intended to reduce the 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.




4
 Table of Contents




ITEM 1A. Risk factors





In
addition to risks and uncertainties in the ordinary course of business,
important risk factors are discussed in the sub-paragraphs below entitled
Manufacturing, Marketing and Distribution Concentrations, Reliance on
Collaborative Manufacturing and Selling Arrangements, Competition, Government
Regulation, Manufacturing, International Regulation, Patents and Trademarks,
Liability and Insurance, Adverse Weather, Research and Development, and Other
Matters.





Manufacturing,
Marketing and Distribution Concentrations





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., Medline, 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 an agreement. On August 31, 2007 we amended and
extended this manufacturing agreement for an additional three year period. The
amended terms continue to provide that we will be reimbursed for our expenses in
developing any changes or modifications to products according to Arthrex’s
specifications, and Arthrex continues to own the intellectual property. In
addition general provisions for product warranties, insurance, termination, and
confidentiality remain the same.  The main change to the amended
manufacturing agreement is the elimination of the provision that required
Arthrex to exclusively purchase the products from us as well as the elimination
of the provision that required us not to compete in the same Arthrex markets
with said products. This amended Arthrex Agreement has termination dates of
December 6, 2010 and March 2011 for the generators. In fiscal 2007, Arthrex
orders represented approximately 21% of our total revenues. As such, should
Arthrex determine to reduce or cease placement of orders for the products, our
business will likely be adversely affected.





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
will give sufficient high priority to our products. Finally, 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 three 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 more than one year and are supported by orders
from our customers.





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.





Domestically,
we believe, we rank third in the number of units sold 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 increase our position 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. We believe our
main competitors do not private label their products.


5
 Table of Contents




Lastly,
at this time we only sell our product through distributors. Since we
infrequently sell direct to the end user, we are participating with our
distribution partners, and not 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 Covidien) and Erbe
Electromedizine, in the electrosurgery market, Xomed (a division of Medtronics),
in the battery operated cautery market and Ethicon and U.S. Surgical in the
endoscopic instrumentation market.   We believe our competitive
position did not change in 2007.




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 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. All Bovie Medical products have been cleared by the Premarket
notification process. To date, the FDA has not failed to clear any of our
devices heretofore submitted.





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
Pre-market approval (PMA) process can be expensive, uncertain and lengthy. A
number of devices for which Premarket approval has been sought by other
companies have never been approved for marketing.




6
 Table of Contents




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
Regulation





To market
products in the European Union and countries other than the United States, our
products must bear the CE mark.  Manufacturers of medical devices
bearing the CE Mark have gone through a conformity assessment process that
assures that products are manufactured in compliance with a recognized quality
system and to comply with the European Medical Devices Directive.





Each
device that bears a CE mark has an associated Technical File that includes a
description of the following:





·
            Description
      of the device and its components,A
      summary of how the device complies with the essential requirements of the
      medical devices directive,·
            Safety
      (risk assessment) 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 ongoing surveillance by the Notified
Body to ensure continued compliance with quality system and reporting
requirements.





We began
CE marking of devices for sale in the European Union in 1999. In addition to the
requirement to CE Mark, each member country of the European Union maintains the
right to impose additional regulatory requirements.





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 and trademarks and do not believe the
patents and trademarks 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, a snare device (GI
accessory products), modular laparoscopic and endoscopic instruments, the output
stage to our generator platform, and a Plasma Stream patent application relating
to the plasma technology.  We also plan to file new trademark
applications relating to our other ICON products later this year.




7
 Table of Contents




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 $10 million on claims made basis. There is no
assurance that this coverage will be adequate to protect us from any possible
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.





Adverse
Weather





Our
manufacturing facilities are located in St. Petersburg, Florida and could be
affected by multiple weather risks, most notably, hurricanes;  one of
which, caused damage to the roof of one of our buildings.  We
sustained flooding and loss of furniture and equipment.  The damage
was mildly disruptive to operations.  Although we carry casualty
insurance and business interruption insurance, future possible disruptions of
operations due to hurricanes or other weather risks could affect our ability to
meet our commitments to our customers and impair important business
relationships, the loss of which could adversely affect our operations and
profitability.





Research
and Development





Our
research and development activities are an essential component of our efforts to
develop new innovative products for introduction in the marketplace. New and
improved products play a critical role in the Company’s sales growth. The
Company continues to place emphasis on the development of proprietary products
and product improvements to complement and expand its existing product lines. We
maintain close working relationships with physicians and medical personnel in
hospitals and universities who assist in product research and areas of
development. Our research and development activities are primarily developed
internally and are expensed as incurred. These expenses include direct expenses
for wages, materials and services associated with the development of our
products net of any reimbursements from customers. Research and development
expenses do not include any portion of general and administrative expenses. The
Company has two complementary facilities that both contribute to a centralized
research and development focus. Our St. Petersburg, FL facility has been our
flagship research and design location, followed later by our addition of the
Canadian facility in October 2006. Currently both facilities are working
synergistically developing our new products the ICON GP/VS, ICON GS, as well
asthe
accompanyingEndoscopic Modular
Instruments, the MEG handle and Polarian handle and accessories.





The
amount expended by us on research and development of our products during the
years 2007, 2006 and 2005, totaled approximately $1.6, $1.0, and $1.0 million
respectively. During the past three years we invested in the J Plasma
Technology, currently our new product under development, the ICON GS plasma
system. In addition, we invested in the ICON GI, Endoscopic Modular Instruments,
the Suture Removal Technology, and undertook development of Cardio and
Urological Electrosurgical devices for a contractual partner. We have not
incurred any direct costs relating to environmental regulations or requirements.
For 2008 we expect our expenditures for research and development activities to
remain around the same level as 2007.





In the
next year we do not contemplate any material purchase or acquisition of assets
that our ordinary cash flow and or credit line would be unable 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
requirements of our credit facility.




8
 Table of Contents




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, Canada 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.





Employees





Presently
Bovie has a total of approximately 162 full time employees. These consist of 5
executive officers, 22 supervisory and managerial personnel, 9 sales, 126
technical support administrative and factory employees.





Significant
Subsidiaries





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.





Bovie
Canada ULC is an Alberta, Canada Corporation with its facility located in
Windsor, Ontario. The principal function of this facility is product development
and manufacturing focused mainly on endoscopic devices.





ITEM
1B. UnresolvedStaff
Comments





There are
no outstanding unresolved comments from the staff of the Securities and Exchange
Commission.





ITEM
2. Description of Properties





Bovie has
executive office space at 734 Walt Whitman Road, Melville, New York, its St.
Petersburg, Florida manufacturing facility located at 7100 30th Ave N.,
and its Windsor, Canada facility located at 4056 North Services Rd. E.. Bovie
leases the executive offices in New York for approximately $1,500 per month and
the Windsor facility for $2,700 Canadian dollars per month. 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 (which option has been exercised
subsequent to December 31, 2007). This additional space provides Bovie with a
total of 48,000 square feet of manufacturing warehousing and office space in
Florida. The building leased is in close proximity to our original (and owned)
manufacturing facility in St. Petersburg, Florida, and the base rent increases
by 3% for each year of the lease. The base monthly rent at December 31, 2007 was
approximately $12,400 (includes real estate tax allocation).





An
additional 4,200 square feet of office and warehouse space (also in close
proximity) is leased on a month-to-month basis at 7191 30th Ave N,
St. Petersburg for approximately $2,400 per month, which is expected to continue
into 2008.





ITEM 3. Legal Proceedings





We
presently have no material litigation outstanding and/or
threatened.




9
 Table of Contents




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





The only
matters submitted to securities holders during the fourth quarter of the year
ended December 31, 2007 were contained in our most recent proxy (See
proxy).








PART
II





ITEM
5. Market for Registrant’s Common Equity and Related Stockholder
Matters





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. These
prices do not represent actual transactions and do not include retail markups,
markdowns or commissions.





2007
            
            High
            
            
            Low4th
      Quarter
            
            $
            8.21
            
            
            $
            6.003rd
      Quarter
            
            
            7.39
            
            
            
            5.302nd
      Quarter
            
            
            8.18
            
            
            
            5.801st
      Quarter
            
            
            9.54
            
            
            
            6.93





2006
            
            High
            
            
            Low4th
      Quarter
            
            $
            10.14
            
            
            $
            6.613rd
      Quarter
            
            
            9.23
            
            
            
            6.012nd
      Quarter
            
            
            6.85
            
            
            
            2.851st
      Quarter
            
            
            3.70
            
            
            
            2.89




On March
14, 2008, the closing bid for Bovie’s Common Stock as reported by the American
Stock Exchange was $6.41 per share. As of March 14, 2008, the total number of
shareholders of the Bovie’s Common Stock was approximately 3,500, of which
approximately 2,800 are estimated to be shareholders 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.




Performance
Graph





The
following graph compares the cumulative total stockholder return on our common
stock with that of the AMEX Composite Index, a broad market index published by
the American Stock Exchange LLC, and a peer group that we believe in good faith
is an appropriate basis for comparison. The comparison for each of the periods
assumes that $100 was invested on December 31, 2002 in our common stock,
the AMEX Composite Index, and the stocks in the peer group, and that all
dividends were reinvested. The results shown in the
graph below are not necessarily indicative of future
performance.


10
 Table of Contents


COMPARISON
OF 5 YEAR CUMULATIVE TOTAL RETURN*


Among
Bovie Medical Corporation, The AMEX Composite Index,


And a
Peer Group





* $100
invested on 12/31/02 in stock or index- including reinvesting of any dividends.
Fiscal year ending December 31.








Cumulative
      Total Return12/02
            12/03
            12/04
            12/05
            12/06
            12/07Bovie
      Medical Corporation
            100.00
            313.27
            259.18
            304.08
            925.51
            653.06AMEX
      Composite Index
            100.00
            142.36
            173.99
            213.38
            249.45
            292.29Peer
      Group
            100.00
            258.58
            218.10
            239.63
            270.63
            316.50




This peer
group consists of five companies, Atrion Corp. (ATRI), Alpha Pro Tech Ltd.
(APT), Criticare Systems Inc. (CMD), MTS Medication Technologies Inc. (MPP), and
Trinity Biotech plc. (TRIB). These companies were chosen using the following
criteria: a listing on the American Stock Exchange, they were in the medical
supply industry, they had similar market capitalization, and similar sales
volume and number of employees.




This
information shall not be deemed to be ''soliciting material’’ or to be ''filed’’
with the Commission or subject to Regulation 14A (17 CFR
240.14a-1-240.14a-104), other than as provided in Item 201(e) of
Regulation S-K, or to the liabilities of section 18 of the Exchange Act (15
U.S.C. 78r).




Dividend
Policy




We have
never declared or paid any cash dividends on our common stock and we do not
intend to pay cash dividends in the foreseeable future. We currently expect to
retain any future earnings to fund the operation and expansion of our
business.




11
 Table of Contents


ITEM
6. Selected Financial Data





The
following selected consolidated financial data (presented in thousands, except
per share amounts and employee data) are derived from our consolidated financial
statements. This data should be read in conjunction with the consolidated
financial statements and notes thereto, and with Item 7, Management’s Discussion
and Analysis of Financial Condition and Results of Operations





Year
Ended December 31,


(in
thousands, except per share amounts)




2007
            
            
            2006
            
            
            2005
            
            
            2004
            
            
            2003Sales,
      net
            
            $
            28,779
            
            
            $
            26,676
            
            
            $
            20,211
            
            
            $
            20,495
            
            
            $
            16,551Cost
      of sales
            
            
            17,464
            
            
            
            16,075
            
            
            
            12,649
            
            
            
            12,638
            
            
            
            9,435Gross
      Profit
            
            
            11,315
            
            
            
            10,601
            
            
            
            7,562
            
            
            
            7,857
            
            
            
            7,116Other
      costs:Research
      and development
            
            
            1,643
            
            
            
            1,048
            
            
            
            986
            
            
            
            907
            
            
            
            717Professional
      services
            
            
            738
            
            
            
            520
            
            
            
            447
            
            
            
            416
            
            
            
            393Salaries
      and related costs
            
            
            2,805
            
            
            
            2,558
            
            
            
            2,011
            
            
            
            1,977
            
            
            
            2,275Selling,
      general and administration
            
            
            4,023
            
            
            
            3,712
            
            
            
            3,553
            
            
            
            3,249
            
            
            
            2,937Development
      cost - joint venture
            
            
            -
            
            
            
            139
            
            
            
            161
            
            
            
            39
            
            
            
            82Total
      other costs
            
            
            9,209
            
            
            
            7,977
            
            
            
            7,158
            
            
            
            6,588
            
            
            
            6,404Income
      from operations
            
            
            2,106
            
            
            
            2,624
            
            
            
            404
            
            
            
            1,269
            
            
            
            712Other
      income and (expense):Other
      income
            
            
            
            
            
            
            -
            
            
            
            -
            
            
            
            245
            
            
            
            -Interest
      income
            
            
            143
            
            
            
            103
            
            
            
            47
            
            
            
            3
            
            
            
            3Interest
      expense
            
            
            (3
            )
            
            
            (16
            )
            
            
            (23
            )
            
            
            (
      15
            )
            
            
            (34
            )Total
      other income (expense) - net
            
            
            140
            
            
            
            87
            
            
            
            24
            
            
            
            233
            
            
            
            (31
            )Income
      before minority interest and income taxes
            
            
            2,246
            
            
            
            2,711
            
            
            
            428
            
            
            
            1,502
            
            
            
            681Minority
      interest
            
            
            5
            
            
            
            20
            
            
            
            10
            
            
            
            10
            
            
            
            -Benefit
      (provision) for income taxes
            
            
            149
            
            
            
            (48
            )
            
            
            (32
            )
            
            
            -
            
            
            
            -Net
      income
            
            $
            2,400
            
            
            $
            2,683
            
            
            $
            406
            
            
            $
            1,512
            
            
            $
            681Earnings
      per common share:Basic
            
            $
            0.16
            
            
            $
            0.19
            
            
            $
            0.03
            
            
            $
            0.11
            
            
            $
            0.05Diluted
            
            $
            0.14
            
            
            $
            0.16
            
            
            $
            0.03
            
            
            $
            0.09
            
            
            $
            0.05Financial
      position:Cash
      and cash equivalents
            
            $
            3,535
            
            
            $
            2,953
            
            
            $
            1,295
            
            
            $
            2,294
            
            
            $
            306Working
      capital
            
            
            9,761
            
            
            
            7,955
            
            
            
            5,501
            
            
            
            5,551
            
            
            
            3,837Total
      assets
            
            
            18,821
            
            
            
            16,686
            
            
            
            11,771
            
            
            
            11,169
            
            
            
            9,234Long-term
      debt
            
            
            318
            
            
            
            368
            
            
            
            0
            
            
            
            348
            
            
            
            380Stockholders’
      equity
            
            $
            16,792
            
            
            $
            14,060
            
            
            $
            9,802
            
            
            $
            9,257
            
            
            $
            7,450




12
 Table of Contents




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





The
following discussion should be read in conjunction with the Selected Financial
Data and the Consolidated Financial Statements and Notes.





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
internally divide our operations into three product lines. 
Electrosurgical products, battery operated cauteries and other products.
The electrosurgical segment sells electrosurgical products which include
dessicators, 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 85% of total revenues in 2007 as compared to 88% in 2006 and
83% in 2005. 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. During fiscal 2007, 2006 and 2005, revenues from
Arthrex, Inc., represented 21%, 22% and 15% of our revenues, respectively. For
fiscal 2006 Medtronic, Inc. revenues represented 11% of our total revenues. No
other single end customer accounted for more than 10% of our revenues for the
fiscal 2007, 2006, or 2005.





International
sales represented 15% of total revenues in 2007 as compared to 12% in 2006 and
17% in 2005. 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, the United Kingdom, China, the CIS (former Soviet Union),
Cyprus, Indonesia, Ireland, Latin America, Malaysia, the Philippines, Thailand,
Turkey, and Vietnam. Our business is generally not seasonal in
nature.





Outlook
for 2008





Our
growth strategy includes entering new niche markets in electrosurgery resulting
from the development of new products anticipated in 2008 and
beyond.  We anticipate that the ICON GI, introduced in August 2007,
will provide the platform technology for new electrosurgical
generators.  The platform will also be a significant component in the
development of our new ICON GS J-Plasma device, forecast to be completed in the
second half of 2008.





With
continued progress in the development of Bovie’s MEG and Polarian hand held
instruments, management remains optimistic that these products could
significantly increase future revenues.  Domestic and international
marketing efforts for these product lines should commence during the current
fiscal year.  Collaborative discussions with larger companies could
result in beneficial agreements in the manufacturing and/or marketing of the
instruments and other new electrosurgery entries.





Our
future growth potential continues to be based on carefully analyzing markets and
developing products that will maximize both our opportunities and profit
margins.





Forecasting
is admittedly a difficult task and it has always been our policy to adopt a
conservative approach.  The outlook is based on a number of
assumptions, which are subject to change and some of which are outside our
control.  A variation in our assumptions may result in a change in
this outlook.




