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, 2008


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)





Title of each Class
                  Name of each Exchange on which
      registeredCommon
      Stock, $.001 Par Value
                  NYSE
      Alternext Market





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
S No £





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





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


Large
      accelerated filer £
                Accelerated
      filer S
                Non-accelerated
      filer £
                Small
      reporting company £




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


Yes £      No
S





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 2, 2009 was approximately
$101,800,000





The
number of shares of the registrant's $.001 par value common stock
outstanding on the NYSE Alternext exchange as of March 2, 2009 was
16,987,698





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










DOCUMENTS
INCORPORATED BY REFERENCE


Portions
of the Registrant’s definitive Proxy Statement relating to the Annual Meeting of
Shareholders which was held on November 6, 2008 are incorporated by
reference into Part I.








BovieMedical Corporation


2008
Form 10-K Annual Report





Table
of Contents





Part
      I
                        
                        PageItem
      1
                        Business
                        1Item
      1A
                        Risk Factors
                        5Item
      1B
                        Unresolved Staff Comments
                        10Item
      2
                        Properties
                        10Item
      3
                        Legal Proceedings
                        10Item
      4.
                        Submission of Matters to a Vote of Security
      Holders
                        10Part IIItem
      5.
                        Market for Registrant’s Common Equity, Related Stockholder
      Matters and Issuer Purchases of Equity Securities
                        11Item
      6.
                        Selected Financial Data
                        13Item
      7
                        Management's Discussion and Analysis of Financial Condition and
      Results of Operations
                        14Item
      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
                        25Item
      9B
                        Other Information
                        26Part IIIItem
      10
                        Directors, Executive Officers, and Corporate
      Governance
                        26Item
      11
                        Executive Compensation
                        30Item
      12
                        Security Ownership of Certain Beneficial Owners and Management
      and Related Stockholder Matters
                        36Item
      13.
                        Certain Relationships and Related Transactions and Director
      Independence
                        38Item
      14
                        Principal Accountant Fees and Services
                        40Part IVItem
      15
                        Exhibits Index


Table of Contents




BOVIE
MEDICAL CORPORATION




Part
I





ITEM1.  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. Our
electrosurgery products fall under two categories, monopolar or bipolar.
Monopolar products require the use of a grounding pad attached to the patient
for the return of the electrical current, while bipolar products consist of two
electrodes, one for the inbound current and one for the return current and
therefore do not require the use of a grounding pad.





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.


1
 Table of Contents


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.




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 - 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. The 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. Although
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 (5,000 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
gastrointestinal (“GI”) 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 thereby reducing the
development time and cost for future new specialized generators and also
allowing 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 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.


2
 Table of Contents


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.





New
Products





SEER
and BOSS product lines





On April
29, 2008, we signed an agreement with Boston Scientific Corporation to acquire
technology, patents, and assets related to the use of conductive sintered steel
as an electrode for radio frequency (RF) cutting and coagulation, intended to
lower blood loss, quicken procedure times and provide cost savings for
hospitals. Potential fields of therapy for the technology acquired include
liver, pancreatic and kidney tumor therapies along with orthopedic and blood
vessel sealing. The process involves delivery of RF current and sterile saline
for resection, haemostatic sealing and coagulation in open and laparoscopic
surgery. The worldwide market size for the liver and orthopedic market is
expected to total $500 million in 2009.We completed
development and started production of the SEER product in 2008, and it is
designed mainly for the liver, pancreatic and kidney tumor markets. The BOSS
product line expands on the premise of the SEER patent and is anticipated to go
into production in 2009 and is designed mainly for the orthopedic
market.





Prior to
the April 29, 2008 agreement, we had a development and manufacturing agreement
signed in 2007 that required us to develop and manufacture certain products
using Boston Scientifics’ intellectual property, with which we complied. Boston
Scientific terminated the original agreement and through the contract settlement
negotiations we acquired the rights to the intellectual property and equipment
in consideration for releasing Boston Scientific from any further obligations as
outlined in the original development and manufacturing agreement. A new
agreement was signed in place of the previous distribution and marketing
agreement between the companies for the technology’s use in Boston Scientifics’
oncology business. As part of this new agreement, we granted a limited license
to Boston Scientific until 2016 for uses outside of our intended fields listed
above. The estimated fair value of the intellectual property and molds we
acquired under this contract settlement approximated $1,455,000 and $40,000,
respectively.  The total of these amounts has been reflected as other
income, and included in purchased technology and prepaid expenses, respectively
in the accompanying 2008 consolidated financial statements.




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 and being developed to add safety
features and improve convenience in performing general purpose procedures and
includes a vessel sealing component.





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 the J-Plasma joint-venture for total consideration of $500,000 (of
which $200,000 is being held in escrow for two years from the date of the
acquisition), 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. We recently
filed for 510K FDA approval to market the Icon GS.


3
 Table of Contents


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.





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 possible 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 are 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 will 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  January 11, 2006.  The
options vested upon FDA clearance for marketing the product. Mr. Livneh later
became an officer of Bovie on October 1, 2006. See below and “Item 10 –
Directors, Executive Officers and Corporate Governance”.





Polarian
Handle and Accessories





In
October 2006 we acquired assets of Lican Developments LTD (Lican), an Ontario,
Canada Corporation.  As a result of the asset acquisition, Steve
Livneh became President of Bovie Canada.   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 include:





-
            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.


4
 Table of Contents




-
            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.





Bovie
Canada is continuing 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 operations and are
included in the Bovie Canada array of technologies.  Patent
applications have been filed.





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.




Employees
 
 Bovie has
174 full time employees consisting of 5 executive officers, 30 supervisory
personnel, 11 sales personnel, and a total of 128 technical support,
administrative, and production employees. None of our current employees are
covered by any collective bargaining agreement and we have never experienced a
work stoppage. We consider our employee relations to be good.
 
 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 (a wholly owned subsidiary of BVX Holdings, LLC, which is wholly
owned by Bovie), 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.




ITEM1A. Risk factors





In
addition to risks and uncertainties in the ordinary course of business,
important risk factors that may affect us are discussed below.