13
 Table of Contents




Results
of Operations





The table
below outlines the components of the consolidated statements of earnings as a
percentage of net sales for the periods indicated:




Year EndedDecember 31,
                2007
              
              
              December 31,
                2006
              
              
              December 31
                2005Sales
              
              
              100.0
              %
              
              
              100.0
              %
              
              
              100.0
              %Cost
      of sales
              
              
              60.7
              
              
              
              60.3
              
              
              
              62.6Gross
      profit
              
              
              39.3
              
              
              
              39.7
              
              
              
              37.4Other
      costs:R
      & D
              
              
              5.7
              
              
              
              3.9
              
              
              
              4.9Professional
      fees
              
              
              2.6
              
              
              
              2.0
              
              
              
              2.6Labor
              
              
              9.7
              
              
              
              9.6
              
              
              
              9.6SGA
              
              
              14.0
              
              
              
              13.9
              
              
              
              17.6Development
      cost - joint venture
              
              
              -
              
              
              
              0.5
              
              
              
              0.8Total
      other costs
              
              
              32.0
              
              
              
              29.9
              
              
              
              35.4Income
      from operations
              
              
              7.3
              
              
              
              9.8
              
              
              
              2.0Other
      income/expense
              
              
              0.5
              
              
              
              0.3
              
              
              
              .1Net
      income before taxes and minority expense
              
              
              7.8
              
              
              
              10.1
              
              
              
              2.1Minority
      Interest
              
              
              0.0
              
              
              
              0.1
              
              
              
              -Benefit
      (provision) for income taxes
              
              
              .5
              
              
              
              (.2
              )
              
              
              (.1
              )Net
      income
              
              
              8.3
              
              
              
              10.0
              
              
              
              2





Comparison
of Fiscal 2007 to Fiscal 2006





The table
below sets forth domestic/international and product line sales
Information:





Net
      Sales (in thousands)
              
              
              
              
              
              
              
              
              
              
              PercentageIncrease
              
              
              Change2007
              
              
              2006
              
              
              (Decrease)
              
              
              2007/2006Domestic/international
      sales (in thousands)Domestic
              
              $
              24,474
              
              
              $
              23,431
              
              
              $
              1,043
              
              
              
              4.5
              %International
              
              
              4,305
              
              
              
              3,245
              
              
              
              1,060
              
              
              
              32.7
              %Total
      net sales
              
              $
              28,779
              
              
              $
              26,676
              
              
              $
              2,103
              
              
              
              7.9
              %


Product
      sales:Electrosurgical
              
              $
              20,284
              
              
              $
              18,255
              
              
              $
              2.029
              
              
              
              11.1
              %Cauteries
              
              
              6,131
              
              
              
              5,846
              
              
              
              285
              
              
              
              4.9
              %Other
              
              
              2,364
              
              
              
              2,575
              
              
              
              (211
              )
              
              
              (8.1
              )%Total
      net sales
              
              $
              28,779
              
              
              $
              26,676
              
              
              $
              2,103
              
              
              
              7.9
              %




14
 Table of Contents




The
results of operations for the year ended December 31, 2007 show increased sales
but a decrease in pre-tax income, as compared to year ended December 31, 2006.
Sales of electrosurgical products increased by 11.1% or $2.0 million compared to
the year ended December 31, 2006 while sales of cauteries increased by 4.9% from
$5.8 million to $6.1 million.  Other sales decreased by 8.1% from $2.6
million to $2.4 million.  This decrease was mainly the result of a
decrease in contracted development services revenue as OEM developed
products went into production and is offset by the increase in electrosurgical
product sales.  No sales of one particular electrosurgical product
dominated the number of units sold.





Arthrex
sales of generators and accessories increased slightly by approximately $50,000
or 0.1% to $6.2 million for the year ended December 31, 2007 from $6.1 million
for the year ended December 31, 2006.





Domestic
sales were $24.5 million for the year ended December 31, 2007, representing an
increase of 4.5% from the prior year. International sales were $4.3 million for
the year ended December 31, 2007, representing an increase of 33.3% or $1.1
million over the prior year.  The international sales increase was
primarily a result of increased sales in our IDS product line coupled with our
customers increased purchase power due to the declining US dollar
exchange.





Cost of
sales represented 60.7% of sales during the year ended December 31, 2007 and
remained relatively the same, as a percentage of sales, as compared to 60.3%
during the year ended December 31, 2006; totals of $17.5 million and $16.1
million, respectively.  The fractional percentage increase was the net
result of an increase in material cost of 0.9% offset by combined decreases of
0.2% in direct labor costs and 1.1% in overhead costs.





Research
and development expenses were 5.7% and 3.9% of sales for the years ended
December 31, 2007 2006, respectively.  These expenses increased 52.6%
in 2007 to approximately $1.6 million, an increase over the year ended December
31, 2006 of approximately $0.6 million. This increase is largely due to costs
related to our Canadian facility, annual salary increases, and ICON GI final
program testing. New products under development are the modular forceps
instruments, Polarian, and our ICON GS plasma technology, and various
improvements to our line of electrosurgical generators. As of August 2007 we
began production and sales of the ICON GI device.





Professional
services increased from approximately $0.5 million in 2006 to $0.7 million in
2007, an increase of approximately $218,000 or 41.9%.  This increase
is mainly attributable to an increase in legal costs related to the development
of additional manufacturing and development contracts as well as an increase in
patent related filings for the year ended December 31, 2007 compared to the year
ended December 31, 2006.





Salaries
and related costs increased by 9.7% to $2.8 million in 2007 as compared to $2.6
for the year ended December 31, 2006.  The increase was mainly
attributable to additional employees needed to foster our growth in various
areas coupled with annual salary increases.





Selling,
general and administrative expenses increased as a percentage of sales by 0.1%
for 2007 as compared to the year ended December 31, 2006 or an increase as a
dollar amount by approximately $0.3 million to a total of $4.0 million for 2007
from $3.7 million for 2006. This increase was mainly due to increased AMEX
exchange fees, coupled with increases in regulatory fees, amortization,
commissions and depreciation expenses.





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
2007 and 2006, commissions paid were approximately $633,200 and $592,200
respectively, an increase of 6.9%.  The increase was due to increased
sales upon which we pay commissions.





Net
interest earned increased by approximately $53,000 during the year ended
December 31, 2007 when compared to 2006 primarily as a result of our higher cash
balances being invested.




15
 Table of Contents




During
the years ended December 31, 2007 and 2006 we recorded current income tax
provisions of approximately $60,000 and $48,000, respectively (which amounts
related primarily to alternative minimum income taxes) and benefits for deferred
income taxes of approximately $209,000 and $-, respectively.   At
December 31, 2006, a significant portion of our deferred income tax assets
arising from net operating loss carryforwards were reduced by valuation
allowances.   In 2007, we satisfied ourselves that such valuation valuation
allowances were no longer necessary in accordance with  the provisions
of Financial Accounting Standards Statement No. 109 "Accounting for Income
Taxes" ("FAS 109").  The reversal of the valuation allowance was the
primary reason for the benefit we recorded in 2007.





Net
earnings for fiscal 2007 decreased 10.5% to $2.4 million from $2.7 million in
2006. Basic net earnings per share decreased by 15.7% to $0.16 in 2007 from
$0.19 in 2006. Diluted earning per share in 2007 was $0.14 as compared to $.16
for diluted earnings per share for 2006.




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.





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 million credit
facility with a local commercial bank. This facility is payable on demand. For
the year ended December 31, 2007, we had zero funds drawn down on this credit
facility.





Our ten
largest customers accounted for approximately 71% of net revenues for 2007 as
compared to 73% in 2006. For fiscal year December 31, 2007, our ten largest
trade receivables accounted for approximately 73% of receivables as compared to
79% for fiscal 2006. In 2007, Arthrex was our only customer that accounted for
over 10% of total revenues, accounting for 21% of our sales. In 2006, two
customers accounted for greater than 10% of our sales, Arthrex for 22% and
Medtronic for 10.5%.





2006
Compared with 2005





The table
below sets forth domestic/international and product line sales
Information:





Net
      Sales (in thousands)
              
              
              
              
              
              
              
              
              
              
              PercentageIncrease
              
              
              Change2006
              
              
              2005
              
              
              (Decrease)
              
              
              2007/2006Domestic/international
      sales (in thousands)Domestic
              
              $
              23,431
              
              
              $
              16,830
              
              
              $
              6,601
              
              
              
              39
              %International
              
              
              3,245
              
              
              
              3,381
              
              
              
              (136
              )
              
              
              (4
              %)Total
      net sales
              
              $
              26,676
              
              
              $
              20,211
              
              
              $
              6,465
              
              
              
              32
              %


Product
      sales:Electrosurgical
              
              $
              18,255
              
              
              $
              12,191
              
              
              $
              6,064
              
              
              
              50
              %Cauteries
              
              
              5,846
              
              
              
              5,462
              
              
              
              384
              
              
              
              7
              %Other
              
              
              2,575
              
              
              
              2,558
              
              
              
              17
              
              
              
              0.0
              %Total
      net sales
              
              $
              26,676
              
              
              $
              20,211
              
              
              $
              6,465
              
              
              
              32
              %


16
 Table of Contents




The
results of operations for the twelve months ended December 31, 2006 show
increased sales and increased profitability, as compared to the twelve months of
2005. Our net sales increased 32% in 2006 to $26.7 million from $20.2 million in
2005 ($6.5 million increase). An increase of 50% was seen in our electrosurgical
product line along with increased sales of generators and accessories to
Arthrex. Arthrex net sales amounted to $6.1 million for 2006, an increase of
$3.1 million or 103% from $3.0 million in 2005.  Approximately 6000
generator units were shipped in 2006 as compared to 4,600 for 2005. No sales of
one particular
electrosurgical product dominates the number of units sold. We instituted price
increases of 3% on cauteries and other products in 2006.




Domestic
sales were $23.4 million for 2006; an increase of 39% from $16.8 million for
2005. International sales were $3.3 million for 2006 a slight decrease of $0.1
million from $3.4 million for 2005.




Cost of
sales represented 60% of sales in 2006 compared to 63% of sales in
2005.   The 3% lower cost of sales in 2006 was mainly
attributable to a decrease of 5.9% in indirect costs as a percentage of sales
and a decrease in labor cost as a percentage of sales of 2.44%. As our sales
have increased, our indirect costs and labor costs as a dollar amount have not
increased in the same manner and have remained relatively constant. Material
cost as a percentage of sales increased slightly from 32% for fiscal 2005 to 33%
for fiscal 2006.





Research,
development and engineering expenses represented 3.9% and 4.9% of sales for 2006
and 2005, respectively. These expenses decreased by 1.0% as a percentage of
sales in 2006 but increased to $1,048,174, an increase over 2005 spending of
$62,260. The higher spending level is the result of development costs in advance
of our proposed product launches in 2007. New products under development are the
modular forceps instruments, suture removal device, ICON GI Device, plasma
technology and various improvements to our line of electrosurgical
generators.





Research
and development for the J. Plasma device decreased from $161,191 in 2005 to
$138,913 in 2006, a decreased of 13.8% or $22,278.





Professional
fees decreased slightly from $527,346 in 2005 to $519,861 in 2006, a decrease of
$7,485 or 1.4%.





Salaries and related costs increased by
32.4% from $1.93 million to $2.56 million.  The increase was mainly
attributable to additional employees and annual salary increases needed to
foster the growth of the company in various areas.





Selling,
general and administrative expenses increased by .2 million or 3.7% to $3.7
million in 2006 as compared to $3.5 million for 2005.





Net
interest earned increased by $62,675 during fiscal 2006 when compared to fiscal
2005 as a result of our higher cash balances being invested and yielding higher
interest returns.





The
effective income tax rate was 36% for 2006 and 2005.  There was also a
tax loss carryover benefit of 35.6 % for 2006 and 36% for 2005. The difference
between the income tax and the tax loss carryover benefit for 2006 is $47,567,
an estimated amount for the AMT (alternative minimum tax).





In
October of 2006, we acquired assets of Lican Development LTD (see Note 9 of
Notes to Consolidated Financial Statements) and formed a wholly owned
subsidiary, Bovie Canada ULC.  Fourth quarter 2006 net income
excluding Bovie Canada was $481,528.  Fourth quarter 2006 consolidated
net income was $423,307 or a decrease of 13.8%.





Net
earnings for fiscal 2006 increased 561% to $2.7 million from $0.4 million in
2005. Basic net earnings per share increased by 533% to $0.19 in 2006 from $0.03
in 2005. Diluted earning per share in 2006 was $0.16 as compared to $.03 for
diluted earnings per share for 2005.




17
 Table of Contents




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 2006 and 2005, commissions paid were $592,159 and
$442,373


respectively,
an increase of 33.8%.  The increase was due to increased sales upon
which we pay commissions.





Our ten
largest customers accounted for approximately 73% of net revenues for 2006 as
compared to 65% in 2005. For fiscal year December 31, 2006, our ten largest
trade receivables accounted for approximately 79% of receivables as compared to
66% for fiscal 2005.  In 2006, two customers accounted for greater
than 10% of our sales, Arthrex for 22% and Medtronic for 10.5%. In 2005, Arthrex
was our only customer that accounted for over 10% of total
revenues.





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 2007, 2006, 2005 and 2004 we received income of $100,000 $100,000
$100,000 and $100,000, respectively, from the licensing. We will receive the
final licensing income installment in October 2008.





Liquidity
and Capital Resources





Our
working capital at December 31, 2007 was $9.8 million compared to $8.0 million
at December 31, 2006. Accounts receivable days sales outstanding were 39 days
and 43 days at December 31, 2007 and 2006 respectively. Day’s sales in inventory
increased 1 day to 110 days at December 31, 2007 from 109 days at December 31,
2006. The higher day sales in inventory is due to increased inventories
resulting from additional orders to be shipped and products to be manufactured
under OEM contracts.





In fiscal
2007, net cash provided by operating activities amounted to $2.0 million
compared to a net cash provided of $2.7 million to operations in 2006. The
decrease in cash generated by operations in 2007 compared to the prior year is
primarily due to the timing of payments and receipts of various current assets
and liabilities.





Net cash
used in investing activities was $1.7 and $2.1 million during 2007 and 2006,
respectively, which amounts were used for the purchase of property and
equipment,  purchased technology and license rights.





Net cash
provided by financing activities was $0.3 million for fiscal 2007, a decrease of
$0.85 million compared to fiscal 2006. During fiscal 2007, there was a
significant decrease in the amount of stock options exercised by individuals,
coupled with the recent ability for individuals to utilize stock swaps to
exercise their stock options.





We had
$3.5 million in cash and cash equivalents at December 31, 2007. We believe our
cash on hand, as well as anticipated cash flows from operations, will be
sufficient to meet our operating cash commitments for the next year. 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 and agreements to purchase materials in the normal course
of business are summarized as follows (in thousands):




18
 Table of Contents




Description
            
            Years
      Ending December 31,2008
            
            
            2009
            
            
            2010
            
            
            2011
            
            
            2012
            
            
            2013Operating
      leases
            
            
            270
            
            
            
            208
            
            
            
            199
            
            
            
            172
            
            
            
            167
            
            
            
            144Employment
      agreements
            
            
            1,043
            
            
            
            1,022
            
            
            
            799
            
            
            
            858
            
            
            
            72
            
            
            
            -Purchase
      Commitments
            
            
            3,863
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -




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 line of credit
            
            $
            1.5
            
            
            $
            1.5
            
            
            
            -0-





As of
December 2007 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.





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  in the United States of America (U.S. GAAP). 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, legal proceedings, research
and development, warranty obligations, product liability, 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, 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:




19
 Table of Contents




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 would 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 would unfavorably affect
future operating results.





Impairment
of goodwill and other long-lived assets




We review
long-lived assets which are held and used, including property and equipment and
purchased intangible assets, for impairment whenever changes in circumstances
indicate that the carrying amount of the assets may not be recoverable. Such
evaluations compare the carrying amount of an asset to future undiscounted net
cash flows expected to be generated by the asset over its expected useful life
and are significantly impacted by estimates of future prices and volumes for our
products, capital needs, economic trends and other factors which are inherently
difficult to forecast. If the asset is considered to be impaired, we record an
impairment charge equal to the amount by which the carrying value of the asset
exceeds its fair value determined by either a quoted market price, if any, or a
value determined by utilizing a discounted cash flow technique.




We test
our goodwill for impairment, at a minimum, annually.   The
goodwill impairment test is a two-step process. The first step of the impairment
analysis compares the fair value of the goodwill to its carrying amount. In
determining fair value, the accounting guidance allows for the use of several
valuation methodologies, although it states quoted market prices are the best
evidence of fair value. If the fair value is less than the assets’ carrying
amount,  we recognize an impairment loss equal to that excess
amount.




Share-based
Compensation





Under
the Company’s stock option plan, options to purchase Common Shares of the
Company may be granted to key employees, officers and directors of the Company
by the Board of Directors. The Company accounts for stock options in accordance
with SFAS Statement 123 (R) with option expense amortized over the vesting
period based on the binomial lattice option-pricing model fair value on the
grant date, which includes a number of estimates that affect the amount of our
expense.





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 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.




20
 Table of Contents




Recent
Accounting Pronouncements





Accounting
for Stock-Based Compensation




Effective
January 1, 2006, the Company adopted Statement of Financial Accounting Standards
No. 123R, Share-Based Payment ("SFAS 123R"), which requires companies to measure
and recognize compensation expense for all share-based payment awards made to
employees and directors based on estimated fair values. SFAS 123R is being
applied on the modified prospective basis. Prior to the adoption of SFAS 123R,
the Company accounted for its stock-based compensation plans under the
recognition and measurement principles of Accounting Principles Board (APB)
Opinion No. 25, Accounting for Stock Issued to Employees, as provided by SFAS
123, "Accounting for Stock Based Compensation" ("SFAS 123") and accordingly,
recognized no compensation expense related to the stock-based plans as stock
options granted to employees and directors were equal to the fair market value
of the underlying stock at the date of grant. In March 2005, the SEC issued
Staff Accounting Bulletin No. 107 ("SAB 107") relating to SFAS 123R. The Company
has applied the provisions of SAB 107 in its adoption of SFAS 123R.






SFAS 123R
applies to new awards and to awards that were outstanding on January 1, 2006
that are subsequently modified, repurchased or cancelled. Under the modified
prospective approach, the Company is required to recognize an allocable portion
of compensation cost for all share-based payments granted prior to, but not yet
vested on, January 1, 2006 (compensation costs are recognized as the awards
continue to vest), based on the grant-date fair value estimated in accordance
with the provisions of SFAS 123.  Prior periods were not restated to
reflect the impact of adopting the new standard. As of December 31, 2007,
there was approximately $412,900 of total unrecognized compensation costs
related to unvested options. That cost is expected to be recognized over a
period of 4 to 7 years.




SFAS
No. 151 - Inventory Costs, an amendment of Accounting Research Bulletin No. 43,
Chapter 4





In
November 2004, the FASB issued SFAS No. 151, “Inventory Costs, an amendment of
Accounting Research Bulletin No. 43, Chapter 4,” which adopts wording from the
International Accounting Standards Board’s (IASB) IAS 2 “Inventories” (“AS 151”)
in an effort to improve the comparability of cross-border financial
reporting.  The FASB and IASB both believe the standards have the same
intent; however, an amendment to the wording was adopted to avoid inconsistent
application.  The new standard indicates that abnormal freight,
handling costs, and wasted materials (spoilage) are required to be treated as
current period charges rather than as a portion of inventory
cost.  Additionally, the standard clarifies that fixed production
overhead should be allocated based on the normal capacity of a production
facility.  Adoption of this statement, which was effective January 1,
2007 did not have a material impact on our consolidated earnings, financial
position or cash flows.





FSP
109-1 Application of FASB Statement No. 109 – Accounting for Income Taxes to the
Tax Deduction on Qualified Production Activities Provided by the American Jobs
Creation Act of 2004





In
December 2004, the FASB issued FSP FAS 109-1, “Application of FASB Statement No.
109, Accounting for Income Taxes to the Tax Deduction on Qualified Production
Activities Provided by the American Jobs Creation Act of 2004.”  The
FSP clarifies that the manufacturer’s deduction provided for under the American
Jobs Creation Act of 2004 (the Act) should be accounted for as a special
deduction in accordance with SFAS No. 109, “Accounting for Income Taxes,” and
not as a tax rate reduction.  The Qualified Production Activities
Deduction did not impact the Company’s consolidated earnings, financial position
or cash flows for fiscal year 2006. This deduction has no effect in
2007.





SFAS
154 - Accounting Changes and Error Corrections--A Replacement of APB Opinion No.
20 and FASB Statement No. 3





In May
2005, the FASB issued SFAS No. 154, "Accounting Changes and Error Corrections, -
a replacement of APB Opinion No. 20 and SFAS No. 3" (“FAS 154”). The Statement
established, unless impracticable, retrospective application as the required
method for reporting a change in accounting principle in the absence of
explicit transition requirements specific to the newly adopted accounting
principle. The provisions of this Statement were effective for accounting
changes and corrections of errors made in fiscal years beginning after December
15, 2005.  The adoption of this Statement did not have a material
impact on the Company's consolidated financial position or result of
operations.




21
 Table of Contents




SFAS
155 - Accounting for Certain Hybrid Financial Instruments – an amendment of FASB
Statement Numbers 133 and 140





In
February 2006, the FASB issued SFAS No. 155, "Accounting for Certain Hybrid
Financial Instruments - an amendment of SFAS No. 133 and No. 140" (“FAS
155”).  This Statement, among other things, allows a preparer to elect
fair value measurement of instruments in cases in which a derivative would
otherwise have to be bifurcated. The provisions of this Statement are effective
for all financial instruments acquired or issued in fiscal years beginning after
September 15, 2006. The adoption of this Statement did not have a material
impact on the Company's consolidated financial position or results of
operations.





SFAS
156 - Accounting for Servicing of Financial Assets – an amendment of FASB
Statement No. 140




In March
2006, the FASB issued SFAS No. 156, "Accounting for Servicing of Financial
Assets-an amendment of SFAS No. 140" (“FAS 156”).  This Statement
amends SFAS No. 140, "Accounting for Transfers and Servicing of Financial Assets
and Extinguishments of Liabilities", with respect to the accounting for
separately recognized servicing assets and servicing liabilities. The provisions
of this Statement are effective for all financial instruments acquired or issued
in fiscal years beginning after September 15, 2006. Adoption of this Statement
did not have a material impact on the Company's consolidated financial position
or results of operations.




FIN
48 - Accounting for Uncertainty in Income Taxes – an Interpretation of FASB
Statement No. 109




In July
2006, the FASB issued Interpretation No. 48, "Accounting for Uncertainty in
Income Taxes - an interpretation of FASB Statement No. 109" ("FIN 48") which
prescribes a recognition threshold and measurement attribute, as well as
criteria for subsequently recognizing, derecognizing and measuring uncertain tax
positions for financial statement purposes. FIN 48 also requires expanded
disclosure with respect to the uncertainty in income tax assets and liabilities.
FIN 48 is effective for fiscal years beginning after December 15, 2006 and is
required to be recognized as a change in accounting principle through a
cumulative-effect adjustment to retained earnings as of the beginning of the
year of adoption. Adoption of this statement did not have a material impact on
the Company's consolidated financial position or results of
operations.




SAB
108 – ‘Considering the Effects of Prior Year Misstatements when Quantifying
Misstatements in Current Year Financial Statements’




In
September 2006, the SEC issued Staff Accounting Bulletin No. 108 (“SAB
108”), Considering the Effects of Prior Year Misstatements when Quantifying
Misstatements in Current Year Financial Statements. SAB 108 provides guidance on
the consideration of the effects of prior year unadjusted errors in quantifying
current year misstatements for the purpose of a materiality
assessment.  The Statement is effective as of the beginning of an
entity’s first fiscal year that begins after November 15, 2007. Early adoption
is permitted as of the beginning of a fiscal year that begins on or before
November 15, 2007, provided the entity also elects to apply the provisions of
FASB Statement No. 157, Fair Value Measurements.  Adoption of this
Statement is not expected to have a material impact on the Company's
consolidated financial position or results of operations.




SFAS
157 – Fair Value Measurement




In
September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements (“FAS
157”). This standard establishes a standard definition for fair value,
establishes a framework under generally accepted accounting principles
for measuring fair value and expands disclosure requirements for fair value
measurements. This standard is effective for financial statements issued for
fiscal years beginning after November 15, 2007.  Adoption of this
statement is not expected to have a material effect on the Company’s
consolidated financial position or results of operations.




22
 Table of Contents




SFAS
158 – Employers’ Accounting for Defined Benefit Pension and Other Postretirement
Plans, an amendment of FASB Statement Nos. 87, 88, 106, and 132(R)




In
September 2006, the FASB issued SFAS No. 158, Employers’ Accounting for Defined
Benefit Pension and Other Postretirement Plans, an amendment of FASB Statement
Nos. 87, 88, 106, and 132(R), or (“FAS 158”). This Statement requires an
employer that is a business entity and sponsors one or more single-employer
defined benefit plans to (a) recognize the funded status of a benefit
plan—measured as the difference between plan assets at fair value (with limited
exceptions) and the benefit obligation—in its statement of financial position;
(b) recognize, as a component of other comprehensive income, net of tax, the
gains or losses and prior service costs or credits that arise during the period
but are not recognized as components of net periodic benefit cost pursuant to
FAS 87, Employers’ Accounting for Pensions, or FAS 106, Employers’ Accounting
for Postretirement Benefits Other Than Pensions; (c) measure defined benefit
plan assets and obligations as of the date of the employer’s fiscal year-end
statement of financial position (with limited exceptions); and (d) disclose in
the notes to financial statements additional information about certain effects
on net periodic benefit cost for the next fiscal year that arise from delayed
recognition of the gains or losses, prior service costs or credits, and
transition assets or obligations.  An employer with publicly traded
equity securities is required to initially recognize the funded status of a
defined benefit postretirement plan and to provide the required disclosures as
of the end of the fiscal year ending after December 15, 2006. Adoption of this
statement did not have a material effect on the Company’s consolidated financial
position or results of operations.




SFAS
159 – The Fair Value Option for Financial Assets and Financial
Liabilities—Including an amendment of FASB Statement No. 115





In
February 2007, the FASB issued SFAS No. 159 “The Fair Value Option for Financial
Assets and Financial Liabilities—Including an amendment of SFAS No. 115” (“FAS
159”).  This Statement permits entities to choose to measure many
financial instruments and certain other items at fair value.  Most of
the provisions of this Statement apply only to entities that elect the fair
value option.




The
following are eligible items for the measurement option established by this
Statement:




1.
            Recognized
      financial assets and financial liabilities except:a.
            An
      investment in a subsidiary that the entity is required to
      consolidateb.
            An
      interest in a variable interest entity that the entity is required to
      consolidatec.
            Employers’
      and plans’ obligations (or assets representing net over funded positions)
      for pension benefits, other postretirement benefits (including health care
      and life insurance benefits), post employment benefits, employee stock
      option and stock purchase plans, and other forms of deferred compensation
      arrangements.d.
            Financial
      assets and financial liabilities recognized under leases as defined in
      FASB Statement No. 13, Accounting for Leases.e.
            Withdrawable
      on demand deposit liabilities of banks, savings and loan associations,
      credit unions, and other similar depository
institutionsf.
            Financial
      instruments that are, in whole or in part, classified by the issuer as a
      component of shareholder’s equity (including “temporary equity”). An
      example is a convertible debt security with a non-contingent beneficial
      conversion feature.2.
            Firm
      commitments that would otherwise not be recognized at inception and that
      involve only financial instruments3.
            Non-financial
      insurance contracts and warranties that the insurer can settle by paying a
      third party to provide those goods or
services


23
 Table of Contents




4.
            Host
      financial instruments resulting from separation of an embedded
      non-financial derivative instrument from a non-financial hybrid
      instrument.




The fair
value option:




1.
            May
      be applied instrument by instrument, with a few exceptions, such as
      investments otherwise accounted for by the equity
method2.
            Is
      irrevocable (unless a new election date occurs)3.
            Is
      applied only to entire instruments and not to portions of
      instruments.




The
Statement is effective as of the beginning of an entity’s first fiscal year that
begins after November 15, 2007. Early adoption is permitted as of the beginning
of a fiscal year that begins on or before November 15, 2007, provided the entity
also elects to apply the provisions of FASB Statement No. 157, Fair Value
Measurements.  Adoption of this statement is not expected to have a
material effect on the Company’s consolidated financial position or results of
operations.





ITEM
7A.  Quantitative and Qualitative
Disclosures about Market Risk





Our
financial instruments include cash, cash equivalents and overnight investments.
As such we do not believe we are exposed to significant interest rate risk on
our short-term investments. The primary objective of our investment activities
is to preserve principal while at the same time maximizing yields without
significantly increasing risk. To achieve this objective, we invest in highly
liquid overnight money market investments. If a 10% change in interest rates
were to have occurred on December 31, 2007, this change would not have had
a material effect on the fair value of our investment portfolio as of that
date.





ITEM 8. Fin anc ial
Statements and Supplementary Data





The
information required by this item may be found beginning on pages F-1 of this
Annual Report.





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





Due to
the unexpected passing of the principal partner, we terminated our relationship
with our accounting firm Bloom and Company LLP and filed an 8K with the SEC
noting the change on April 25, 2007. We then engaged Kingery & Crouse, P.A.
as our independent accountants, and our Board of Directors approved the change.
Bloom and Company LLP’s reports on our consolidated financial statements as of
and for the years ended December 31, 2006 and 2005 did not contain any adverse
opinion or disclaimer of opinion, nor were they qualified or modified as to
uncertainty, audit scope for accounting principles.





There
were no disagreements with our current and former accountants on accounting and
financial disclosures.





ITEM
9A. Disclosure Controls and Procedures







a)
Evaluation of Disclosure Controls and Procedures




We are
required to maintain disclosure controls and procedures that are designed to
ensure that information required to be disclosed in our reports under the
Securities Exchange Act of 1934, as amended (Exchange Act), is recorded,
processed, summarized and reported within the time periods specified in the
Commission’s rules and forms, and that such information is accumulated and
communicated to our management, including our Chief Executive Officer (CEO) and
Chief Financial Officer (CFO) as appropriate, to allow timely decisions
regarding required disclosure.




In
connection with the preparation of this Form 10-K for the year ended
December 31, 2007, our management, under the supervision of the CEO and
CFO, conducted an evaluation of disclosure controls and procedures.  A
control system, no matter how well conceived and operated, can provide only
reasonable, not absolute,
assurance that the objectives of the control systems are met.  Based
on that evaluation, our CEO and CFO concluded that our disclosure controls and
procedures were not effective at a reasonable assurance level as of
December 31, 2007 due to a significant deficiency discussed
below.  However, the significant deficiency described below has been
remediated as of the filing date of this Form 10-K, and accordingly, our
CEO and CFO conclude that our disclosure controls and procedures are effective
as of the filing date of this Form 10-K.




24
 Table of Contents




As a
non-accelerated reporting filer, management's assessment of the effectiveness of
our internal control over financial reporting as of December 31, 2007 is
not required to be audited by Kingery & Crouse PA, our independent
registered public accountant until our fiscal year ending December 31,
2009.




b)
Management’s Report on Internal Control over Financial Reporting




Management
is responsible for establishing and maintaining adequate internal control
structure and procedures over financial reporting (as defined in
Rules 13a-15(e) and 15d-15(e)) under the Exchange Act. Our management
conducted an assessment of the effectiveness of our internal control over
financial reporting as of December 31, 2007 based on the framework set
forth in Internal Control — Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO).  Internal
control over financial reporting cannot provide absolute assurance of achieving
financial reporting objectives because of its inherent
limitations.  Internal control over financial reporting is a process
that involves human diligence and compliance and is subject to lapses in
judgment and breakdowns resulting from human failures.  Because of
such limitations, there is a risk that material misstatements may not be
prevented or detected on a timely basis by internal control over financial
reporting.  Also, projections of any evaluation of effectiveness to
future periods are subject to the risk that controls may become inadequate
because of changes in conditions, or that the degree of compliance with the
policies or procedures may deteriorate.




A
material weakness in internal control over financial reporting is defined by the
Public Company Accounting Oversight Board’s Audit Standard No.5 as a deficiency,
or a combination of deficiencies, in internal control over financial reporting,
such that there is a reasonable possibilitythat a material
misstatement of the company's annual or interim financial statements will not be
prevented or detected on a timely basis.  A significant deficiency is
a deficiency, or a combination of deficiencies, in internal control over
financial reporting that is less severe than a material weakness, yet important
enough to merit attention by those responsible for oversight of our financial
reporting.




Our
management identified a significant deficiency  in our disclosure
controls as of December 31, 2007 as we initially failed to include various
required disclosures (e.g. disclosures related to income taxes and segment
information) in the notes to our consolidated financial statements prior to the
distribution of these financial statements to our board of directors and
independent accountants,.




c) Remediation–The deficiency noted above
has been remediated as follows:




·
            Our
      chief financial officer and an outside consultant that assists us with our
      SEC reporting have received additional training subsequent to December 31,
      2007 relative to certain required disclosures.·
            We
      have made the decision to   engage an outside tax
      accountant that is familiar with Financial Accounting Standards Board
      Statement No. 109, and other related income tax
      pronouncements  to assist us with any complex tax issues that
      could potentially impact our financial
  statements.





We also
understand that remediation of disclosure controls is a continuing work in
progress due to the issuance of new standards and promulgations, and continued
remediation of the significant deficiency described above is among our highest
priorities.  Our management and Audit Committee will periodically
assess the progress and sufficiency of our ongoing initiatives and make
adjustments as and when necessary.  As of the date of this report, our
management believes that our efforts, have remediated the significant deficiency
in internal control over financial reporting as described
above.  However, our management and our Audit Committee do not expect
that our disclosure controls and procedures or internal control over financial
reporting will prevent all errors or all instances of fraud.  A
control system, no matter how well designed and operated, can provide only
reasonable, not absolute, assurance that the control system’s objectives will be
met.  Further, the design of a control system must reflect the fact
that there are resource constraints, and the benefits of controls must be
considered relative to their costs.  Because of the inherent
limitations in all control systems, no evaluation of controls can provide
absolute assurance that all control gaps and instances of fraud have been
detected.  These inherent limitations include the realities that
judgments in decision-making can be faulty, and that breakdowns can occur
because of simple errors or mistakes.  Controls can also be
circumvented by the individual acts of some persons, by collusion of two or more
people, or by management override of the controls.  The design of any
system of controls is based in part upon certain assumptions about the
likelihood of future events, and any design may not succeed in achieving its
stated goals under all potential future conditions. 25
 Table of Contents




d)
Changes in Internal Control over Financial Reporting





With the
exception of the identification of the deficiency discussed above, there were no
changes in our internal control over financial reporting that occurred during
our last fiscal quarter of 2007 that have materially affected, or are reasonably
likely to materially affect, our internal control over financial
reporting.




In
addition, except as disclosed above with respect to our remediation procedures,
there were no changes in our internal control over financial reporting that
occurred during our first  quarter of fiscal 2008 that have materially
affected, or are reasonably likely to materially affect, our internal control
over financial reporting.





ITEM
9B. Other Information





None.





Part
III





ITEM
10. Directors,  Executive Officers, and Corporate
Governance





Set forth
below is information regarding the executive officers and directors of Bovie
Medical as of February 28, 2008:





Name
            
            Position
            
            Director
      SinceAndrew
      Makrides
            
            Chairman
      of the Board, President, and CEO
            
            December
      1982J.
      Robert Saron
            
            President
      of Aaron Medical Industries, Inc. and Director
            
            August
      1994George
      Kromer
            
            Research
      Analyst and Director
            
            October
      1995Brian
      Madden
            
            Director
            
            September
      2003Randy
      Rossi
              
              Michael
      Norman
              
              August
      Lentricchia
              
              Moshe
      Citronowicz
            
            Director
              
              Director
              
              Director
              
              Executive
      Vice President and Chief Operating Officer
            
            September
      2004
              
              September
      2004
              
              October
      2007Gary
      D. Pickett
            
            Chief
      Financial OfficerSteve
      Livneh
            
            President
      of Bovie Canada




26
 Table of Contents




Directors
serve for one-year terms and are elected at the annual shareholders
meeting.





Andrew
Makrides, Esq. Age 66, 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 a co-founder and 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, 2011.





J. Robert
Saron, age 55, 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 currently 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,
2011.





George
Kromer, Jr., age 67, became a director on October 1, 1995. On January 1, 2006
Mr. Kromer accepted an employment position with Bovie Medical Corporation as
research analyst for the company in which he still maintains his capacity as a
director. Mr. Kromer had 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.





Moshe
Citronowicz, age 55, 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, 2011.





Gary D.
Pickett, CPA, age 56, holds an MBA from the University of Tampa, a BS degree in
Accounting from Florida State University, and served five years as a field
artillery officer in the United States Army.  Gary joined as
controller of Bovie in March 2006 and became Chief Financial Officer in October
2006.  During the past five years, Mr. Pickett held positions of
Director of Financial Systems with Progress Energy Services of Raleigh, NC, Vice
President and Controller of Progress Rail Services, a subsidiary of Progress
Energy Services in Albertville, AL, each of which were non-affiliated with
Bovie.  He has had extensive experience in Sarbanes-Oxley
implementation as well as GAAP accounting and SEC Reporting.




Brian
Madden, age 54, joined Bovie as a director in August 2003.  He
graduated from Iona College in 1976 with a Bachelor of Business Administration
degree. He is currently the president of Liberty Title Agency, which he founded
in 2001 and is currently the president. 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. In addition Mr. Madden sits on the board of Madison
National Bank (MNBX) and presently sits on our audit committee.





Randy
Rossi, age 48, joined Bovie as director in 2004.  He graduated from
the University of Southwestern LA, with a BSBA degree in
management.  Mr. Rossi currently serves as President of In Home
Respiratory, which he founded in 2004. Prior to that, he served as Executive VP
at Brewer Corp. and was president at Kendall Patient Care Division of TYCO
Healthcare from 2000-2004.