Global
Economic Conditions and Financial Crisis




The
current global economic crisis described below should also be considered when
reviewing each of the subsequent paragraphs setting forth the various aspects of
our business, operations, and products.





The
recent global economic and financial market crisis has caused, among other
things, a general tightening in the credit markets, lower levels of liquidity,
increases in the rates of default and bankruptcy, and lower consumer and
business spending. Although the ultimate outcome of these events cannot be
predicted, it may have a material adverse effect on the Company and our ability
to borrow money in the credit markets and potentially to draw on our revolving
credit facility or otherwise obtain financing.  Similarly, current or
potential customers and suppliers may no longer be in business, may be unable to
fund purchases or determine to reduce purchases, all of which could lead to
reduced demand for our products, reduced gross margins, and increased customer
payment delays or defaults. Further, suppliers may not be able to supply us with
needed raw materials on a timely basis, may increase prices or go out of
business, which could result in our inability to meet customer demand in a
timely manner or affect our gross margins. We are also limited in our ability to
reduce costs to offset the results of a prolonged or severe economic downturn
given certain fixed costs associated with our operations.





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. If any
of these distributor relationships are terminated or not replaced, our revenue
from the territories served by these distributors could be adversely
affected.


5
 Table of Contents


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 to forego competing 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 2008, Arthrex
orders represented approximately 20% 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 Other Collaborative, Manufacturing and Selling Arrangements





We are
also dependent on other OEM customers because we manufacture products for them;
however they have no legal obligation to purchase such 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 under which we request the development
of certain items and components and we purchase them pursuant to purchase
orders. Our purchase order commitments are never more than one year in duration
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.





Lastly,
at this time we sell the majority of our products through distributors. 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, Salient Surgical Technologies (formerly
Tissuelink) in the saline enhanced sintered steel market and Ethicon and U.S.
Surgical in the endoscopic instrumentation market.   We believe
our competitive position did not change in 2008.


6
 Table of Contents


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 Pre-market
notification process. To date, the FDA has not failed to clear any devices we
have 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 process can be expensive, uncertain and lengthy. A number of
devices for which pre-market approval has been sought by other companies have
never been approved for marketing.





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, 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:


7
 Table of Contents




·
            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 have
twenty patents and trademarks; however we do not believe the patents and
trademarks have a material effect on our operations as their remaining useful
lives are minimal. 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 various new products including a
scanning cannula, modular laparoscopic and endoscopic instruments, the output
stage to our generator platform, our ICON product line and a Plasma Stream
patent application relating to the plasma technology.





Liability
and Insurance





The
manufacture and sale of medical products entail significant risks of product
liability claims. Bovie currently maintains product liability insurance with
combined coverage limits of $10 million on a 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
previously caused damage to the roof of one of our buildings as well as some of
our 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 and ICON GS, as well
asthe
accompanyingEndoscopic Modular
Instruments, the Polarian handle and accessories. We expect to make future
investments to enable us to develop new technologies and products to further our
strategic objectives and strengthen our existing business.  However,
we cannot guarantee that any of our previous or future investments will be
successful.




8
 Table of Contents




The
amount expended by us on research and development of our products during the
years 2008, 2007 and 2006, totaled approximately $2.1, $1.6, and $1.0 million
respectively. During the past three years, we invested in the J Plasma
technology, currently used in one of our new products under development, the
ICON GS plasma system. In addition, we invested in the SEER and BOSS devices,
Endoscopic Modular Instruments 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 2009 we expect our expenditures for research and development activities to
remain around the same level as 2008.




Foreign
Currency Risk





We
operate internationally and enter into transactions denominated in foreign
currencies (most notably the Canadian dollar and the Euro). To date, we have not
hedged our exposure to changes in foreign currency exchange rates, and as a
result, we are subject to foreign currency transaction and translation gains and
losses. We purchase goods and services in U.S. and Canadian dollars and have
recently begun to invoice certain product sales in Euros. Foreign exchange risk
is managed primarily by satisfying foreign denominated expenditures with cash
flows or assets denominated in the same currency. We charged $88,464 to
accumulated other comprehensive loss for the year ended December 31, 2008 as a
result of changes in the relationship of the U.S. dollar to the Canadian dollar
using the re-measurement method of translating our Canadian subsidiary’s
financial statements into U.S. dollars. Other foreign currency transaction gains
amounted to $4,505.


9
 Table of Contents


ITEM1B. Unresolved Staff Comments





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





ITEM2. Properties





Bovie
currently has the following locations:





·
            Our
      executive office at 734 Walt Whitman Road, Melville, New York which is
      leased for approximately $1,500 per
month.





·
            A  28,000
      square foot manufacturing facility at 7100 30th
      Ave N., St Petersburg, Florida which we
own.





·
            A
      research and manufacturing facility at 4056 North Services Rd. E.,
      Windsor, Canada which is leased for approximately $2,800 per month through
      December 2010.





·
            A
      research and manufacturing facility at 3200 Tyrone Blvd., St. Petersburg,
      Florida which is leased for approximately $12,700 per month under a lease
      that expires in September 2013.





In
addition, on September 11, 2008, we acquired a 60,000 square foot facility
located at 5115 Ulmerton Rd. in Largo, Florida.  This facility is
currently being renovated to suit our manufacturing needs.  We
anticipate a move date near the end of the second quarter of 2009. This new
facility consists of office, warehousing and manufacturing space. Upon the move
to the new manufacturing facility, the Company intends to sell its facility at
7100 30th Ave.
N., St. Petersburg and sublease its facility at 3200 Tyrone Blvd., St.
Petersburg.





ITEM3. Legal Proceedings





In 2008,
a civil action was instituted by Erbe USA, Inc. (“Erbe”) in the US District
Court for the Northern District of Georgia, Atlanta Division, against Bovie and
a recently hired employee, seeking equitable relief and damages.  The
complaint essentially alleges that the newly hired employee, among other things,
breached his employment agreement with Erbe USA, Inc., (“Erbe”) by wrongfully
taking Erbe’s confidential information and trade secrets for use in his new
employment with the assistance of Bovie.  Bovie denies the allegations
and pursuant to a Consent and Protective Order, the action has been stayed
pending mutual discovery by the parties.  It is too early in the
proceeding to determine the extent, if any, of Bovie’s possible exposure in the
lawsuit.