27
 Table of Contents




Michael
Norman, CPA age 50, joined Bovie in 2004.  He manages the CPA firm,
Michael Norman, CPA, PC since 1994 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.





August
Lentricchia, age 53, is presently employed by Freedom Tax and Financial Services
Bohemia as a Registered Representative since 2001. He is also licensed as a
Registered Representative and investment consultant of HD Vest Investment
Services, a non-bank subsidiary of Wells Fargo and Company. He has also served
as an investment consultant for Citibank. Since joining the Board in August of
2007, Mr. Lentricchia serves on our audit committee. He is a graduate of the
University of Arizona (BA 1977) and has received a Masters degree in Education
from Dowling College (2004).





Steve
Livneh, age 59, became President of Bovie Canada in October 2006 following the
asset purchase of certain intellectual properties by Bovie from Lican
Development of Ontario, Canada.  Mr. Livneh, is a mechanical engineer
and inventor, and has developed and manufactured varied products, including
aerial munitions, consumer goods, irrigation and hydraulic devices and guidance
systems.  During the past several years he has been engaged in
developing endoscopic electrosurgery instruments, targeting the general surgery,
gynecology, urology and thoracic surgery markets.





We have a
3-member audit committee consisting of three independent members of the Board of
Directors,  Brian Madden, Michael Norman CPA, and  August
Lentricchia. 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 will be provided
without charge to any person upon request to Bovie Medical Corporation, 734 Walt
Whitman Road, Melville, NY 11747, Attn: Andrew Makrides.





ITEM
11. Executive Compensation





General
Compensation Philosophy





Bovie’s
compensation programs are designed to attract, motivate and retain the
management talent the Company believes is necessary to achieve its short-term
and long-term business goals. In this way, the Company believes that the
interests of its executives align with the interests of its stockholders. With
these objectives in mind, Bovie’s Board of Directors has built an executive
compensation program that consists of two principal elements:





1. Base Salary


2. Grant
of stock-based compensation (such as stock options and/or shares of restricted
stock)





Compensation
Program




Base
Salary




Bovie
pays base salaries to its Named Executive Officers in order to provide a
consistent, minimum level of pay that sustained individual performance warrants.
The Company also believes that a competitive annual base salary is important to
attract and retain an appropriate caliber of talent for each position over
time.





The
annual base salaries of Bovie's Named Executive Officers are determined by its
CEO (except with regard to his salary) and COO, and include employment
contracts, that provide for annual increases, and are initially approved and
renewed by the Board of Directors. The annual base salary of Bovie's CEO is
determined by the Board of Directors. All salary decisions are based on each
Named Executive Officer's level of responsibility,
experience and recent and past performance, as determined by the independent
Board members, constituting the Compensation Committee. The Board of Directors
does not benchmark its base salaries in any way, nor do they employ the services
of a compensation consultant.




28
 Table of Contents





Stock
options




The second component of
executive compensation is equity grants which have mainly come in the form of
stock options. Bovie believes that equity ownership in the Company is
important to provide its Named Executive Officers with long-term incentives
to better align
interests of executives with the interests of stockholders and build
value for Bovie stockholders. In addition, the equity compensation is designed
to attract and retain the executive management team. Stock options have value
only if the stock price increases over time and, therefore, provide executives
with an incentive to build Bovie's value. This characteristic ensures that the
Named Executive Officers have a meaningful portion of their compensation tied to
future stock price increases and reward management for
long-term strategic planning through the resulting enhancement of the stock
price.






Stock
option awards to Named Executive Officers are entirely discretionary. The CEO
and COO recommend whether and how many stock options should be awarded to the
other Named Executive Officers, and the Board of Directors approves or, if
necessary, modifies their recommendations. The Board of Directors solely
determines whether and how many stock options should be awarded to the CEO. In
making stock option award determinations, the CEO, COO and Board of Directors
consider the prior contribution of participants and their expected future
contributions to the growth of Bovie.




Perquisites
and Other Benefits




Bovie's
Named Executive Officers are eligible for the same health and welfare programs
and benefits as the rest of its employees in their respective locations. In
addition, Bovie's CEO, COO, President of Aaron, and President of Bovie Canada
each receive an automobile allowance of $6,310 per year.




Bovie's
Named Executive Officers are entitled to participate in and receive employer
contributions to Bovie's 401(k) Savings Plan. For more information on employer
contributions to the 401(k) Savings Plan see the Summary Compensation Table and
its footnotes.




Tax
and Accounting Considerations.




Section 162(m)
of the Internal Revenue Code of 1986, as amended (the “Code”), places a limit of
$1,000,000 on the amount of compensation that we may deduct as a business
expense in any year with respect to each of our most highly paid executives
unless, among other things, such compensation is performance-based and has been
approved by stockholders. The non-performance-based compensation paid to our
executive officers for the 2007 fiscal year did not exceed the $1 million limit
per officer. Accounting considerations also play an important role in the design
of our executive compensation program. Accounting rules such as FAS 123R require
us to expense the cost of our stock option grants which reduces the amount of
our reported profits.




Because
of option expensing and the impact of dilution on our stockholders, we pay close
attention to the number and value of the shares underlying stock options we
grant.




Compensation
of Named Executive Officers





The
following table sets forth the compensation paid to each of Bovie’s Named
Executive Officers for the three years ended December 31, 2007 for services to
our company in all capacities:




29
 Table of Contents




Summary
Compensation Table





Name
                  And
                  Principal
                  Position
                Year
                Salary
                  ($)
                Bonus
                  ($)
                Stock
                  Awards
                  ($)
                Option
                  Awards
                  ($)
                Non-
                  Equity
                  Incentive
                  Plan
                  Compensa-
                  tion
                  Earnings
                  ($)
                Change
      in
                  Pension
                  Value
      and
                  Nonquali-
                  fied
                  Deferred
                  compen-
                  sation
                  Earnings
                  ($)
                All
                  Other
                  Compen-
                  Sation
                  ($)
                Total
                  ($)(a)
                (b)
                (c)
                (d)
                (e)
                (f)
                (g)
                (h)
                (i)
                (j)Andrew
      Makrides
                  President,
      CEO, Chairman of the Board
                2007
                  2006
                  2005
                $195,452
                  $217,358* (1)
                  $180,108
                3,685
                  3,685
                  3,428
                0
                  0
                  0
                0
                  0
                  56,250
                0
                  0
                  0
                0
                  0
                  0
                21,770
      (6)
                  19,646
      (7)
                  13,366
      (8)
                $220,907
                  $240,689
                  $253,152Gary
      D.
                  Pickett
                  Chief
                  Financial
                  Officer
                2007
                  2006
                  2005
                $94,457
                  $66,442* (A)(4)
                  0
                1,904
                  1,731
                  0
                0
                  0
                  0
                88,200*(5)
                  0
                  0
                0
                  0
                  0
                0
                  0
                  0
                3,097
      (9)
                  1,488
      (10)
                  0
                $187,658
                  $  69,661
                  0J.
      Robert Saron
                  President
                  Aaron
                  Medical
      and
                  Director
                2007
                  2006
                  2005
                $276,680
                  $281,109* (2)
                  $249,863
                5,218
                  5,218
                  4,854
                0
                  0
                  0
                0
                  0
                  56,250
                0
                  0
                  0
                0
                  0
                  0
                20,413(11)
                  16,201(12)
                  16,548(13)
                $302,311
                  $302,528
                  $327,515Moshe
                  Citronowicz
                  Vice
                  President
                  Chief
                  Operating
                  Officer
                2007
                  2006
                  2005
                $203,349
                  $242,947* (3)
                  $187,141
                3,834
                  3,834
                  3,567
                0
                  0
                  0
                0
                  0
                  56,250
                0
                  0
                  0
                0
                  0
                  0
                20,109(14)
                  18,506(15)
                  16,273(16)
                $227,292
                  $265,287
                  $263,231Steve
      Livneh
                  President
      Bovie Canada
                2007
                  2006
                  2005
                $174,155
                  $
      36,060*
      (B)
                  --
                3,523
                  2,885
                  --
                0
                  0
                  --
                0
                  0
                  --
                0
                  0
                  --
                0
                  0
                  --
                12,664(17)
                  1,750
      (18)
                  --
                $190,342
                  $40,695
                  --





__________________________________________





In 2005 a
total of 220,000 options were granted to executive officers and
directors. These options granted in 2005 were not pursuant to a qualified
shareholder approved plan and are restricted. No options were granted to
executive officers and directors for 2006.




Column(d)
consists of amounts for annual bonuses given to all employees equal to one week
of base compensation.





(A) Mr.
Pickett started with Bovie on March 27, 2006.





(B) Mr.
Livneh started with Bovie on October 1, 2006.




30
 Table of Contents




*(1)
Includes $27,825 for unused vacation pay, which had been reserved for in prior
years.  This had no effect on the 2006 earnings.





*(2)
Includes $13,045 for unused vacation pay, which had been reserved for in prior
years.  This had no effect on the 2006 earnings.





*(3)
Includes $49,561 for unused vacation pay, which had been reserved for in prior
years.  This had no effect on the 2006 earnings.





*(4)
Includes $865 for unused vacation pay, which had been reserved for in
2006.





*(5) In
2007 a total of 25,000 options were granted to Mr. Pickett as follows: 20,000
stock options granted on January 12, 2007 with a fair value of $3.66 per option;
5,000 stock options granted on March 29, 2007 with a fair value of $3.00 per
option.





(6) This
amount includes: $3,759 of employer contributions under the Bovie Employee
401(k) savings plan; car allowance of $6,310; life insurance premiums of $396;
and health insurance premiums of $11,305.





(7) This
amount includes: $4,026 of employer contributions under the Bovie Employee
401(k) savings plan; car allowance of $6,310; life insurance premiums of $396;
and health insurance premiums of $8,914.





(8) This
amount includes: $4,095 of employer contributions under the Bovie Employee
401(k) savings plan; car allowance of $6,310; life insurance premiums of $396;
and health insurance premiums of $2,565.





(9) This
amount includes: $2,834 of employer contributions under the Bovie Employee
401(k) savings plan; and life insurance premiums of $263.





(10) This
amount includes: $1,356 of employer contributions under the Bovie Employee
401(k) savings plan; and life insurance premiums of $132.





(11) This
amount includes: $8,140 of employer contributions under the Bovie Employee
401(k) savings plan; car allowance of $6,310; life insurance premiums of $434;
and health insurance premiums of $5,529.





(12) This
amount includes: $5,179 of employer contributions under the Bovie Employee
401(k) savings plan; car allowance of $6,310; life insurance premiums of $434;
and health insurance premiums of $4,278.





(13) This
amount includes: $4,095 of employer contributions under the Bovie Employee
401(k) savings plan; car allowance of $6,310; life insurance premiums of $434;
and health insurance premiums of $5,709.





(14) This
amount includes: $5,982 of employer contributions under the Bovie Employee
401(k) savings plan; car allowance of $6,310; life insurance premiums of $434;
and health insurance premiums of $7,383.





(15) This
amount includes: $5,544 of employer contributions under the Bovie Employee
401(k) savings plan; car allowance of $6,310; life insurance premiums of $434;
and health insurance premiums of $6,218.





(16) This
amount includes: $3,671 of employer contributions under the Bovie Employee
401(k) savings plan; car allowance of $6,310; life insurance premiums of $434;
and health insurance premiums of $5,858.





(17) This
amount includes: $4,591 of employer contributions under the Bovie Employee
401(k) savings plan; car allowance of $6,310; life insurance premiums of $192;
and health insurance premiums of $1571.





(18) This
amount includes: $0 of employer contributions under the Bovie Employee 401(k)
savings plan; car allowance of $1,440; life insurance premiums of $48; and
health insurance premiums of $262.




31
 Table of Contents




Employment
Agreements and Potential Payments Upon Termination or Change in
Control





We have
employment contracts with Mr. Makrides, Mr. Saron, and Mr. Citronowicz that
expire in January 2011 assuming we provide the executives with appropriate
written notice pursuant to the contracts (otherwise commencing in 2009, the
agreements continue to extend for periods of one year).  The
employment agreements provide, among other things, that the Executive may be
terminated as follows:





(a)
            Upon
      the death of the Executive, the Executive’s estate shall be paid the basic
      annual compensation due the Employee pro-rated through the date of
      death.





(b)
            By
      the Resignation of the Executive at any time upon at least thirty (30)
      days prior written notice to Bovie in which case 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. In this case Bovie shall be obligated to pay the
      Executive compensation in effect at such time, including all bonuses,
      accrued or prorated, and expenses up to the date of termination.
      Thereafter, for the period remaining under the contract, Bovie shall pay
      the Executive the salary in effect at the time of termination payable
      weekly until the end of their
contract.





(e)
            If
      Bovie 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.





On June
18, 2007, the Company entered into a two year employment contract with Mr.
Pickett to serve as Chief Financial Officer. This two year contract provides for
an automatic extension of one year unless the Company through written
notification conveys an intention not to renew and does so with 365 days advance
notice. In the event of a change of control, the contract provides that Mr.
Pickett will receive salary and bonus in effect up to the date of the remaining
portion of the contract.





On
October 10, 2006, the Company entered into a three year contract with Mr. Livneh
to serve as President of Bovie Canada. This three year contract contains an
automatic two year extension, unless the Company provides written notice of an
intention not to renew prior to the expiration date. In the event of a change of
control, the Company is obligated to Mr. Livneh for compensation and bonuses
currently in effect through to the date of the remaining portion of the
contract.




32
 Table of Contents




The
following schedule shows all contracts and terms with officers of
Bovie.





Bovie
      Medical CorporationDecember
      31, 2007Contract
            
            Expiration
            
            Current
            
            
            AutoDate
            
            Date
            
            Base
      Pay
            
            
            AllowanceAndrew
      Makrides
            02/01/00
            
            1/31/2011
            
            $
            186,091
            
            
            $
            6,310J.
      Robert Saron
            02/01/00
            
            1/31/2011
            
            $
            263,406
            
            
            $
            6,310Moshe
      Citronowicz
            02/01/00
            
            1/31/2011
            
            $
            193,507
            
            
            $
            6,310Steve
      Livneh
            10/02/06
            
            11/01/2009
            
            $
            150,000
            
            
            $
            6,310Gary
      Pickett
            6/18/07
            
            6/18/2009
            
            $
            90,000
            
            
            $
            -





Grants
of Plan-Based Awards




The
following table presents information regarding the incentive awards granted to
Bovie's Named Executive Officers for fiscal 2007.




Name
            
            Grant
      Date
            
            
            Estimated Future Payouts
              Under
      Non-Equity
              Incentive
      Plan Awards
            
            
            All
      Other
              Option Awards:
              #
      of Shares
              Underlying
              Options
            
            
            Exercise
              Price
              of Options
              ($/Sh)
            
            
            Grant
      Date
              Fair
      Value
              of
      Option
              Awards ($)Target
      ($)Andrew
      Makrides
            
            
            --
            
            
            
            --
            
            
            
            --
            
            
            
            --
            
            
            
            --J.
      Robert Saron
            
            
            --
            
            
            
            --
            
            
            
            --
            
            
            
            --
            
            
            
            --Moshe
      Citronowicz
            
            
            --
            
            
            
            --
            
            
            
            --
            
            
            
            --
            
            
            
            --Steve
      Livneh
            
            
            --
            
            
            
            --
            
            
            
            --
            
            
            
            --
            
            
            
            --Gary
      Pickett
            
            1/12/07
            
            
            
            --
            
            
            
            20,000
            
            
            $
            8.66
            
            
            $
            73,2003/29/07
            
            
            
            --
            
            
            
            5,000
            
            
            $
            7.10
            
            
            $
            15,000




Options
Exercises During Fiscal 2007





There
were no options exercised by Named Executive Officers for fiscal
2007.







Outstanding
Equity Awards




The
following table presents information with respect to each unexercised stock
option held by Bovie's Named Executive Officers as of December 31,
2007.




33
 Table of Contents




Outstanding
      Equity Awards at 12/31/07Name
            
            
            # of Securities
              Underlying
              Unexercised
              Options
              (# Exercisable)
            
            
            #
      of Securities
              Underlying
              Unexercised
              Options
              (# Unexercisable)
              (*)
            
            
            Option
              Exercise
              Price
              ($/sh)
            
            Option
              Expiration
              DateAndrew
      Makrides
            
            
            
            150,000
            
            
            
            --
            
            
            
            0.75
            
            1/1/200875,000
            
            
            
            --
            
            
            
            0.50
            
            4/23/201180,000
            
            
            
            --
            
            
            
            0.50
            
            4/23/201185,000
            
            
            
            --
            
            
            
            0.70
            
            1/21/201325,000
            
            
            
            --
            
            
            
            3.25
            
            9/29/201325,000
            
            
            
            --
            
            
            
            2.13
            
            9/23/201425,000
            
            
            
            --
            
            
            
            2.25
            
            5/5/2015J.
      Robert Saron
            
            
            
            75,000
            
            
            
            --
            
            
            
            0.75
            
            1/1/200837,500
            
            
            
            --
            
            
            
            0.50
            
            4/23/201140,000
            
            
            
            --
            
            
            
            0.50
            
            4/23/201142,500
            
            
            
            --
            
            
            
            0.70
            
            1/21/201312,500
            
            
            
            --
            
            
            
            3.25
            
            9/29/201312,500
            
            
            
            --
            
            
            
            2.13
            
            9/23/201412,500
            
            
            
            --
            
            
            
            2.25
            
            5/5/2015Moshe
      Citronowicz
            
            
            
            150,000
            
            
            
            --
            
            
            
            0.75
            
            1/1/200875,000
            
            
            
            --
            
            
            
            0.50
            
            4/23/201180,000
            
            
            
            --
            
            
            
            0.50
            
            4/23/201185,000
            
            
            
            --
            
            
            
            0.70
            
            1/21/201325,000
            
            
            
            --
            
            
            
            3.25
            
            9/29/201325,000
            
            
            
            --
            
            
            
            2.13
            
            9/23/201425,000
            
            
            
            --
            
            
            
            2.25
            
            5/5/2015Gary
      Pickett
            
            
            
            20,000
            
            
            
            --
            
            
            
            8.66
            
            1/12/20175,000
            
            
            
            --
            
            
            
            7.10
            
            3/29/2017Steve
      Livneh
            (1)
            
            
            100,000
            
            
            
            --
            
            
            
            3.26
            
            1/1/2016





(1)
Issued as part of Henvil Purchase Agreement in the name of Henvil Corporation.
Steve Livneh is the principal owner of Henvil Corporation. (see Item 1 New
Products)





Compensation
of Non-Employee Directors





The
following is a table showing the director compensation for the year ending
December 31, 2007:




34
 Table of Contents




Director
Compensation





Name
            
            Fees
              Earned
              Or
      Paid
              In
      Cash
              ($)
            
            
            Stock
              Awards
              ($)
            
            
            Option
              Awards
              ($)
            
            
            Non-Equity
              Incentive
              Plan
              Compensa-
              tion
              ($)
            
            
            Change
      in Pension
              Value
      and
              Nonqualified
              Deferred
              Compensation
              Earnings
              ($)
            
            
            All
              Other
              Compensa-
              tion
              ($)
            
            
            Total
              ($)(a)
            
            (b)
            
            
            (c)
            
            
            (d)
            
            
            (e)
            
            
            (f)
            
            
            (g)
            
            
            (h)Brian
              Madden
            
            
            0
            
            
            
            0
            
            
            $
            45,750
            *
      (1)
            
            
            0
            
            
            
            0
            
            
            
            0
            
            
            $
            45,750Michael
              Norman
            
            
            0
            
            
            
            0
            
            
            $
            45,750
            *
      (2)
            
            
            0
            
            
            
            0
            
            
            
            0
            
            
            $
            45,750Randy
              Rossi
            
            
            0
            
            
            
            0
            
            
            $
            36,600
            *
      (3)
            
            
            0
            
            
            
            0
            
            
            
            0
            
            
            $
            36,600August
      Lentricchia
            
            
            0
            
            
            
            0
            
            
            $
            17,400
            *
      (4)
            
            
            0
            
            
            
            0
            
            
            
            0
            
            
            $
            17,400





*
(1)  In 2007 Mr. Madden was granted 12,500 stock options on January
12, 2007 which had a fair value of $3.66 per option.