ITEM4. 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, 2008 were contained in our most recent proxy (See
proxy).


10
 Table of Contents


PART
II





ITEM5. Market for Registrant’s Common Equity and Related Stockholder
Matters





Bovie’s
common stock currently is traded on the NYSE Alternext exchange and previously
was traded on the American Stock Exchange from 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.





2008
                    
                    High
                    
                    
                    Low4th
      Quarter
                    
                    $
                    7.57
                    
                    
                    $
                    3.903rd
      Quarter
                    
                    
                    8.05
                    
                    
                    
                    6.512nd
      Quarter
                    
                    
                    9.27
                    
                    
                    
                    6.271st
      Quarter
                    
                    
                    6.69
                    
                    
                    
                    5.50





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




On March
2, 2009, the closing bid for Bovie’s Common Stock as reported by the NYSE
Alternext exchange was $5.99 per share. As of March 2, 2009, the total number of
shareholders of 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 shows a comparison of the cumulative total stockholder return
for our common stock, the NASDAQ Medical Industry
Index (Medical Devices, Instruments and Supplies), 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, 2003
in our common stock, the NASDAQ Medical Industry
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.


11
 Table of Contents




COMPARISON
OF 5 YEAR CUMULATIVE TOTAL RETURN*


Among
Bovie Medical Corporation, NASDAQ Medical Industry Index,


And a
Peer Group











* $100
invested on 12/31/2003 in stock or index, including reinvesting of any
dividends. Fiscal year ended December 31.





Cumulative
      Total Return12/03
                                    
                                    
                                    12/04
                                    
                                    
                                    12/05
                                    
                                    
                                    12/06
                                    
                                    
                                    12/07
                                    
                                    
                                    12/08Bovie
      Medical Corporation
                                    
                                    
                                    100.00
                                    
                                    
                                    
                                    82.74
                                    
                                    
                                    
                                    97.07
                                    
                                    
                                    
                                    295.44
                                    
                                    
                                    
                                    208.47
                                    
                                    
                                    
                                    203.26NASDAQ
      Medical Industry Index
                                    
                                    
                                    100.00
                                    
                                    
                                    
                                    117.17
                                    
                                    
                                    
                                    128.72
                                    
                                    
                                    
                                    135.76
                                    
                                    
                                    
                                    172.51
                                    
                                    
                                    
                                    92.91Peer
      Group
                                    
                                    
                                    100.00
                                    
                                    
                                    
                                    100.11
                                    
                                    
                                    
                                    119.08
                                    
                                    
                                    
                                    111.84
                                    
                                    
                                    
                                    117.07
                                    
                                    
                                    
                                    79.67




This peer
group consists of five companies, Atrion Corp. (ATRI), Alpha Pro Tech Ltd.
(APT), Endologix (ELGX), Utah Medical Products (UTMD), and Trinity Biotech plc.
(TRIB). These companies were chosen using the following criteria: a listing on
either the NYSE or Nasdaq 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 subject 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.




12
 Table of Contents




ITEM6. 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)


2008
                  
                  
                  2007
                  
                  
                  2006
                  
                  
                  2005
                  
                  
                  2004Sales,
      net
                  
                  $
                  28,097
                  
                  
                  $
                  28,779
                  
                  
                  $
                  26,676
                  
                  
                  $
                  20,211
                  
                  
                  $
                  20,495Cost
      of sales
                  
                  
                  16,248
                  
                  
                  
                  17,464
                  
                  
                  
                  16,075
                  
                  
                  
                  12,649
                  
                  
                  
                  12,638Gross
      Profit
                  
                  
                  11,849
                  
                  
                  
                  11,315
                  
                  
                  
                  10,601
                  
                  
                  
                  7,562
                  
                  
                  
                  7,857Other
      costs:Research
      and development
                  
                  
                  2,061
                  
                  
                  
                  1,643
                  
                  
                  
                  1,048
                  
                  
                  
                  986
                  
                  
                  
                  907Professional
      services
                  
                  
                  991
                  
                  
                  
                  738
                  
                  
                  
                  520
                  
                  
                  
                  447
                  
                  
                  
                  416Salaries
      and related costs
                  
                  
                  3,017
                  
                  
                  
                  2,805
                  
                  
                  
                  2,558
                  
                  
                  
                  2,011
                  
                  
                  
                  1,977Selling,
      general and administration
                  
                  
                  4,489
                  
                  
                  
                  4,023
                  
                  
                  
                  3,712
                  
                  
                  
                  3,553
                  
                  
                  
                  3,249Development
      cost - joint venture
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  139
                  
                  
                  
                  161
                  
                  
                  
                  39Total
      other costs
                  
                  
                  10,558
                  
                  
                  
                  9,209
                  
                  
                  
                  7,977
                  
                  
                  
                  7,158
                  
                  
                  
                  6,588Income
      from operations
                  
                  
                  1,291
                  
                  
                  
                  2,106
                  
                  
                  
                  2,624
                  
                  
                  
                  404
                  
                  
                  
                  1,269Other
      income and (expense):Other
      income
                  
                  
                  1,496
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  245Interest
      income
                  
                  
                  49
                  
                  
                  
                  143
                  
                  
                  
                  103
                  
                  
                  
                  47
                  
                  
                  
                  3Interest
      expense
                  
                  
                  (59
                  )
                  
                  
                  (3
                  )
                  
                  
                  (16
                  )
                  
                  
                  (23
                  )
                  
                  
                  (
      15
                  )Total
      other income (expense) - net
                  
                  
                  1,486
                  
                  
                  
                  140
                  
                  
                  
                  87
                  
                  
                  
                  24
                  
                  
                  
                  233Income
      before minority interest and income taxes
                  
                  
                  2,777
                  
                  
                  
                  2,246
                  
                  
                  
                  2,711
                  
                  
                  
                  428
                  
                  
                  
                  1,502Minority
      interest
                  
                  
                  -
                  
                  
                  
                  5
                  
                  
                  
                  20
                  
                  
                  
                  10
                  
                  
                  
                  10Benefit
      (provision) for income taxes
                  
                  
                  (945
                  )
                  
                  
                  (6
                  )
                  
                  
                  (48
                  )
                  
                  
                  (32
                  )
                  
                  
                  -Net
      income
                  
                  $
                  1,832
                  
                  
                  $
                  2,245
                  
                  
                  $
                  2,683
                  
                  
                  $
                  406
                  
                  
                  $
                  1,512Earnings
      per common share:Basic
                  
                  $
                  0.11
                  
                  
                  $
                  0.15
                  
                  
                  $
                  0.19
                  
                  
                  $
                  0.03
                  
                  
                  $
                  0.11Diluted
                  
                  $
                  0.11
                  
                  
                  $
                  0.13
                  
                  
                  $
                  0.16
                  
                  
                  $
                  0.03
                  
                  
                  $
                  0.09Balance
      Sheet Information:Cash
      and cash equivalents
                  
                  $
                  2,565
                  
                  
                  $
                  3,535
                  
                  
                  $
                  2,953
                  
                  
                  $
                  1,295
                  
                  
                  $
                  2,294Working
      capital
                  
                  $
                  9,796
                  
                  
                  $
                  10,006
                  
                  
                  $
                  7,955
                  
                  
                  $
                  5,501
                  
                  
                  $
                  5,551Total
      assets
                  
                  $
                  25,779
                  
                  
                  $
                  19,066
                  
                  
                  $
                  16,686
                  
                  
                  $
                  11,771
                  
                  
                  $
                  11,169Long-term
      debt
                  
                  $
                  4,143
                  
                  
                  $
                  318
                  
                  
                  $
                  368
                  
                  
                  $
                  0
                  
                  
                  $
                  348Stockholders’
      equity
                  
                  $
                  18,788
                  
                  
                  $
                  16,637
                  
                  
                  $
                  14,060
                  
                  
                  $
                  9,802
                  
                  
                  $
                  9,257


13
 Table of Contents




ITEM7. Management’s Discussion and Analysis
of Financial Condition and Results of Operations





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 state of the economy; 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.





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 line 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.





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. New distributors are contacted through responses to our advertising
in international and domestic medical journals and domestic or international
trade shows.   International sales represented 17% of total
revenues in 2008 as compared with 15% in 2007 and 12% in 2006. The Company’s
products are sold in more than 150 countries through local dealers, including
Argentina, Australia, Austria, Belgium, Brazil, Canada, Chile, China, the CIS
(former Soviet Union), Cyprus, Denmark, Finland, France, Germany, Greece, India,
Indonesia, Ireland, Italy, Japan, Malaysia, Mexico, The Netherlands, New
Zealand, Norway, the Philippines, Poland, Portugal, Singapore, South Africa,
South Korea, Spain, Sweden, Switzerland, Taiwan, Thailand, Turkey, the United
Kingdom, Vietnam and various countries in Latin America. Local dealer support is
coordinated by sales and marketing personnel at the St. Petersburg, Florida
facility.. Our business is generally not seasonal in nature.





Outlook
for 2009





The
Company continues to work diligently on the development and marketing of our new
products and technologies which we view as the vehicles to our future
growth.  Management is encouraged by the positive acceptance of our
new SEER tissue resection device having already established a direct and
specialty sales team as well as receiving initial orders.  A 510(k)
FDA application for the BOSS orthopedic device, an expansion and companion of
SEER, should be submitted in the near future.





The
recent 510(k) application for our ICON GS/J-Plasma now includes an improved
system with several new features that should increase efficiency for the
physician or surgeon, while reducing manufacturing costs.  Management
is undertaking a marketing strategy for the ICON GS, a system we believe to be
versatile with possible uses in a wide variety of surgical
specialties.


14
 Table of Contents


Bovie
Canada continues to direct efforts to finalize development of its MEG and
Polarian vessel sealing instruments.  The submission of a 510(k) FDA
application for Polarian is scheduled to be completed in the next several
months.





The
Company remains focused on its efforts to maximize shareholder value through the
development of products that provide high margin and growing profit
opportunities.





In
today’s economic environment, marked by historic uncertainty, forecasting has
become increasingly more difficult.  We have and will always, take a
conservative approach.  Every effort has been made to provide an
outlook based on our experience and knowledge; however, variations often impact
forecasting which may result in a change in this outlook. We strongly encourage
individuals to visit our website: www.boviemedical.com
to view the most current news.





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,
      2008
                    
                    
                    December 31,
      2007
                    
                    
                    December 31,
      2006Sales
                    
                    
                    100.0
                    %
                    
                    
                    100.0
                    %
                    
                    
                    100.0
                    %Cost
      of sales
                    
                    
                    57.8
                    
                    
                    
                    60.7
                    
                    
                    
                    60.3Gross
      profit
                    
                    
                    42.2
                    
                    
                    
                    39.3
                    
                    
                    
                    39.7Other
      costs:Research
      and development
                    
                    
                    7.3
                    
                    
                    
                    5.7
                    
                    
                    
                    3.9Professional
      fees
                    
                    
                    3.5
                    
                    
                    
                    2.6
                    
                    
                    
                    2.0Salaries
      and related costs
                    
                    
                    10.8
                    
                    
                    
                    9.7
                    
                    
                    
                    9.6Selling,
      general and administration
                    
                    
                    16.0
                    
                    
                    
                    14.0
                    
                    
                    
                    13.9Development
      cost - joint venture
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    0.5Total
      other costs
                    
                    
                    37.6
                    
                    
                    
                    32.0
                    
                    
                    
                    29.9Income
      from operations
                    
                    
                    4.6
                    
                    
                    
                    7.3
                    
                    
                    
                    9.8Other
      income/expense
                    
                    
                    5.3
                    
                    
                    
                    0.5
                    
                    
                    
                    0.3Net
      income before taxes and minority expense
                    
                    
                    9.9
                    
                    
                    
                    7.8
                    
                    
                    
                    10.1Minority
      interest
                    
                    
                    0.0
                    
                    
                    