*
(2)  In 2007 Mr. Norman was granted 12,500 stock options on January
12, 2007 which had a fair value of $3.66 per option.





*
(3)  In 2007 Mr. Rossi was granted 10,000 stock options on January 12,
2007 which had a fair value of $3.66 per option.





* (4) In
2007 Mr. Lentricchia was granted 7,500 stock options on October 30, 2007 which
had a fair value of $2.32 per option.





Directors'
compensation is determined by the Board of Directors. In the past directors have
been compensated through option grants. Presently, the Board has not established
a compensation committee nor does it have a standard policy regarding
compensation of members of the Board of Directors. In the past, the Board has
granted directors stock options in order to assure that the directors are
properly incentivized and have an opportunity for an ownership interest in
common with other stockholders.





Our Board
of Directors presently consists of J. Robert Saron, Andrew Makrides, Chairman,
CEO, and President, George Kromer, Jr., Randy Rossi, Michael Norman, Brian
Madden and August Lentricchia.  Prior to January 1, 2006, pursuant to
a written agreement, Mr. Kromer was retained by Bovie as a business and public
relations consultant on a month-to-month basis at the average monthly fee of
$2,000.  On January 1, 2006 Mr. Kromer accepted an employment position
of research analyst with the company.





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 options to purchase a like number of shares of common
stock.





On
October 30, 2007, shareholders approved and the Board of Directors adopted an
amendment to the 2003 Executive and Employee Stock Option Plan to increase the
maximum aggregate number of shares of common stock reserved for issuance under
the 2003 Plan from 1.2 Million shares (already reserved against outstanding
options) to 1.7 Million shares, or an increase of 500,000 shares of common stock
for future issuance pursuant to the terms of the Plan. Except for the increase
in the number of shares covered by the




35
 Table of Contents




Plan, the
Plan remains otherwise unchanged from its present status. In 2007, the Board of
Directors granted 137,500 options to purchase a like number of shares of common
stock..





There
have been no changes in the pricing of any options previously or currently
awarded.







ITEM
12. Section 16(a) Beneficial Ownership Reporting
Compliance





The
following table sets forth certain information as of December 31, 2007, 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
                6.5%FBO
      RenaissanceUS
      Growth InvestmentTrust
      PLC.Trust
      no. W00740100The
      Frost National Bank
                Common
                1,000,000
                Beneficial
                6.5%FBO,
      BFS US SpecialOpportunities
      Trust PLC.Trust
      no. W00118000Directors
      and OfficersAndrew
      Makrides
                  734
      Walt Whitman Road
                  Melville,
      NY 11746
                Common
                821,800(ii)
                Beneficial
                5.3%George
      Kromer
                  P.O.
      Box 188
                  Farmingville,
      NY 11738
                Common
                383,500(iii)
                Beneficial
                2.5%J.
      Robert Saron
                  7100
      30th
      Avenue North
                  St.
      Petersburg, FL 33710
                Common
                503,863(iv)
                Beneficial
                3.3%Brian
      Madden
                  300
      Garden City Plaza
                  Garden
      City, NY 11530
                Common
                103,000
      (vi)
                Beneficial
                0.7%Mike
      Norman
                Common
                72,500(vii)
                Beneficial
                0.5%410
      Jericho Tpke.Jericho,
      NYRandy
      Rossi
                Common
                45,000(viii)
                Beneficial
                0.3%2641
      Kelliwood CircleShreveport,
      LA


36
 Table of Contents


Moshe
      Citronowicz
                7100
      30th
      Avenue North
                St.
      Petersburg, FL 33710
              Common
              619,591
      (v)
              Beneficial
              4.0%Gary
      Pickett
              Common
              25,000
      (ix)
              Beneficial
              0.2%7100
      30th
      Avenue North
                St.
      Petersburg, FL 33710Steve
      Livneh
              Common
              300,000
      (x)
              Beneficial
              1.9%4056
      North Services Rd. E.Windsor,
      CanadaAugust
      Lentricchia
              Common
              9,100
      (xi)
              Beneficial
              0.1%734
      Walt Whitman Road
                Melville,
      NY 11746Officers
      and Directors as a group (10 Persons)
              
              2,883,354(xii)
              
              18.7%





__________________________________________





(i) Based
on 15,457,088 outstanding shares of Common Stock and 3,133,400 outstanding
options to acquire a like number of shares of Common Stock as of December 31,
2007, of which officers and directors owned a total of 1,835,000 options and
1,,048,354 shares at December 31, 2007.  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 356,800 shares reserved and 465,000 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 48,500 shares reserved and 335,000 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 271,363 shares reserved and 232,500 ten 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 154,591 shares reserved and 465,000 ten 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 5,500 shares of stock and 97,500 shares reserved pursuant to ten year
options owned by Mr. Madden exercisable at prices ranging from $3.25 for 25,000
to $8.66 for 12,500 options to purchase Common Stock.  Mr. Madden has
no financial interest in 25,000 shares of Bovie owned by his wife.





(vii)
Includes 72,500 shares reserved pursuant to ten year options owned by Mr. Norman
exercisable at prices ranging from $2.13 for 25,000 shares to $8.66 for 12,500
shares.





(viii)
Includes 10,000 shares and 35,000 shares reserved pursuant to ten year options
owned by Mr. Rossi exercisable at prices ranging from $2.13 for 25,000 to $8.66
for 12,500 shares.





(ix)
Includes 25,000 ten year options issued to Mr. Pickett exercisable at prices
ranging from $8.66 for 20,000 shares to $7.10 for 5,000 shares. These options
vest over a 7yr period.




37
 Table of Contents




(x)
Includes 100,000 ten year options owned by Mr. Livneh. These options were part
of the Henvil Purchase Agreement and were issued under the name Henvil
Corporation. Mr. Livneh is the principal owner of Henvil Corporation. (see Item
1 New Products) Also includes 200,000 restricted shares issued under the name
Lican Developments, Inc. of which Mr. Livneh is also the principal
owner.





(xi)
Includes 1,600 Shares owned by Mr. Lentricchia and 7,500 ten year options issued
to Mr. Lentricchia on October 30, 2007. These options vest over a period of 7
years and have an exercise price of $7.68.





(xii)
Includes 1,727,500 shares reserved for outstanding options owned by all
Executive Officers and directors as a group. The last date options can be
exercised is October 30, 2017.





Section
16(a) Beneficial Ownership Reporting Compliance




Section
16(a) of the Securities Exchange Act of 1934 requires our officers and
directors, and persons who own more than ten percent of a registered class of
our equity securities, to file reports of ownership and changes in ownership
with the Securities and Exchange Commission.  Officers, directors and
greater than ten-percent shareholders are required by SEC regulation to furnish
us with copies of all Section 16(a) forms they file.




Based
solely on a review of the copies of such forms furnished to us, we believe that
during the year ended December 31, 2007 all officers, directors and ten percent
beneficial owners who were subject to the provisions of Section 16(a) complied
with all of the filing requirements during the year.








ITEM
13. Certain Relationships and Related Transactions




In
October 2006, Bovie Medical Corporation acquired certain assets of Lican
Developments LTD (Lican), an Ontario, Canada Corporation for total consideration
of $1,125,685 (consisting of the following):




·
            Cash
      of $350,000; $150,000 of which was paid at inception. The remaining
      $200,000 is being paid in $50,000 installments in October 2007, October
      2008, October 2008 and October 2010.·
            200,000
      shares of our restricted common stock; 80,000 of which vested immediately,
      40,000 of which vested in October 2006, 40,000 of which vested in October
      2007 and 40,000 of which are to vest in October
  2008




In
addition, Lican is to receive an additional 150,000 shares of our restricted
common stock upon the achievement of the following
milestones:







·
            80,000
      shares upon the receipt of certain FDA marketing
    clearances.·
            17,500
      shares upon the Company attaining $1,000,000 in net sales of the “Seal and
      Cut Product”·
            17,500
      shares upon the Company attaining $3,000,000 in net sales of the “Seal and
      Cut Product”17,500 shares upon the Company attaining $1,000,000 in net
      sales of the “Modullion Product”·
            17,500
      shares upon the Company attaining $3,000,000 in net sales of the
      “Modullion Product”




The
assets acquired included proprietary patent pending technologies, working
prototypes in various stages of development and production equipment. 
Lican is a product development and manufacturing company focused on endoscopic
devices.  Technologies in development included and currently
include:




-
            Tip-On-Tube
      a disposable tip technology complementary to Bovie’s previously acquired
      and announced Modular Ergonomic Grip (MEG) forceps.  Bovie
      acquired the MEG technology in January 2006.-
            A
      new surgical handle platform called the Polarian. The Polarian handle
      supports a plurality of electrical and mechanical modes to be used in
      conjunction with disposable, Seal-N-Cut bipolar cartridges.
      This is an advanced entrant into the growing vessel and tissue sealing and
      cutting market.


38
 Table of Contents






Finally,
Lican is to receive ongoing royalties ranging from 2.5% to 3% of sales of
certain products, which royalties will be halved in certain instances if the
founder of Lican (who is currently the President of Bovie Canada) fails to
remain in the Company’s employ for at least five years.  Because the
cost of these royalties  was not and is not determinable, they have
not been included in the purchase price computations, and any such amounts paid
under this arrangement will be reflected as an increase in the intangible asset
in the year the royalty payments are made.





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 $128,553, $87,550, and $80,400 in legal fees for the years 2007,
2006 and 2005, respectively.





In
November 2006, the Board of Directors, including all disinterested directors,
approved 2-year extensions of the outstanding Employment Agreements of Messrs.
Makrides, Citronowicz and Saron.  Such extensions are historically
consistent with prior pattern of extensions in past years.





A
director, George Kromer, served as a consultant previous to his employment with
us in 2006 and received consulting compensation of $2,228 and $22,906 for 2006
and 2005, respectively.





Two
relatives of the chief operating officer of the Company are employed by the
Company. Yechiel Tsitrinovich, an engineering consultant received compensation
for 2007, 2006 and 2005 of $85,926, $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 original two-year contract providing for a salary of
$90,000 per year plus living expenses and benefits which currently is subject to
renewal on an annual basis. For 2007, 2006 and 2005 he was paid $166,487,
$162,562 and $157,045 respectively, which includes living expenses and benefits.





ITEM
14. Principal Accountant Fees And Services





The
following table sets forth the aggregate fees billed to us for fiscal years
ended December 31, 2007 and 2006 by our current and previous accountants
(Kingery & Crouse P.A. and Bloom & Co. LLP, respectively):





2007
            
            
            2006Audit
      Fees (1)
            
            $
            133,652
            
            
            $
            114,694Non-Audit
      Fees:Related
      Fees(2)
            
            
            --
            
            
            
            2,000Tax
      Fees(3)
            
            
            4,400
            
            
            
            8,000All
      other Fees(4)
            
            
            15,206
            
            
            
            --Total
      Fees billed
            
            $
            153,258
            
            
            $
            124,694




(1) Audit
fees consist of fees billed for professional services rendered for the audit of
Bovie’s annual financial statements and review of its interim consolidated
financial statements included in quarterly reports and other services related to
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”.





(3) Tax
fees consist of fees billed for professional services rendered for tax
compliance and tax advice (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 our independent auditors in providing certain tax services
to




39
 Table of Contents




Bovie and
had concluded that such services were compatible with their 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. The Audit Committee pre-approves all
audit and permissible non-audit services provided by our 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.





The audit
committee is presently made up of three members, Michael Norman, CPA (Financial
Expert), Brian Madden, and August Lentricchia.





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
24, 2008.





Bovie
      Medical CorporationBy:
      /s/ Andrew MakridesAndrew
      MakridesPresidentChairman
      of the Board











Bovie
      Medical Corporation/s/Gary D. PickettGary
      D. PickettChief
      Financial Officer


40
 Table of Contents




PART
IV





ITEM
15.   Exhibits and Financial Statement
Schedules





The
financial statements and exhibits filed as part of this annual report on Form
10-K  are provided below:





ITEM
15A. Financial Statements





BOVIE
MEDICAL CORPORATION INDEX TO FINANCIAL STATEMENTS




PageReport
      of Independent Registered Public Accounting Firm
            F-1Report
      of Predecessor Independent Registered Public Accounting
    Firm
            F-2Consolidated
      Balance Sheets at December 31, 2007 and 2006
            F-3Consolidated
      Statements of Operations for the years ended December 31, 2007, 2006 and
      2005
            F-5Consolidated
      Statements of Shareholders' Equity for the years ended December 31, 2007,
      2006 and   2005
            F-6Consolidated
      Statements of Cash Flows for the years ended December 31, 2007, 2006 and
      2005
            F-7Notes
      to Consolidated Financial Statements
            F-8




Table of Contents






[LETTERHEAD
OF KINGERY & CROUSE, P.A.]








REPORT OF INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM





To
the Board of Directors and Shareholders of Bovie Medical
Corporation:





We
have audited the accompanying balance sheet of Bovie Medical Corporation (the
“Company”), as of December 31, 2007, and the related consolidated statements of
operations, stockholders’ equity and cash flows for the year 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 audit.





We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States of America).  Those
standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement.  The Company is not required to have, nor were we
engaged to perform, an audit of its internal control over financial
reporting.  Our audit included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company’s internal control over financial
reporting.  Accordingly, we express no such opinion.  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 audit provides a reasonable basis
for our opinion.





In
our opinion, the financial statements referred to above present fairly, in all
material respects, the financial position of the Company as of December 31,
2007, and the results of its operations and its cash flows for the year then
ended, in conformity with accounting principles generally accepted in the United
States of America.








Kingery
& Crouse, P.A s/s


Tampa,
FL


March
31, 2008




F-1
 Table of Contents




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 sheet of Bovie Medical Corporation
as of December 31, 2006, and the related consolidated statements of operations,
stockholders’ equity, and cash flows for each of the two fiscal years in the
period ended December 31, 2006. 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 audits 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, 2006, and the consolidated results of its
operations and its cash flows for the years ended December 31, 2006 and 2005 in
conformity with accounting principles generally accepted in the United States of
America.





/s/Bloom
and Company LLP


Hempstead,
New York


March 22,
2007




F-2
 Table of Contents






BOVIE
MEDICAL CORPORATION


CONSOLIDATED
BALANCE SHEETS


DECEMBER
31, 2007 AND 2006





ASSETS
            
            2007
            
            
            2006Current
      assets:Cash
      and cash equivalents
            
            $
            3,534,759
            
            
            $
            2,952,892Trade
      accounts receivable, net
            
            
            2,525,451
            
            
            
            2,817,557Inventories
            
            
            4,521,992
            
            
            
            3,609,301Prepaid
      expenses
            
            
            278,262
            
            
            
            402,423Deferred
      income tax asset, net
            
            
            603,223
            
            
            
            310,392Total
      current assets
            
            
            11,463,687
            
            
            
            10,092,565Property
      and equipment, net
            
            
            3,421,455
            
            
            
            3,217,020Other
      assets:Brand  name/Trademark/Goodwill
            
            
            1,509,662
            
            
            
            1,509,662Purchased
      technology, net
            
            
            2,102,844
            
            
            
            1,529,330License
      rights, net
            
            
            278,797
            
            
            
            240,000Deposits
            
            
            44,438
            
            
            
            21,215Deferred
      income tax asset, net
            
            
            -
            
            
            
            75,808Total
      other assets
            
            
            3,935,741
            
            
            
            3,376,015Total
      Assets
            
            $
            18,820,883
            
            
            
            16,685,600The
      accompanying notes are an integral part of the consolidated financial
      statements.