                    0.0
                    
                    
                    
                    0.1Benefit
      (provision) for income taxes
                    
                    
                    (3.4
                    )
                    
                    
                    0.5
                    
                    
                    
                    (0.2
                    )Net
      income
                    
                    
                    6.5
                    
                    
                    
                    8.3
                    
                    
                    
                    10.0


15
 Table of Contents




2008
Compared with 2007





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





Net
      Sales (in thousands)
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      PercentageIncrease
                      
                      
                      Change2008
                      
                      
                      2007
                      
                      
                      (Decrease)
                      
                      
                      2008/2007Domestic/international
      salesDomestic
                      
                      $
                      23,176
                      
                      
                      $
                      24,474
                      
                      
                      $
                      (1,298
                      )
                      
                      
                      (5.3
                      )%International
                      
                      
                      4,920
                      
                      
                      
                      4,305
                      
                      
                      
                      615
                      
                      
                      
                      14.3
                      %Total
      net sales
                      
                      $
                      28,096
                      
                      
                      $
                      28,779
                      
                      
                      $
                      (683
                      )
                      
                      
                      (2.4
                      )%Product
      sales:Electrosurgical
                      
                      $
                      19,473
                      
                      
                      $
                      20,284
                      
                      
                      $
                      (811
                      )
                      
                      
                      (4.0
                      )%Cauteries
                      
                      
                      6,265
                      
                      
                      
                      6,131
                      
                      
                      
                      134
                      
                      
                      
                      2.2
                      %Other
                      
                      
                      2,358
                      
                      
                      
                      2,364
                      
                      
                      
                      (6
                      )
                      
                      
                      0.0
                      %Total
      net sales
                      
                      $
                      28,096
                      
                      
                      $
                      28,779
                      
                      
                      $
                      (683
                      )
                      
                      
                      (2.4
                      )%





The
results of operations for the year ended December 31, 2008 show a decrease in
sales of approximately $683,000 or 2.4% compared with the year ended December
31, 2007. Sales of electrosurgical products decreased by 4.0% or $0.8 million
compared with the year ended December 31, 2007 while sales of cauteries
increased by 2.2% from $6.1 million to $6.3 million.  Other sales
remained about the same at $2.4 million.  This overall decrease was
mainly the result of a decrease in OEM electrosurgical sales.  No
sales of one particular electrosurgical product dominated the number of units
sold.





Our ten
largest customers accounted for approximately 70% of net revenues for 2008 as
compared with 71% in 2007. In 2008 and 2007, Arthrex was our only customer that
accounted for over 10% of total revenues (20%, and 21% of our revenues for such
years).  Arthrex sales of generators and accessories decreased by
approximately $0.5 million or 6.5% to $5.7 million for the year ended December
31, 2008 from $6.2 million for the year ended December 31, 2007.





Domestic
sales were $23.2 million for the year ended December 31, 2008, representing a
decrease of 5.3% from the prior year. International sales were $4.9 million for
the year ended December 31, 2008, representing an increase of 14.3% or $0.6
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 purchasing power due to the declining US dollar exchange
rate.





Cost of
sales represented 57.8% of sales during the year ended December 31, 2008 or 2.9%
better than the 60.7% during the year ended December 31, 2007.  This
was mainly from changes in product sales mix resulting in  material
costs decreasing by 8.4%, direct labor decreasing by 1.1% and overhead
decreasing by 7.3% mainly due to a decrease in contractor development
services.





Research
and development expenses were 7.3% and 5.7% of sales for the years ended
December 31, 2008 2007, respectively.  These expenses increased 25.4%
in 2008 to approximately $2.1 million, an increase over the year ended December
31, 2007 of approximately $0.4 million. This increase is largely due to costs
related to our Canadian facility, annual salary increases, and costs related to
our new SEER (Saline Enhanced Electrosurgical Resection) device.





Professional
services expenses increased from approximately $0.7 million in 2007 to $1.0
million in 2008, an increase of approximately $250,000 or 34.3%.  This
increase is mainly attributable to an increase in legal costs related to the
litigation for the Erbe lawsuit and audit fees for Sarbanes Oxley related
testing.





Salaries
and related costs increased by 7.5% to $3.0 million in 2008 compared with $2.8
for the year ended December 31, 2007.  The increase was mainly
attributable to additional employees needed to foster our growth in various
areas coupled with annual salary increases.





Selling,
general and administration expenses increased as a percentage of sales by 3.0%
for 2008 compared with the year ended December 31, 2007 or an increase of
approximately $0.5 million to a total of $4.5 million for 2008 from $4.0 million
for 2007. This increase was mainly due to increased costs of establishing a
distribution channel in Europe for the MEG and SEER product lines, coupled with
increases in travel costs, amortization, and commissions.


16
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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
2008 and 2007, commission expenses were approximately $727,800 and $633,200
respectively, an increase of 14.9%.  The increase was due to increased
sales upon which we pay commissions.





Net
interest earned decreased by approximately $131,000 during the year ended
December 31, 2008 when compared with 2007.  This was due to lower
interest rates on the sweep account coupled with the interest expense incurred
on debt that was used to acquire a new building.




During
2008, we realized other income in the amount of approximately $1.5 million, as a
result of our acquiring intellectual property from a contract settlement with
Boston Scientific Corporation.




Our
income tax provision for the year ended December 31, 2008 was approximately
$945,000 compared with approximately $6,100 for the year ended December 31,
2007.  Our effective tax rate was approximately 34% for the year ended
December 31, 2008, which percentage is somewhat less than statutory rates
because of certain research and development tax credits we used during the
year.  The prior year tax provision was minimal because we offset the
current provision that would otherwise be due through the utilization of net
operating loss carryforwards  that had been reduced by a valuation
allowance at December 31, 2006.


Net
earnings for fiscal 2008 decreased 18.4% to $1.8 million from $2.2 million in
2007. Basic net earnings per share decreased by 26.7% to $0.11 in 2008 from
$0.15 in 2007. Diluted earning per share in 2008 was $0.11 compared with $.13
for diluted earnings per share for 2007.




2007
Compared with 2006





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





Net
      Sales (in thousands)
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  PercentageIncrease
                  
                  
                  Change2007
                  
                  
                  2006
                  
                  
                  (Decrease)
                  
                  
                  
                  2007/2006Domestic/international
      salesDomestic
                  
                  $
                  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
                  %





The
results of operations for the year ended December 31, 2007 show increased sales
but a decrease in pre-tax income compared with the year ended December 31, 2006.
Sales of electrosurgical products increased by 11.1% or $2.0 million compared
with 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 was offset by the increase in electrosurgical product
sales.  No sales of one particular electrosurgical product dominated
the number of units sold.  Our ten largest customers accounted for
approximately 71% of net revenues for 2007 compared with 73% in 2006. Arthrex
was our only customer that accounted for over 10% of 2007 total revenues (21% of
such revenues) whereas in 2006, two customers accounted for greater than 10% of
our sales (Arthrex for 22% and Medtronic for 10.5%).


17
 Table of Contents


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 purchasing power due to the declining US dollar exchange
rate.





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, compared with 60.3%
during the year ended December 31, 2006, with; total cost of sales 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 and 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. In August 2007, we began
production and sales of the ICON GI device.





Professional
services expenses 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 during the year ended December 31, 2007
compared with the year ended December 31, 2006.





Salaries
and related costs increased by 9.7% to $2.8 million in 2007 compared with $2.6
million 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 administration expenses increased as a percentage of sales by 0.1%
for 2007 compared with the year ended December 31, 2006 or an increase of
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 compared with 2006, primarily as a result of our higher
invested cash balances.





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 a benefit for
deferred income taxes of approximately $53,900 at December 31,
2007.   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 allowances
were no longer necessary in accordance with  the provisions of
Financial Accounting Standards Statement No. 109 "Accounting for Income
Taxes".  The reversal of the valuation allowance was the primary
reason for the benefit we recorded in 2007.


18
 Table of Contents


Net
earnings for fiscal 2007 decreased 16.3% to $2.2 million from $2.7 million in
2006. Basic net earnings per share decreased by 21.1% to $0.15 in 2007 from
$0.19 in 2006. Diluted earnings per share in 2007 was $0.13 compared with $0.16
for diluted earnings per share for 2006.





Liquidity
and Capital Resources





Our
working capital at December 31, 2008 was $9.8 million compared with $10.0
million at December 31, 2007. Accounts receivable days sales outstanding were 37
days and 39 days at December 31, 2008 and 2007 respectively. Day’s sales in
inventory increased 34 days to 144 days at December 31, 2008 from 110 days at
December 31, 2007. The higher days 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
2008, net cash provided by operating activities amounted to $0.7 million
compared with net cash provided of $2.1 million from operations in 2007. The
decrease in cash generated by operations in 2008 compared with the prior year is
primarily due to an increase in the balance of trade accounts receivable and the
build up of inventory parts to accommodate the anticipated increase in sales of
new products.





Net cash
used in investing activities was $4.5 million and $1.7 million during 2008 and
2007, respectively, which amounts were used for the purchase of property and
equipment (most notably a new facility), purchased technology and license
rights.





Net cash
provided by financing activities was $2.9 million for fiscal 2008, an increase
of $2.7 million compared with fiscal 2007. During fiscal 2008, we received $4.0
million from industrial revenue bonds through RBC Bank, These funds covered
approximately $2.7 million of the $3 million purchase price for the facility and
the remainder is being held in escrow until such time we complete our
renovations to prepare the facility for our manufacturing needs.  The
bonds, which are being amortized over a 20 year term, balloon in 10 years and
bear interest at a  fixed interest rate of 4.6%.  Scheduled
maturities of this indebtedness are $125,000, $135,000, $140,000, $145,000 and
$155,000 for 2009, 2010, 2011, 2012 and 2013.




We had
$2,500,000 in cash and cash equivalents at December 31, 2008. 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 $5.0 million of additional borrowing
capacity available under our existing line of credit facility with RBC Bank (see
below).





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):





Description
                
                Years
      Ending December 31,2009
                
                
                2010
                
                
                2011
                
                
                2012
                
                
                2013
                
                
                2014Operating
      leases
                
                
                282
                
                
                
                278
                
                
                
                252
                
                
                
                247
                
                
                
                223
                
                
                
                11Employment
      agreements
                
                
                1,038
                
                
                
                814
                
                
                
                64
                
                
                
                
                
                
                
                -
                
                
                
                -Purchase
      Commitments
                
                
                5,766
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -





The
Company has a $5 million secured revolving line of credit with RBC Bank (USA)
that is due on demand.   The line of credit allows for maximum
borrowings of $5,000,000, and advances under the line bear interest at 4.39% and
are secured by a perfected first security interest in all our business assets,
namely inventory, accounts receivable, equipment, and general intangibles.
Through May 12, 2009,  the full amount of the line is available, and
subsequent to such time, available borrowings will be based on a borrowing base
utilizing a percentage of eligible receivables and inventories. As of December
31, 2008 and March 1, 2009, no borrowings were outstanding under the line of
credit.


19
 Table of Contents




Critical
Accounting Estimates





In
preparing the consolidated financial statements in accordance with accounting
principles generally accepted in the United States of America (U.S. GAAP), we
have adopted various accounting policies. 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:





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.





Long-lived
assets




We review
long-lived assets which are held and used, including property and equipment and
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 that 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.




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.


20
 Table of Contents


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.