F-3
 Table of Contents




BOVIE
MEDICAL CORPORATION


CONSOLIDATED
BALANCE SHEETS


DECEMBER
31, 2007 AND 2006


(Continued)





LIABILITIES
AND STOCKHOLDERS' EQUITY





LIABILITIES
            
            2007
            
            
            2006Current
      liabilities:Accounts
      payable
            
            $
            807,437
            
            
            $
            916,253Accrued
      warranty
            
            
            56,386
            
            
            
            98,986Accrued
      payroll
            
            
            113,308
            
            
            
            89,907Accrued
      vacation
            
            
            229,591
            
            
            
            190,192Accrued  insurance
      premium
            
            
            -
            
            
            
            161,948Customers
      deposits
            
            
            36,077
            
            
            
            91,198Current
      portion of due to Lican
            
            
            50,000
            
            
            
            50,000Deferred
      revenues
            
            
            56,386
            
            
            
            173,986Accrued
      and other liabilities
            
            
            353,494
            
            
            
            364,683Total
      current liabilities
            
            
            1,702,679
            
            
            
            2,137,153Deferred
      income taxes payable, net
            
            
            8,188
            
            
            
            -Due
      to Lican, net of current portion
            
            
            318,150
            
            
            
            368,150Total
      liabilities
            
            
            2,029,017
            
            
            
            2,505,303Minority
      interest
            
            
            --
            
            
            
            120,000Commitments
      and Contingencies (see Note 10)Stockholders'
      equity:Preferred
      stock, par value $.001; 10,000,000 shares
              authorized;
      none issued and outstanding
            
            
            --
            
            
            
            --Common
      stock par value $.001 par value;40,000,000 shares authorized,
              15,457,088
      and 15,223,538 issued and outstanding on December 31,
              2007
      and December 31, 2006 respectively,
            
            
            15,457
            
            
            
            15,241Additional
      paid-in capital
            
            
            22,435,161
            
            
            
            22,104,399Deficit
            
            
            (5,658,752
            )
            
            
            (8,059,343
            )
      )Total
      stockholders' equity
            
            
            16,791,866
            
            
            
            14,060,297Total
      Liabilities and Stockholders' Equity
            
            $
            18,820,883
            
            
            $
            16,685,600The
      accompanying notes are an integral part of the consolidated financial
      statements.




F-4
 Table of Contents




BOVIE
MEDICAL CORPORATION


CONSOLIDATED
STATEMENTS OF OPERATIONS


FOR
THE YEARS ENDED DECEMBER 31, 2007, 2006 AND 2005





2007
            
            
            2006
            
            
            2005Sales,
      net
            
            $
            28,779,157
            
            
            $
            26,676,182
            
            
            $
            20,211,141Cost
      of sales
            
            
            17,463,644
            
            
            
            16,075,426
            
            
            
            12,649,209Gross
      Profit
            
            
            11,315,513
            
            
            
            10,600,756
            
            
            
            7,561,932Other
      costs:Research
      and development
            
            
            1,643,092
            
            
            
            1,048,175
            
            
            
            985,807Professional
      services
            
            
            737,800
            
            
            
            519,861
            
            
            
            447,346Salaries
      and related costs
            
            
            2,805,082
            
            
            
            2,558,170
            
            
            
            2,010,599Selling,
      general and administration
            
            
            4,023,033
            
            
            
            3,711,795
            
            
            
            3,553,022Development
      cost - joint venture
            
            
            --
            
            
            
            138,913
            
            
            
            161,190Total
      other costs
            
            
            9,209,007
            
            
            
            7,976,914
            
            
            
            7,157,964Income
      from operations
            
            
            2,106,506
            
            
            
            2,623,842
            
            
            
            403,968Other
      income (expense):Interest
      income
            
            
            142,721
            
            
            
            103,088
            
            
            
            46,959Interest
      expense
            
            
            (2,471
            )
            
            
            (16,157
            )
            
            
            (22,703
            )Total
      other income,  net
            
            
            140,250
            
            
            
            86,931
            
            
            
            24,256Income
      before minority interest and income taxes
            
            
            2,246,756
            
            
            
            2,710,773
            
            
            
            428,224Minority
      interest
            
            
            5,000
            
            
            
            20,000
            
            
            
            10,000Provision
      for current income taxes
            
            
            (60,000
            )
            
            
            (47,567
            )
            
            
            (32,016
            )Benefit
      (provision) for deferred income taxes
            
            
            208,835
            
            
            
            --
            
            
            
            -Net
      income
            
            $
            2,400,591
            
            
            $
            2,683,206
            
            
            $
            406,208Earnings
      per common share:Basic
            
            $
            0.16
            
            
            $
            0.19
            
            
            $
            0.03Diluted
            
            $
            0.14
            
            
            $
            0.16
            
            
            $
            0.03Weighted
      average number of common shares outstanding
            
            
            15,324,508
            
            
            
            14,537,025
            
            
            
            13,923,134Weighted
      average number of shares outstandingadjusted
      for dilutive securities
            
            
            17,684,705
            
            
            
            16,909,103
            
            
            
            15,750,284The
      accompanying notes are an integral part of the consolidated financial
      statements.




F-5
 Table of Contents




BOVIE
MEDICAL CORPORATION


CONSOLIDATED
STATEMENTS OF STOCKHOLDERS’ EQUITY


FOR
THE YEARS ENDED DECEMBER 31, 2007, 2006 AND 2005


AdditionalOptions
            
            
            Common
            
            
            Paid-Outstanding
            
            
            Shares
            
            
            Value
            
            
            in
      Capital
            
            
            Deficit
            
            
            TotalJanuary
      1, 2005
            
            
            3,951,200
            
            
            
            13,862,128
            
            
            $
            13,881
            
            
            $
            20,391,407
            
            
            $
            (11,148,757
            )
            
            $
            9,256,531Options
      granted
            
            
            487,500
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -Options
      exercised
            
            
            (178,600
            )
            
            
            178,600
            
            
            
            178
            
            
            
            138,683
            
            
            
            
            
            
            
            138,861Options
      forfeited
            
            
            (31,230
            )
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -Income
      for period
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            406,208
            
            
            
            406,208December
      31, 2005
            
            
            4,228,870
            
            
            
            14,040,728
            
            
            
            14,059
            
            
            
            20,530,090
            
            
            
            (10,742,549
            )
            
            
            9,801,600Options
      granted
            
            
            120,000
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -Options
      exercised
            
            
            (982,810
            )
            
            
            982,810
            
            
            
            982
            
            
            
            794,944
            
            
            
            
            
            
            
            795,926Options
      forfeited
            
            
            (102,360
            )
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -Stock
      based compensation
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            41,097
            
            
            
            -
            
            
            
            41,097Stock
      options issued to acquire
              assets
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            63,300
            
            
            
            -
            
            
            
            63,300Stock
      issued to acquire assets
            
            
            -
            
            
            
            200,000
            
            
            
            200
            
            
            
            674,968
            
            
            
            -
            
            
            
            675,168Income
      for period
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            2,683,206
            
            
            
            2,683,206December
      31, 2006
            
            
            3,263,700
            
            
            
            15,223,538
            
            
            
            15,241
            
            
            
            22,104,399
            
            
            
            (8,059,343
            )
            
            
            14,060,297Options
      granted
            
            
            137,500
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -Options
      exercised
            
            
            (225,300
            )
            
            
            225,300
            
            
            
            225
            
            
            
            309,925
            
            
            
            
            
            
            
            310,150Options
      forfeited
            
            
            (42,500
            )
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -Stock
      based compensation
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            72,089
            
            
            
            -
            
            
            
            72,089Stock
      swap to acquire options
            
            
            -
            
            
            
            (9,179
            )
            
            
            (9
            )
            
            
            (56,241
            )
            
            
            -
            
            
            
            (56,250
            )Other
            
            
            -
            
            
            
            17,429
            
            
            
            -
            
            
            
            4,989
            
            
            
            -
            
            
            
            4,989Income
      for period
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            2,400,591
            
            
            
            2,400,591December
      31, 2007
            
            
            3,133,400
            
            
            
            15,457,088
            
            
            $
            15,457
            
            
            $
            22,435,161
            
            
            $
            (5,658,752
            )
            
            $
            16,791,866


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




F-6
 Table of Contents




BOVIE
      MEDICAL CORPORATION


CONSOLIDATED
STATEMENTS OF CASH FLOWS


FOR
THE YEARS ENDED DECEMBER 31, 2007, 2006 AND 2005





2007
            
            
            2006
            
            
            2005Cash flows from operating
      activities:Net
      income
            
            $
            2,400,591
            
            
            $
            2,683,206
            
            
            $
            406,208Adjustments
      to reconcile net income to net cashprovided
      by operating activities:Depreciation
      and amortization of property and equipment
            
            
            666,162
            
            
            
            479,826
            
            
            
            428,966Amortization
      of intangible assets
            
            
            104,664
            
            
            
            69,434
            
            
            
            126,910Provision
      for (recovery of) inventory obsolescence
            
            
            (100,565
            )
            
            
            (141,370
            )
            
            
            (22,644
            )Loss
      on disposal of fixed assets
            
            
            10,806
            
            
            
            29,422
            
            
            
            43,469Stock-based
      compensation
            
            
            72,089
            
            
            
            41,098
            
            
            
            0Stock-based
      expense for Henvil asset purchase
            
            
            0
            
            
            
            20,886
            
            
            
            0Noncash
      reclass adjustment
            
            
            4,989
            
            
            
            --
            
            
            
            0Provision
      (benefit) for deferred income taxes
            
            
            (208,835
            )
            
            
            --
            
            
            
            0Provision
      for (recovery of) bad debts
            
            
            3,375
            
            
            
            (7,506
            )
            
            
            24,177Minority
      interest in net loss of joint venture
            
            
            (5,000
            )
            
            
            (20,000
            )
            
            
            (10,000
            )Change
      in assets and liabilities:Trade
      receivables
            
            
            288,731
            
            
            
            (493,290
            )
            
            
            (386,651
            )Prepaid
      expenses
            
            
            124,161
            
            
            
            (66,931
            )
            
            
            ( 6,727
            )Inventories
            
            
            (812,127
            )
            
            
            (471,099
            )
            
            
            (848,188
            )Deposits
            
            
            (23,223
            )
            
            
            --Accounts
      payable
            
            
            (108,816
            )
            
            
            118,130
            
            
            
            248,061Accrued
      and other liabilities
            
            
            (61,189
            )
            
            
            306,495
            
            
            
            (128,216
            )Accrued
      Warranty
            
            
            (42,600
            )
            
            
            (42,600
            )
            
            
            (16,258
            )Accrued
      Payroll
            
            
            23,401
            
            
            
            14,387
            
            
            
            (35
            )Accrued
      Vacation
            
            
            39,399
            
            
            
            15,498
            
            
            
            11,033Insurance
      premium payable
            
            
            (161,948
            )
            
            
            161,948
            
            
            
            -Customer
      deposits
            
            
            (55,121
            )
            
            
            -
            
            
            
            -Deferred
      revenue
            
            
            (117,600
            )
            
            
            32,400
            
            
            
            ( 16,258
            )Net
      cash provided by (used in ) operations
            
            
            2,041,344
            
            
            
            2,729,934
            
            
            
            (146,153
            )Cash
      flows from investing activities:Increase
      in property and equipment
            
            
            (881,401
            )
            
            
            (1,130,627
            )
            
            
            (951,752
            )Increase
      in security deposits
            
            
            --
            
            
            
            --
            
            
            
            ( 6,770
            )Increase
      in purchased technology
            
            
            (516,356
            )
            
            
            (926,193
            )
            
            
            ( 2,001
            )Increase
      in license rights
            
            
            (315,620
            )
            
            
            --
            
            
            
            --Net
      cash used in investing activities
            
            
            (1,713,377
            )
            
            
            (2,056,820
            )
            
            
            (960,523
            )Cash
      flows from financing activities:Proceeds
      from sales of common stock
            
            
            253,900
            
            
            
            1,332,840
            
            
            
            138,861Repayments
      of long-term debt
            
            
            --
            
            
            
            (348,328
            )
            
            
            (31,665
            )Net
      cash provided by financing activities
            
            
            253,900
            
            
            
            984,512
            
            
            
            107,196Net
      change in cash and cash equivalents
            
            
            581,867
            
            
            
            1,657,626
            
            
            
            (999,480
            )Cash
      and cash equivalents at beginning of year
            
            
            2,952,892
            
            
            
            1,295,266
            
            
            
            2,294,746Cash
      and cash equivalents  at end of year
            
            $
            3,534,759
            
            
            $
            2,952,892
            
            
            $
            1,295,266Cash
      paid for:Interest
            
            $
            2,471
            
            
            $
            16,156
            
            
            $
            22,703Income
      Taxes
            
            $
            73,504
            
            
            $
            32,557
            
            
            $
            22,015The
      accompanying notes are an integral part of the consolidated financial
      statements.




F-7
 Table of Contents




BOVIE
MEDICAL CORPORATION


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS





NOTE
1. DESCRIPTION OF BUSINESS





Bovie
Medical Corporation (“Bovie”) was incorporated in 1982, under the laws of the
State of Delaware and is 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.





NOTE
2. SIGNIFICANT ACCOUNTING POLICIES





Use
of Estimates in the Preparation of Financial Statements





The
preparation of consolidated financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make certain estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the consolidated financial statements. The reported
amounts of revenues and expenses during the reporting period may be affected by
the estimates and assumptions management is required to make. Estimates that are
critical to the accompanying consolidated financial statements relate
principally to the adequacy of our accounts receivable and inventory allowances,
the recoverability of long-lived assets and the valuation of our net deferred
income tax assets.   The markets for the Company’s products are
characterized by intense price competition, rapid technological development,
evolving standards and short product life cycles, all of which could impact the
future realization of its assets. Estimates and assumptions are reviewed
periodically and the effects of revisions are reflected in the period that they
are determined to be necessary. It is at least reasonably possible that the
Company’s estimates could change in the near term with respect to these
matters.





Consolidated
Financial Statements





The
accompanying consolidated financial statements included the accounts of Bovie
Medical Corporation and its subsidiaries Aaron Medical Industries, Inc., Bovie
Canada ULC and Jump Agentur Fur Electrotechnik GMBH (collectively, the “Company”
or “we”, “our” or “us”).  The latter entity was a 50% owned joint
venture until May 2007 at which time Bovie purchased the minority stockholder’s
50% interest (see Note 15).  We were required
to  consolidate this joint venture in accordance with FASB
Interpretation No. 46R, Consolidation of Variable Interest
Entities.  All intercompany transaction accounts have been eliminated
in consolidation.





Cash
and Cash Equivalents




Holdings
of highly liquid investments with maturities of three months or less, when
purchased, are considered to be cash equivalents.




Fair
Values of Financial Instruments and Concentration of Credit Risk





The
carrying amount of our financial instruments included in current assets and
liabilities  approximates fair value due to their short term
nature.  In addition, management believes the balance of the “Due to
Lican” approximates its fair value as the liability was established at inception
using various fair value techniques..





Financial
instruments, which potentially subject us to significant concentrations of
credit risk, consist primarily of cash and cash equivalents, and trade accounts
receivable. We frequently maintain cash and cash equivalent balances in excess
of federally insured limits. We have not experienced any losses in such
accounts.





With
respect to receivables, our ten largest customers accounted for approximately
73%, 79% and 66% of trade receivables as of December 31, 2007, 2006 and 2005,
respectively, and 71%, 73% and 65% of netrevenues
for the respective years then ended.   In 2007 and 2005, Arthrex
was our only customer that accounted for over 10% of total revenues, accounting
for 21% and 22%, respectively of such revenues.  In 2006, two
customers accounted for greater than 10% of our sales, Arthrex for 22% and
Medtronic for 10.5%.  All of these entities are customers of our U.S.
Operations.




F-8
 Table of Contents






Accounts Receivable and Allowance for
Doubtful Accounts





Our
credit terms for our billings range from net 10 days to net 30 days, depending
on the customer agreement.  Accounts receivable are determined to be
past due if no payments have been received and a reserve is created for them
when they become three months past due. Customary collection efforts are
initiated and receivables are written off when we determine they are not
collectible and abandon these  collection efforts. We gave negotiated
sales volume discounts which amounted to $580,605, $578,135 and $397,950 for
2007, 2006 and 2005, respectively. Sales as shown on the profit and loss
statement are net of all discounts.





We
evaluate the allowance for doubtful accounts on a regular basis for adequacy
based upon our periodic review of the collectibility of the receivables in light
of historical experience, adverse situations that may affect our customers’
ability to pay, estimated value of any underlying collateral and prevailing
economic conditions.  This evaluation is inherently subjective, as it
requires estimates that are susceptible to significant revision as more
information becomes available.  We perform ongoing credit evaluations
of our customers and generally do not require collateral as we believe we have
certain collection measures in place to limit the potential for significant
losses.  Substantially all of the receivables included in the
accompanying balance sheets were recovered subsequent to the respective year
ends.  Because of this, and because historical losses on accounts
receivable have not been material, management believes that the allowances for
doubtful accounts of $8,734 and $10,000 at December 31, 2007 and 2006,
respectively, are adequate to provide for possible bad debts.





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 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.





Inventory
at December 31, 2007 and 2006 was as follows:





2007
            
            
            2006Raw
      materials (net of reserves)
            
            $
            2,447,090
            
            
            $
            1,640,254Work
      in process
            
            
            1,230,172
            
            
            
            1,351,540Finished
      goods
            
            
            844,730
            
            
            
            617,507Total
            
            $
            4,521,992
            
            
            $
            3,609,301





Reserves
for obsolescence of raw materials were $400,309 and $500,874 at December 31,
2007 and 2006, respectively. There were no reserves for finished goods or work
in progress.   During 2006 and 2007, this reserve, and related
cost of sales, were reduced by $141,370, and $100,565 in 2006 and 2007
respectively as a result changes in estimates regarding the recoverability of
our inventories.




F-9
 Table of Contents







Property
and Equipment





These
assets are recorded at cost.  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, 3-10 years; buildings, 40 years; molds, 7-15 years and furniture
and fixtures, 5-10 years.





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 commencing with the date they are
placed in service. Estimated aggregate amortization expense for the five years
ended December 31, 2012 is expected to approximate $389,000.





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.





Impairment
of Long-Lived Assets




We review
our long-lived assets for recoverability if events or changes in circumstances
indicate that the asset(s) may have been impaired. In the event of impairment of
any long-lived 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 recoverability of goodwill and other intangible assets
based on an independent appraisal and or undiscounted cash flows that measures
the impairment, if any.  At December 31, 2007, we believe all of our
long-lived assets are recoverable.





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 the 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 $124,424, and $125,927 for 2007 and 2006,
    respectively.





We have
no consignment inventory with customers but we do have inventory consigned to
contract manufactures that produce components for us.  For December
31, 2007 and 2006 we had consigned work in progress of $331,866 and $214,989,
respectively.





We sell
to a diversified base of customers around the world and, therefore, believe
there is no material concentration of credit risk.




F-10
 Table of Contents







Advertising
Costs





All
advertising costs are expensed, as incurred. The amounts of advertising costs
were $470,890, $451,093 and $468,716 for 2007, 2006 and 2005,
respectively.