Recent
Accounting Pronouncements





SFAS
No. 141 (revised 2007), “Business Combinations” (SFAS No. 141)





In
December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business
Combinations” (SFAS No. 141(R)), which replaces SFAS No. 141, “Business
Combinations.” SFAS No. 141(R) retains the underlying concepts of SFAS
No. 141 in that all business combinations are still required to be
accounted for at fair value under the acquisition method of accounting, but SFAS
No. 141(R) changes the method of applying the acquisition method in a
number of significant aspects. Acquisition costs will generally be expensed as
incurred; non-controlling interests will be valued at fair value at the
acquisition date; in-process research and development will be recorded at fair
value as an indefinite-lived intangible asset at the acquisition date;
restructuring costs associated with a business combination will generally be
expensed subsequent to the acquisition date; and changes in deferred tax asset
valuation allowances and income tax uncertainties after the acquisition date
generally will affect income tax expense. SFAS No. 141(R) is effective on a
prospective basis for all business combinations for which the acquisition date
is on or after the beginning of the first annual period subsequent to
December 15, 2008, with an exception related to the accounting for
valuation allowances on deferred taxes and acquired contingencies related to
acquisitions completed before the effective date. SFAS No. 141(R) amends
SFAS No. 109 to require adjustments, made after the effective date of this
statement, to valuation allowances for acquired deferred tax assets and income
tax positions to be recognized as income tax expense. The impact of our adoption
of SFAS 141R will depend upon the nature and terms of business combinations, if
any, that we consummate on or after January 1, 2009.





SFAS
No. 157 – Fair Value Measurement





In
September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements. This
standard defines fair value, establishes a framework and gives guidance
regarding the methods used for measuring fair value, and expands disclosures
about fair value measurements. This standard is effective for financial
statements issued for fiscal years beginning after November 15, 2007. In
February 2008, the FASB released a FASB Staff Position (FSP FAS 157-2— Effective
Date of FASB Statement No. 157) which delays the effective date of SFAS No. 157
for all non-financial assets and non-financial liabilities, except those that
are recognized or disclosed at fair value in the financial statements on a
recurring basis (at least annually) to fiscal years beginning after November 15,
2008. The partial adoption of SFAS No. 157 on January 1, 2008, for financial
assets and liabilities did not have a material impact on the Company’s
consolidated financial position or results of operations.





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)




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)”. 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.




21
 Table of Contents




SFAS
No. 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 FASB
Statement No. 115," which provides a fair value option election that permits
entities to irrevocably elect to measure certain financial assets and
liabilities (exceptions are specifically identified in the Statement) at fair
value as the initial and subsequent measurement attribute, with changes in fair
value recognized in earnings as they occur. SFAS No. 159 permits the fair value
option election on an instrument-by-instrument basis at initial recognition of
an asset or liability or upon an event that gives rise to a new basis of
accounting for that instrument.  The adoption of SFAS No. 159 on
January 1, 2008, for financial assets and liabilities did not have a material
impact on the Company’s consolidated financial position or results of
operations.





SFAS
No. 160 - Non-controlling Interests in Consolidated Financial Statements, an
amendment of ARB No. 51





In
December 2007, the FASB issued SFAS No. 160, “Non-controlling Interests in
Consolidated Financial Statements, an amendment of ARB No. 51”. SFAS No.
160 will change the accounting and reporting for minority interests, which will
be recharacterized as non-controlling interests (NCI) and classified as a
component of equity. This new consolidation method will significantly change the
accounting for partial and/or step acquisitions. SFAS No. 160 will be effective
for the Company in the first quarter of fiscal year 2010, however since we do
not have any minority interests, it will not impact our consolidated financial
statements.





SFAS
No. 161 – Disclosures about Derivative Instruments and Hedging Activities — an
amendment of FASB Statement No. 133





In
March 2008, the FASB issued SFAS No. 161, “Disclosures about
Derivative Instruments and Hedging Activities — an amendment of FASB Statement
No. 133”. This Standard requires enhanced disclosures regarding derivatives
and hedging activities, including: (a) the manner in which an entity uses
derivative instruments; (b) the manner in which derivative instruments and
related hedged items are accounted for under Statement of Financial Accounting
Standards No. 133, Accounting for Derivative Instruments and Hedging
Activities; and (c) the effect of derivative instruments and related hedged
items on an entity’s financial position, financial performance, and cash flows.
The Standard is effective for financial statements issued for fiscal years and
interim periods beginning after November 15, 2008. As SFAS No. 161 relates
specifically to disclosures, the Standard will have no impact on our
consolidated financial position or results of operations.


22
 Table of Contents


EITF
Issue No. 07-3, Accounting for Nonrefundable Advance Payments for Goods or
Services Received to Be Used in Future Research and Development Activities”
(EITF No. 07-3)





In June
2007, the Emerging Issues Task Force (EITF) reached a consensus on EITF Issue
No. 07-3, “Accounting for Nonrefundable Advance Payments for Goods or Services
Received to Be Used in Future Research and Development Activities” (EITF No.
07-3). EITF No. 07-3 requires companies that are involved in research and
development activities to defer nonrefundable advance payments for future
research and development activities and to recognize those payments as goods and
services are delivered. The Company will be required to assess on an ongoing
basis whether or not the goods or services will be delivered and to expense the
nonrefundable advance payments immediately if it is determined that delivery is
unlikely. EITF No. 07-3 is effective for new arrangements entered into
subsequent to the beginning of the Company’s fiscal year 2009. The Company is
currently evaluating the impact that the adoption of EITF No. 07-3 will have,
but does not believe it will be material to the consolidated financial position
or results of operations.





FASB
Staff Position (“FSP”) FSP FAS 142-3, Determination of the Useful Life of
Intangible Assets or FSP FAS 142-3.





In April
2008, the FASB issued FSP FAS 142-3, “Determination of the Useful Life of
Intangible Assets or FSP FAS 142-3”. FSP FAS 142-3 amends the factors that
should be considered in developing renewal or extension assumptions used to
determine the useful life of a recognized intangible asset under SFAS No. 142,
Goodwill and Other Intangible Assets. The intent of the position is to improve
the consistency between the useful life of a recognized intangible asset under
SFAS No. 142 and the period of expected cash flows used to measure the fair
value of the intangible asset. FSP FAS 142-3 is effective for fiscal years
beginning after December 15, 2008. The Company is currently evaluating the
impact that the adoption of FSP FAS 142-3 will have, but does not believe it
will be material to the consolidated financial position or results of
operations.





SFAS
No. 162 - The Hierarchy of Generally Accepted Accounting Principles





In May
2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted
Accounting Principles”. SFAS No. 162 identifies the sources of accounting
principles and the framework for selecting the principles used in the
preparation of financial statements of nongovernmental entities that are
presented in conformity with GAAP. The implementation of this standard did not
have any effect on the Company’s financial statements.