Net
Earnings Per Common Share





We
compute basic earnings per share (“basic EPS”) by dividing net income by the
weighted average number of common shares outstanding for the reporting
period.  Diluted earnings per share (“Diluted EPS”) gives effect to
all potential dilutive shares outstanding (in our case, employee stock options)
during the period.




Research
and Development Costs





With the
exception of development costs that are purchased from another enterprise and
have alternative future use, research and development expenses are charged to
operations as incurred.





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.





Deferred
Revenue





We
periodically sell generators with guarantees that we replace hand pieces for 5
years. A portion of the sale associated with the future delivery of the
additional hand pieces has been reflected as deferred revenue.  These
deferred revenues are allocated to sales using the straight line method over the
lives of the guarantees.





Income
Taxes





Bovie and
its wholly owned subsidiaries 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.  At December 31, 2007 and 2006, significant temporary
differences arise  primarily from allowances recorded in our financial
statements for inventories and receivables that are not currently deductible,
and differences in the lives and methods used to depreciate and/or amortize our
property and equipment and intangible assets.





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.




F-11
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Foreign
Currency Translation





The
assets and liabilities of the Company's foreign subsidiary, Bovie Canada are
translated into U.S. dollars at exchange rates in effect at the balance sheet
dates.  Revenue and expense items are translated into U.S. dollars at
the average exchange rate for the years.  Resulting unrealized
translation adjustments, which have been immaterial through December 31, 2007,
are included in stockholders' equity.





Gains and
(losses) on foreign currency exchange transactions are reflected in the
consolidated statements of operations.  Net transaction gains and
(losses) included in income for the year ended December 31, 2007 and the period
ended December 31, 2006 were $23,500 and $0, respectively.





Recent
Pronouncements





In
November 2004, the FASB issued SFAS No. 151, “Inventory Costs, an amendment of
Accounting Research Bulletin No. 43, Chapter 4,” which adopts wording from the
International Accounting Standards Board’s (IASB) IAS 2 “Inventories” in an
effort to improve the comparability of cross-border financial
reporting.  The FASB and IASB both believe the standards have the same
intent; however, an amendment to the wording was adopted to avoid inconsistent
application.  The new standard indicates that abnormal freight,
handling costs, and wasted materials (spoilage) are required to be treated as
current period charges rather than as a portion of inventory
cost.  Additionally, the standard clarifies that fixed production
overhead should be allocated based on the normal capacity of a production
facility.  The statement is effective beginning in fiscal year
2007.  Adoption is not expected to have a material impact on our
consolidated earnings, financial position or cash flows.





In
December 2004, the FASB issued FSP FAS 109-1, “Application of FASB Statement No.
109, Accounting for Income Taxes, to the Tax Deduction on Qualified Production
Activities Provided by the American Jobs Creation Act of 2004.”  The
FSP clarifies that the manufacturer’s deduction provided for under the American
Jobs Creation Act of 2004 (the Act) should be accounted for as a special
deduction in accordance with SFAS No. 109, “Accounting for Income Taxes,” and
not as a tax rate reduction.  The Qualified Production Activities
Deduction will not impact our consolidated earnings, financial position or cash
flows for fiscal year 2006 because the deduction is not available to
us.  We are currently evaluating the effect that this deduction will
have in subsequent years.




Effective
January 1, 2006, the Company adopted Statement No. 123R, Share-Based Payment
("SFAS 123R"), which requires companies to measure and recognize compensation
expense for all share-based payment awards made to employees and directors based
on estimated fair values. SFAS 123R is being applied on the modified prospective
basis. Prior to the adoption of SFAS 123R, the Company accounted for its
stock-based compensation plans under the recognition and measurement principles
of Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued
to Employees, as provided by SFAS 123, "Accounting for Stock Based Compensation"
("SFAS 123") and accordingly, recognized no compensation expense related to the
stock-based plans as stock options granted to employees and directors were equal
to the fair market value of the underlying stock at the date of grant. In March
2005, the SEC issued Staff Accounting Bulletin No. 107 ("SAB 107") relating to
SFAS 123R. The Company has applied the provisions of SAB 107 in its adoption of
SFAS 123R.




Under the
modified prospective approach, SFAS 123R applies to new awards and to awards
that were outstanding on January 1, 2006 that are subsequently modified,
repurchased or cancelled. As such, compensation cost recognized
includes compensation cost for all share-based payments granted prior to, but
not yet vested on, January 1, 2006, and compensation cost for all share-based
payments granted subsequent to January 1, 2006, based on the grant-date fair
value estimated in accordance with the provisions of SFAS 123R. Prior periods
were not restated to reflect the impact of adopting the new standard. During the
fiscal year 2006, the Company recorded $41,098 in non-cash charges for the
implementation of SFAS 123R.




The
weighted average grant date fair value of options granted during the years ended
December 31, 2007 and 2006 were estimated on the grant date using the binomial
lattice option-pricing model with the following assumptions: expected volatility
of 25%, expected term of 5 years, risk-free interest rate of 5.0%, and
expected dividend yield of 0%. Expected volatility is based on a weighted
average of the historical volatility of the Company's stock and peer company
volatility. The average expected life was calculated using the simplified method
under SAB 107. The risk-free rate is based on the rate of U.S. Treasury
zero-coupon issues with a remaining term equal to the expected life of option
grants. The Company uses historical data to estimate pre-vesting forfeiture
rates.




F-12
 Table of Contents








Allocation
of stock based compensation expense for the fiscal years ended December 31,
2007, 2006 and 2005 was as follows:





2007
            
            
            2006
            
            
            2005Cost
      of Sales
            
            $
            36,185
            
            
            $
            3,408
            
            
            $
            --Research
      and Development
            
            
            10,072
            
            
            
            25,125
            
            
            
            --Salaries
      and related costs
            
            
            25,832
            
            
            
            12,564
            
            
            
            --Total
            
            $
            72,089
            
            
            $
            41,097
            
            
            $
            --





Prior to
January 1, 2006, we applied Accounting Principles Board (APB) Opinion
No. 25, “Accounting for Stock Issued to Employees,” and related interpretations
which required compensation costs to be recognized based on the difference, if
any, of the quoted market price of the stock on the grant date and the exercise
price. As all options granted to employees under such plans had an exercise
price at least equal to the market value of the underlying common stock on the
date of grant, and given the fixed nature of the equity instruments, no
stock-based employee compensation cost relating to stock options was reflected
in net income (loss). If we had expensed stock options for the year ended
December 31, 2005 our net income  and pro forma net
income  per share amounts would have been reflected as
follows:





Net
      income:As
      reported
            
            $
            406,208Pro
      forma
            
            $
            372,623





Income
      per share:As
      reported
            
            $
            .03Pro
      forma
            
            $
            .02





In June
2006, the FASB issued FASB Interpretation No. 48, "Accounting for Uncertainty in
Income Taxes" (“FIN 48”) which clarifies the accounting for uncertainty in
income taxes recognized in an enterprise's financial statements in accordance
with FAS 109, "Accounting for Income Taxes". This interpretation prescribes a
recognition threshold and measurement attribute for the financial statement
recognition and measurement of a tax position taken or expected to be taken in a
tax return. FIN 48 also provides guidance on derecognition, classification,
interest and penalties, accounting in interim periods, disclosure and
transition. FIN 48 is effective for fiscal years beginning after December 15,
2006. The adoption of this statement did not have a significant effect on our
financial statements.




In
September 2006, the FASB issued Financial Accounting Standard No. 157, “Fair
Value Measurements,” or FAS 157. This Statement defines fair value, establishes
a framework for measuring fair value in accordance with generally accepted
accounting principles and expands disclosures about fair value measurements.
This statement applies under other accounting pronouncements that require or
permit fair value measurements as the FASB previously concluded in those
accounting pronouncements that fair value is a relevant measurement attribute.
Accordingly, this Statement does not require us to develop or report any new
fair value measurements. This Statement is effective for financial statements
for fiscal years beginning after November 15, 2007. Earlier application is
permitted provided that the reporting entity has not yet issued financial
statements for that fiscal year. This statement is not expected to have a
significant effect on our financial statements.





On
February 15, 2007, the FASB issued Financial Accounting Standard No. 159,
“The Fair Value Option for Financial Assets and Financial Liabilities, including
an amendment of FASB Statement No. 115”, or FAS 159, which creates a
fair-value option allowing an entity to irrevocably elect fair value as the
initial and
subsequent measurement attribute for certain financial assets and financial
liabilities, with changes in fair value recognized in earnings as they occur.
FAS 159 also requires an entity to report those financial assets and financial
liabilities measured at fair value in a manner that separates those reported
fair values from the carrying amounts of assets and liabilities measured using
another measurement attribute on the face of the statement of financial
position. Lastly, FAS 159 requires an entity to provide information that would
allow users to understand the effect on earnings of changes in the fair value on
those instruments selected for the fair-value election. FAS 159 is effective for
fiscal years beginning after November 15, 2007, with early adoption
permitted. We have not yet determined the effect that the implementation of FAS
159 will have on our results of operations or financial
condition.




F-13
 Table of Contents










In
December 2007, the FASB issued Financial Accounting Standard No. 160,
Non-controlling Interests in Consolidated Financial Statements—an amendment of
ARB No. 51 (“FAS 160”). FAS 160 requires that a non-controlling interest in
a subsidiary be reported as equity and the amount of consolidated net income
specifically attributable to the non-controlling interest be identified in the
consolidated financial statements. It also calls for consistency in the manner
of reporting changes in the parent’s ownership interest and requires fair value
measurement of any non-controlling equity investment retained in a
deconsolidation.  FAS 160 is effective for fiscal years beginning
after December 15, 2008, with early adoption prohibited. This statement is
not expected to have a significant effect on our financial
statements.





In
December 2007, the FASB issued Financial Accounting Standard No. 141
(revised 2007), Business Combinations (“FAS 141R”). FAS 141R broadens the
guidance of FAS 141, extending its applicability to all transactions and other
events in which one entity obtains control over one or more other businesses. It
broadens the fair value measurement and recognition of assets acquired,
liabilities assumed, and interests transferred as a result of business
combinations. FAS 141R also expands on required disclosures to improve the
statement users’ abilities to evaluate the nature and financial effects of
business combinations. FAS 141R applies prospectively to business
combinations consummated in fiscal years beginning after December 15,
2008., and interim periods within those fiscal years. FAS 141R is effective for
fiscal years beginning after December 15, 2008, with early adoption
prohibited. This statement is not expected to have a significant effect on our
financial statements.





Reclassifications





Certain
amounts in the 2006 and 2005 financial statements have been reclassified to
conform to the current year presentation.





NOTE
3. TRADE ACCOUNTS RECEIVABLE





As of
December 31, 2007 and 2006 the trade accounts receivable were as
follows:





2007
            
            
            2006Trade
      accounts receivable
            
            $
            2,534,185
            
            
            $
            2,827,557Less:
      allowance for doubtful accts
            
            
            (8,734
            )
            
            
            (
      10,000
            )Trade
      accounts receivable, net
            
            $
            2,525,451
            
            
            $
            2,817,557




F-14
 Table of Contents






NOTE
4. PROPERTY, PLANT AND EQUIPMENT





As of
December 31, 2007 and 2006 property, plant and equipment consisted of the
following:





2007
            
            
            2006Equipment
            
            $
            2,339,106
            
            
            $
            1,995,562Building
            
            
            791,618
            
            
            
            791,618Furniture
      and fixtures
            
            
            1,461,716
            
            
            
            1,221,559Leasehold
      improvements
            
            
            990,051
            
            
            
            894,478Molds
            
            
            856,308
            
            
            
            725,1656,438,799
            
            
            
            5,628,382Less:
      accumulated depreciation and amortization
            
            
            (3,017,344
            )
            
            
            (2,411,362
            )Net
      property, plant, and equipment
            
            $
            3,421,455
            
            
            $
            3,217,020





NOTE
5. INTANGIBLE ASSETS





At
December 31, 2007 and 2006 intangible assets consisted of the
following:





2007
            
            
            2006Trade
      name (life indefinite)
            
            $
            1,509,662
            
            
            $
            1,509,662Purchased
      technology (9-17 year lives)
            
            $
            2,438,175
            
            
            $
            1,805,864Less
      accumulated amortization
            
            
            (335,331
            )
            
            
            (276,534
            )Net
      carrying amount
            
            $
            2,102,844
            
            
            $
            1,529,330License
      rights (5 year life)
            
            
            315,619
            
            
            $
            -License
      rights (10 year life)
            
            
            -
            
            
            
            400,000Less
      accumulated amortization
            
            
            (36,822
            )
            
            
            (160,000
            )Net
      carrying amount
            
            $
            278,797
            
            
            $
            240,000





With
respect to our trademark and brand name,   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 trade names intangible assets are not amortized.





In May of
2007 we entered into distribution and manufacturing agreements with Canady
Technology, LLC for its plasma related products for a total consideration of
approximately $316,000, which amount has been reflected as license rights
above.  We will manufacture several types of argon plasma accessories
for Canady Technology as well as distribute Canady products
worldwide.





NOTE
6. LONG-TERM DEBT AND LINE OF CREDIT





Mortgage
Payable


In 2001,
Bovie paid off its existing mortgage on its premises at 7100 30th Avenue
North, St. Petersburg, Florida,
and replaced it with a new first mortgage of $475,000, from its commercial
lender. The interest Bovie paid on the mortgage was variable at the bank’s base
rate which was 7.5%. Bovie made principal payments of $2,639 per month plus
interest. The mortgage was paid in full in 2006.




F-15
 Table of Contents







In May of
2006, we obtained a revolving line of credit in the amount of $1,500,000 with
our bank.  The credit line available on December 31, 2007 and 2006 was
$1,500,000. In May of 2007, we amended the revolving credit line note to a two
year term ending May 31, 2009. Any borrowings under the credit line would accrue
interest at the rate of Libor plus 2% and be secured by accounts
receivable.





NOTE
7. TAXES AND NET OPERATING LOSS CARRYFORWARDS





As of
December 31, 2007 and 2006, the components of deferred income tax assets and
liabilities, assuming effective income tax rates of approximately 38%, were as
follows:


Current
      deferred income tax assets:
            
            2007
            
            
            2006Allowance
      for doubtful accounts
            
            $
            3,286
            
            
            $
            3,500Inventory
      reserves
            
            
            237,264
            
            
            
            283,094Net
      operating loss carry forwards ("NOLS")
            
            
            362,673
            
            
            
            1,094,888Subtotal
            
            
            603,223
            
            
            
            1,381,482Less
      valuation allowance
            
            
            -
            
            
            
            (1,071,090
            )Current
      deferred income tax asset – net
            
            $
            603,224
            
            
            $
            310,392Non-current
      deferred income tax assets (liabilities):Accumulated
      amortization - intangibles
            
            $
            (128,247
            )
            
            $
            (58,242
            )Accumulated
      depreciation and amortization - property and equipment
            
            
            120,059
            
            
            
            134,050Non-current
      deferred income tax asset, liability, net
            
            $
            (8,188
            )
            
            $
            75,808





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. At December 31, 2006, management believed there was a
risk that substantially all  of their NOLs might not be
realizable  and, accordingly, established a valuation allowance
against them. Although realization was 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,
we believed it was likely that they would be realized through future taxable
earnings.





During
the year ended December 31, 2007, management determined that such valuation
allowances were no longer necessary, and accordingly, the valuation allowances
were reversed, resulting in a benefit for income taxes being recorded for the
anticipated utilization.  We estimate that our net operating loss
carryforwards will be fully utilized in  2008.  Until such
carryforwards are utilized, we do not expect to pay any income taxes, other than
those arising from the alternative minimum tax.





The
valuation allowance of $2,187,818 as of December 31, 2005 was reduced by
$1,116,728 to $1,071,090, in 2006. The Company recognized a tax benefit of loss
carryforward of approximately $895,900 during 2006.  Other reasons for
the reduction of valuation allowance were the decrease in tax assets related to
the allowance for doubtful accounts and the reserve for inventory losses
respectively, and a small increase in tax liability for amortization of patent
rights.  A reconciliation of the Federal statutory tax rate to Bovie’s
effective tax rate is as follows for the years ended December 31, 2007 and
2006:




F-16
 Table of Contents







2007
            
            
            2006Tax
      at statutory rates, net of state income taxes
            
            
            32
            %
            
            
            32.0
            %State
      income taxes, net of U.S. federal benefit
            
            
            2
            %
            
            
            2
            %Tax
      benefit of loss carry forward
            
            
            (41
            %)
            
            
            (32
            %)Effective
      tax rate
            
            
            (7
            %)
            
            
            2
            %








At
December 31, 2007, we had net operating loss carryforwards of approximately
$1,136,000.  Assuming our net operating loss carryforwards are not
disallowed because of certain “change in control” provisions of the Internal
Revenue Code, these net operating loss carryforwards expire in 2019 and 2022,
however we anticipate they will be realized during our fiscal year ended
December 31, 2008.





NOTE
8. RETIREMENT PLAN





The
Company 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. The employees may make voluntary
contributions to the plan of up to the maximum percentage allowed by the
Internal Revenue Code. Vesting in employee matching contributions is graded and
depends on the years of service. After three years from their date of hire, the
employees are 100% vested.  The Company makes matching contributions
of 50% of the employee contributions up to a total of 3% of participant
payroll.





The
Company’s contributions, and expense during 2007, 2006 and 2005 approximated
$149,000, $107,500 and $67,800 respectively.





NOTE
9. OTHER RELATED PARTY TRANSACTIONS





Lican
Purchase




In
October 2006, Bovie Medical Corporation acquired certain assets of Lican
Developments LTD (Lican), an Ontario, Canada Corporation for total consideration
of $1,125,685 (consisting of the following):




·
            Cash
      of $350,000; $150,000 of which was paid at inception. The remaining
      $200,000 is being paid in $50,000 installments in October 2007, October
      2008, October 2008 and October 2010.·
            200,000
      shares of our restricted common stock; 80,000 of which vested immediately,
      40,000 of which vested in October 2006, 40,000 of which vested in October
      2007 and 40,000 of which are to vest in October
  2008





In
addition, Lican is to receive an additional 150,000 shares of our restricted
common stock upon the achievement of the following milestones:





·
            80,000
      shares upon the receipt of certain FDA marketing
    clearances.·
            17,500
      shares upon the Company attaining $1,000,000 in net sales of the “Seal and
      Cut Product”·
            17,500
      shares upon the Company attaining $3,000,000 in net sales of the “Seal and
      Cut Product”17,500 shares upon the Company attaining $1,000,000 in net
      sales of the “Modullion Product”·
            17,500
      shares upon the Company attaining $3,000,000 in net sales of the
      “Modullion Product”






The
assets acquired included proprietary patent pending technologies, working
prototypes in various stages of development and production equipment. 
Lican is a product development and manufacturing company focused on endoscopic
devices.  Technologies in development included and currently
include:




F-17
 Table of Contents






·
            Tip-On-Tube
      a disposable tip technology complementary to Bovie’s previously acquired
      and announced Modular Ergonomic Grip (MEG) forceps.·
            A
      new surgical handle platform called the Polarian that allows a plurality
      of electrical and mechanical modes to be used in conjunction with reusable
      and disposable mono and bipolar cartridges and is applicable to most
      endoscopic surgeries.·
            Seal-N-Cut
      a family of endoscopic instruments used in monopolar and bipolar vessel
      and tissue cutting and sealing.





Finally,
Lican is to receive ongoing royalties ranging from 2.5% to 3% of sales of
certain products, which royalties will be halved in certain instances if the
founder of Lican (who is currently the President of Bovie Canada) fails to
remain in the Company’s employ for at least five years.  Because the
cost of these royalties  was not and is not determinable, they have
not been included in the purchase price computations, and any such amounts paid
under this arrangement will be reflected as an increase in the intangible asset
in the year the royalty payments are made.





Bovie has
formed a wholly owned subsidiary, Bovie Canada, which will continue the further
development of these technologies as well as manufacturing the new devices and
other Bovie products.





Professional
Services and Employment Agreements





A former
director, Alfred V. Greco, Esq. is a partner of Sierchio Greco & Greco LLP,
Bovie’s counsel. The legal fees paid to Sierchio Greco & Greco LLP were
$128,553, $87,550 and $80,400 for the years 2007, 2006 and 2005,
respectively.





Prior to
January 2006, a director, George W. Kromer, Jr. served as a consultant to us.
The consulting fees paid to Mr. Kromer were $2,228 and $22,906 for 2006 and
2005, respectively.  In January of 2006 Mr. Kromer accepted an
employment position with the Company.





NOTE
10. COMMITMENTS AND CONTINGENCIES





Property
and Rental Agreements





The
Company owns its main facility in St. Petersburg, but is also obligated under
various operating leases for a manufacturing and warehouse facility in St.
Petersburg, Florida (which lease requires monthly payments of approximately
$12,400, and expires on October 31, 2013 (which date includes a five year
renewal option we exercised subsequent to December 31, 2007), a separate
warehouse facility in St Petersburg (under a month to month arrangement
requiring monthly payments of approximately $2,400) its Windsor, Canada facility
(which lease requires monthly payments of approximately $2,400 through December
31, 2010) and its executive offices in New York (which lease requires monthly
payments of approximately $1,500 on a month to month basis).  The
following is a schedule of approximate future minimum lease payments under
operating leases as of December 31, 2007 (including the aforementioned renewal
option) and assuming the renewal of all month to month leases:




2008
            
            $
            269,6002009
            
            
            208,0002010
            
            
            198,5002011
            
            
            172,3002012
            
            
            167,250Thereafter
            
            
            143,500Total
            
            $
            1,159,150





Rent
expense for the years ended December 31, 2007, 2006 and 2005 approximated
$283,100, $235,400 and $223,900, respectively.




F-18
 Table of Contents






Purchase
Commitments





At  December
31, 2007, we had non-cancelable purchase commitments for inventories totaling
approximately $3.9 million, substantially all of which is expected to be paid by
mid 2008.








Employment
Agreements





The
Company is obligated under employment agreements with six employees which have
expiration dates between June 2009 and January 2011. Approximate future minimum
payments under these agreements are as follows as of December 31,
2007:





2008
            
            $
            1,042,5002009
            
            
            1,022,1002010
            
            
            798,8002011
            
            
            858,7002012
            
            
            71,600Total
            
            $
            3,793,700





The
employees also are eligible to receive bonuses and certain medical and other
benefits.  In addition, the agreements with our Chief Operating
Officer, and the Presidents of Bovie and Aaron Medical contain the
following:





·
            Clauses
      that allow for continuous automatic extensions of one year after January
      31, 2009 unless timely written notice terminating the contract is provided
      to such officers (as defined in the agreements).·
            Clauses
      which require the Company to make lump sum payments to such officers equal
      to three times their salary and bonus in effect at the time of any change
      in control  and/or breach of the agreements by the
      Company.  The 2008 base salaries for these officers are expected
      to approximate $700,000, and such amounts increase by 7.5% per
      year.




Henvil
Technology





In
January, 2006, pursuant to an 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”).  Commencing with the year following the first sale or
commercial delivery of the Product, Bovie is required to pay 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, Mr. Livneh will be paid a royalty equal to 2.5% of adjusted gross
sales for the life of the patents issuable for the technology. As additional
consideration for the acquisition of the technology, Mr. Livneh received 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
execution of the Agreement, January 11, 2006.  The options vest upon
FDA clearance for marketing the product.





Litigation





We may
also become involved in certain other litigation from time to time in the
ordinary course of business, however at December 29, 2007, no such litigation
exists.





NOTE
11.  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, it forfeits the development
payments we have incurred. The customer must fulfill its agreement if Bovie
delivers its working prototypes timely.




F-19
 Table of Contents










The
following is research and development revenue and costs related to specific
contracts, for 2007, 2006 and 2005:





Contracted
Development Payments Received:


2007
            
            
            2006
            
            
            2005Revenues
      included in Gross Sales
            
            $
            126,098
            
            
            $
            463,926
            
            
            $
            203,857Cost
      of Research and Development contracts included in costs of
      sales
            
            $
            45,860
            
            
            $
            452,585
            
            
            $
            203,857






NOTE
12 –  PURCHASE OF MINORITY INTEREST IN JOINT VENTURE





In May
2007 we acquired the remaining 50% interest in JAG (previously our J-Plasma
joint-venture) for total consideration of $500,000, resulting in us having 100%
ownership of the medical device technology. We recorded the $500,000 investment,
as well as certain direct costs incident to the acquisition and the reversal of
the remaining balance of our minority interest ($115,000) as an increase in
“Purchased technology”.  This intangible asset is being amortized over a
period of nine years and no residual value has been assumed to
exist.





NOTE
13 – SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING
ACTIVITIES




During
the year ended December 31, 2007, the minority interest and license rights
intangible asset declined by $115,000 upon the acquisition of the minority
interest in a joint venture.   In addition, upon such
acquisition, the remaining net balance of the license rights intangible asset of
$115,000 was reclassified to purchased technology.




There were three non-cash transactions
in fiscal 2006. The first was $41,097 for stock based compensation to employees.
The second was $63,300, which was the calculated fair value of stock options
given as consideration in the purchase of assets under the Henvil agreement, of
which $20,886 was expensed for the twelve months of 2006. The third transaction was for purchased
assets of $418,150, which was the calculated fair value of 150,000 restricted
common stock shares given as consideration in the purchase of assets under the
Lican agreement, which based upon the available information, the Company
believes to be determinable beyond a reasonable doubt.




The fair
value of the Henvil agreement options were estimated on the grant date using the
binomial lattice option-pricing model with the following assumptions: expected
volatility of 25%, expected term of 5 years, risk-free interest rate of 5.0%,
and expected dividend yield of 0%. Expected volatility is based on a weighted
average of the historical volatility of the Company's stock and peer company
volatility. The average expected life was calculated using the simplified method
under SAB 107. The risk-free rate is based on the rate of U.S. Treasury
zero-coupon issues.




The fair
value of the Lican agreement 150,000 restricted shares were estimated on the
grant date using the market close price of the contract date with adjustments
against the total value for contingencies such as, but not limited to, a one
year holding period related to each of the six targeted milestones for the IP’s,
resulted in discounts in the amount of approximately 80%.





There
were no non-cash transactions in 2005.




F-20
 Table of Contents






NOTE
14 – STOCK OPTIONS





On
October 30, 2007, shareholders approved and the Board of Directors adopted an
amendment to the 2003 Executive and Employee Stock Option Plan (the “Plan”) to
increase the maximum aggregate number of shares of common stock reserved for
issuance under the  Plan from 1.2 Million shares (already reserved
against outstanding options) to 1.7 Million shares.. Except for the increase in
the number of shares covered by the Plan, the Plan remains otherwise unchanged
from its present status. Stock options typically have a ten year life and
currently vest over a seven year period.





As of
December 31, 2007, there was approximately $413,000 of total unrecognized
compensation costs related to outstanding stock options, which is expected to be
recognized over a period of 5 years.








The
status of our stock options and stock awards are summarized as
follows:





NumberOf
              Options
            
            
            Weighted
      AverageExercise
      PriceOutstanding
      at December 31, 2005
            
            
            4,228,870
            
            
            
            1.26Granted
            
            
            120,000
            
            
            
            3.87Exercised
            
            
            (982,810
            )
            
            
            0.79Canceled
            
            
            (102,360
            )
            
            
            1.39Outstanding
      at December 31, 2006
            
            
            3,263,700
            
            
            
            1.52Granted
            
            
            137,500
            
            
            
            8.27Exercised
            
            
            (225,300
            )
            
            
            1.38Canceled
            
            
            (42,500
            )
            
            
            1.01Outstanding
      at December 31, 2007
            
            
            3,133,400
            
            
            
            1.83Exercisable
      at December 31, 2007
            
            
            2,949,200
            
            
            
            1.50





The
following table summarizes information about our options outstanding at December
31, 2007:




F-21
 Table of Contents






Range
      of Exercise Prices
            
            
            NumberOutstanding
            
            Weighted
      Average Remaining ContractualLife
      (in years)
            
            WeightedAverageExercise
      Price
            
            
            Options
      Exercisable
            
            
            WeightedAverageExercise
      Price0.00-0.50
            
            
            
            687,700
            
            4
      years
            
            
            .50
            
            
            
            687,700
            
            
            
            .500.51-0.70
            
            
            
            360,500
            
            6
      years
            
            
            .70
            
            
            
            360,500
            
            
            
            .700.71-0.75
            
            
            
            657,500
            
            1
      year – 6 years
            
            
            .75
            
            
            
            657,500
            
            
            
            .750.76-1.30
            
            
            
            40,000
            
            6
      years
            
            
            1.30
            
            
            
            40,000
            
            
            
            1.301.31
      – 2.13
            
            
            
            175,000
            
            7
      years
            
            
            2.13
            
            
            
            175,000
            
            
            
            2.132.14
      – 2.25
            
            
            
            405,000
            
            8
      years
            
            
            2.25
            
            
            
            388,500
            
            
            
            2.252.26
      – 2.41
            
            
            
            50,000
            
            7
      years
            
            
            2.41
            
            
            
            50,000
            
            
            
            2.412.42
      – 2.93
            
            
            
            60,000
            
            8
      years
            
            
            2.93
            
            
            
            60,000
            
            
            
            2.932.94
      – 3.24
            
            
            
            29,000
            
            7
      years
            
            
            2.95
            
            
            
            17,800
            
            
            
            2.953.25
      – 3.25
            
            
            
            411,200
            
            6
      years
            
            
            3.25
            
            
            
            408,200
            
            
            
            3.253.26
      – 6.92
            
            
            
            100,000
            
            8
      years
            
            
            3.26
            
            
            
            100,000
            
            
            
            3.266.93
      – 7.09
            
            
            
            20,000
            
            9
      years
            
            
            6.93
            
            
            
            4,000
            
            
            
            6.937.10
      – 7.85
            
            
            
            30,000
            
            10
      years
            
            
            7.10
            
            
            
            --
            
            
            
            7.107.86
      – 8.65
            
            
            
            7,500
            
            10
      years
            
            
            7.86
            
            
            
            -
            
            
            
            7.868.66
      -
            
            
            
            100,000
            
            10
      years
            
            
            8.66
            
            
            
            -
            
            
            
            8.663,133,400
            
            
            
            
            
            
            
            
            2,949,200





The
number and weighted average grant-date fair values of options non-vested at the
beginning and end of 2007, as well as options granted, vested and forfeited
during the year was as follows:





Number
              Of
              Options
            
            Weighted
      Average
              Fair
      ValuesNonvested
      at January 1, 2007
            90,000
            
            1.21Granted
      in 2007
            137,500
            
            3.44Vested
      in 2007
            29,500
            
            1.10Forfeited
      in 2007
            7,500
            
            .75Nonvested
      at December 31, 2007
            190,500
            
            2.86











Common
shares required to be issued upon the exercise of stock options and warrants
would be issued from our authorized and unissued shares.





NOTE
15 – GEOGRAPHIC AND SEGMENT INFORMATION





The
Company has two reportable business segments, our main operations, Bovie Medical
Corporation located in the United States and Bovie Canada, our Canada operations
located in Windsor, Canada. Since Bovie Canada operations represented a loss
greater than 10% of our consolidated net income (on an absolute value basis) we
are required to report certain information broken out by segment in the table
listed below for the years ended December 31, 2007, 2006, and 2005




F-22
 Table of Contents




.





For the
twelve months ended December 31: (in thousands)





Bovie
      Medical Corp
            
            
            Bovie
      Canada
            
            
            Bovie
      Medical Corp
            
            
            Bovie
      Canada
            
            
            Bovie
      Medical Corp
            
            
            Bovie
      Canada2007
            
            
            2007
            
            
            2006
            
            
            2006
      (1)
            
            
            2005
            
            
            2005Sales,
      net
            
            $
            28,432
            
            
            $
            347
            
            
            $
            26,571
            
            
            $
            105
            
            
            $
            20,211
            
            
            
            -Gross
      Profit
            
            
            11,569
            
            
            
            (253
            )
            
            
            10,607
            
            
            
            (6
            )
            
            
            7,562
            
            
            
            -Operating
      expenses
            
            
            8,716
            
            
            
            488
            
            
            
            7,925
            
            
            
            52
            
            
            
            7,158
            
            
            
            -Net
      Income (Loss)
            
            $
            3,141
            
            
            $
            (741
            )
            
            $
            2,741
            
            
            $
            (58
            )
            
            $
            406
            
            
            
            -





(1) The Canadian operations
start date was October 1, 2006





NOTE
16 - SELECTED QUARTERLY INFORMATION (UNAUDITED)





The
following table sets forth certain unaudited quarterly data for each of the four
quarters in the years ended December 31, 2007, 2006 and 2005. The data has been
derived from the Company's unaudited consolidated financial statements that, in
management's opinion, include all adjustments (consisting of normal recurring
adjustments) necessary for a fair presentation of such information when read in
conjunction with the Consolidated Financial Statements and Notes
thereto.  The results of operations for any quarter are not
necessarily indicative of the results of operations for any future
period.





First
            
            
            Second
            
            
            Third
            
            
            FourthYear
      ended December 31, 2007
            
            Quarter
            
            
            Quarter
            
            
            Quarter
            
            
            QuarterTotal
      revenue
            
            $
            6,705
            
            
            $
            7,439
            
            
            $
            7,460
            
            
            $
            7,177Gross
      profit
            
            
            2,483
            
            
            
            3,038
            
            
            
            3,116
            
            
            
            2,679Net
      income
            
            
            580
            
            
            
            1,068
            
            
            
            472
            
            
            
            281Diluted
      Earnings per share (1)
            
            
            .03
            
            
            
            .06
            
            
            
            .03
            
            
            
            .02Year
      ended December 31, 2006Total
      revenue
            
            $
            6,011
            
            
            $
            6,741
            
            
            $
            6,999
            
            
            $
            6,925Gross
      profit
            
            
            2,306
            
            
            
            2,892
            
            
            
            2,881
            
            
            
            2,522Net
      income
            
            
            690
            
            
            
            713
            
            
            
            857
            
            
            
            423Diluted
      Earnings per share (1)
            
            
            .04
            
            
            
            .04
            
            
            
            .05
            
            
            
            .02Year
      ended December 31, 2005Total
      revenue
            
            $
            4,743
            
            
            $
            5,058
            
            
            $
            5,039
            
            
            $
            5,371Gross
      profit
            
            
            1,650
            
            
            
            1,641
            
            
            
            2,115
            
            
            
            2,156Net
      income
            
            
            89
            
            
            
            (118
            )
            
            
            172
            
            
            
            264Diluted
      Earnings per share (1)
            
            
            .01
            
            
            
            .00
            
            
            
            .01
            
            
            
            .02




(1)
            Quarterly
      income (loss) per share may not equal the annual reported
      amounts.





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, 2000Between Bovie Medical Corporation and Jump Agentur
      FurElektrotechnik GmBH
  (3)




F-23
 Table of Contents





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
      Symbol Medical 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 Citronowicz 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 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._____________________(1) 
      Incorporated by reference to Exhibit 4.2 of Form S-3 bearing file No.
      333-120741 filed on November 23, 2004.
              (2) 
      Incorporated by reference
      to Exhibit 4.3 of Form S-3/A bearing file No.
      333-120741.
              (3) 
      Incorporated by reference
      to Exhibit 10.1 of Form KSB of Bovie Medical Corporation for 12-31-04
      filed on 3-31-05.
              (4) 
      Incorporated by reference
      to Exhibit 99.1 of Form S-3/A filed on August 8, 2005 and has been granted
      confidential treatment.
              (5) 
      Incorporated by reference
      to Exhibit 10.3 of Form 10KSB for the period ended 12-31-04 filed on March
      31, 2005.
              (6) 
      Incorporated by reference
      to Exhibit 10.4 of Form 10KSB/A for December 31, 2004 filed on
      7-15-2005.
              (7) 
      Incorporated by reference
      to Exhibit 10.5 of Form 10KSB/A for December 31, 2004 filed on
      7-15-2005.
              (8) 
      Incorporated by reference
      to Exhibit 10.6 of Form 10KSB/A for December 31, 2004 filed on
      7-15-2005.
              (9) 
      Incorporated by reference
      to Exhibit 10.8 of Form 10KSB/A for December 31, 2004 filed on August 25,
      2005.
              (10)
       Incorporated by
      reference to Exhibit 10.9 of Form 10KSB/A for December 31, 2004 filed on
      August 25, 2005.
              (11)Incorporated by reference
      to Exhibit 10.10 of Form 10KSB/A for December 31, 2004 filed on August 25,
      2005.
              (12) 
      Incorporated by reference
      to Exhibit 10.11 of Form 10KSB/A for December 31, 2004 filed on August 25,
      2005.




F-24