SFAS
No. 163 - Accounting for Financial Guarantee Insurance Contracts





In May
2008, the FASB issued SFAS No. 163, “Accounting for Financial Guarantee
Insurance Contracts, an interpretation of FASB Statement No. 60”.  The
scope of this Statement is limited to financial guarantee insurance (and
reinsurance) contracts, as described in FAS 163, issued by enterprises included
within the scope of FAS 60. Accordingly, SFAS 163 does not apply to financial
guarantee contracts issued by enterprises excluded from the scope of Statement
60 or to some insurance contracts that seem similar to financial guarantee
insurance contracts issued by insurance enterprises (such as mortgage guaranty
insurance or credit insurance on trade receivables). SFAS 163 also does not
apply to financial guarantee insurance contracts that are derivative instruments
included within the scope of FASB Statement No. 133, “Accounting for Derivative
Instruments and Hedging Activities.”  SFAS 163, which is effective for
fiscal years beginning after December 15, 2008, is not expected to have any
effect on our financial statements.





FASB
Staff Position (“FSP”) Accounting Principles Board (“APB”) 14-1, Accounting for
Convertible Debt Instruments That May Be Settled in Cash upon Conversion
(Including Partial Cash Settlement)





In May
2008, the FASB issued FASB Staff Position (“FSP”) Accounting Principles Board
(“APB”) 14-1, “Accounting for Convertible Debt Instruments That May Be Settled
in Cash upon Conversion (Including Partial Cash Settlement).” FSP APB 14-1
applies to convertible debt instruments that, by their stated terms, may be
settled in cash (or other assets) upon conversion, including partial cash
settlement of the conversion option. FSP APB 14-1 requires bifurcation of the
instrument into a debt component that is initially recorded at fair value and an
equity component. The difference between the fair value of the debt component
and the initial proceeds from issuance of the instrument is recorded as a
component of equity. The liability component of the debt instrument is accreted
to par using the effective yield method; accretion is reported as a component of
interest expense. The equity component is not subsequently re-valued as long as
it continues to qualify for equity treatment. FSP APB 14-1 must be applied
retrospectively to previously issued cash-settleable convertible instruments as
well as prospectively to newly issued instruments. FSP APB 14-1 is effective for
fiscal years beginning after December 15, 2008, and interim periods within
those fiscal years. Because we do not have any convertible debt instruments, we
do not expect that the adoption of this statement will have any effect on our
consolidated financial statements.


23
 Table of Contents




FASB
Staff Position (“FSP”) No. EITF 03-6-1, Determining Whether Instruments Granted
in Share-Based Payment Transactions Are Participating Securities





In June
2008, the FASB issued FASB Staff Position No. EITF 03-6-1, “Determining Whether
Instruments Granted in Share-Based Payment Transactions Are Participating
Securities”. This FASB Staff Position  addresses whether instruments
granted in share-based payment transactions are participating securities prior
to vesting and, therefore, need to be included in the earnings allocation in
computing earnings per share (EPS) under the two-class method described in
paragraphs 60 and 61 of FASB Statement No. 128, Earnings per Share. Unvested
share-based payment awards that contain nonforfeitable rights to dividends or
dividend equivalents (whether paid or unpaid) are participating securities and
shall be included in the computation of EPS pursuant to the two-class method. At
this time, the Company does not believe FSP EITF 03-6-1 will have any impact on
our earnings per share calculations.





FASB
Staff Position (“FSP”) No. EITF 08-7, Accounting for Defensive Intangible
Assets





In
November 2008, the Emerging Issues Task Force issued EITF No. 08-7,
“Accounting for Defensive Intangible Assets” which clarifies the accounting for
“defensive” intangible assets subsequent to initial measurement. EITF 08-7
applies to acquired intangible assets which an entity has no intention of
actively using, or intends to discontinue use of the intangible asset but holds
it (locks up) to prevent others from obtaining access to it (i.e., a defensive
intangible asset). Under EITF 08-7, the Task Force reached a consensus that an
acquired defensive asset should be accounted for as a separate unit of
accounting (i.e., an asset separate from other assets of the acquirer) and the
useful life assigned to an acquired defensive asset should be based on the
period during which the asset would diminish in value. EITF 08-7 is effective
for defensive intangible assets acquired in fiscal years beginning on or after
December 15, 2008.





ITEM7A.  Quantitative and Qualitative
Disclosures about Market Risk





Our short
term investments consist of cash, cash equivalents and overnight investments. As
such we do not believe we are exposed to significant interest rate risk. 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, 2008, this change would not have had a material effect on the
fair value of our investment portfolio as of that date.





ITEM8. Financial Statements and Supplementary Data





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





ITEM9. 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 report on our consolidated financial statements as of
and for the year ended December 31, 2006 did not contain an adverse opinion or
disclaimer of opinion, nor was it qualified or modified as to uncertainty, audit
scope or accounting principles.


24
 Table of Contents


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





ITEM9A. Disclosure Controls and Procedures





Controls and
Procedures




We have
carried out an evaluation, under the supervision of and with the participation
of our management, including our Chief Executive Officer (CEO) and Chief
Financial Officer (CFO), of the effectiveness of the design and operation of our
disclosure controls and procedures (as defined in Rules 13a-15(e) and
15d-15(e) under the Securities Exchange Act of 1934, as amended), as of
December 31, 2008. Based upon that evaluation, our CEO and CFO concluded
that, as of the end of that period, our disclosure controls and procedures are
effective in providing reasonable assurance that (a) the information
required to be disclosed by us in the reports that we file or submit under the
Securities Exchange Act is recorded, processed, summarized and reported within
the time periods specified in the SEC’s rules and forms, and (b) such
information is accumulated and communicated to our management, including our CEO
and CFO, as appropriate to allow timely decisions regarding required disclosure.
In designing and evaluating our disclosure controls and procedures, our
management recognized that any controls and procedures, no matter how well
designed and operated, can provide only reasonable assurance of achieving the
desired control objectives, and our management necessarily was required to apply
its judgment in evaluating the cost-benefit relationship of possible controls
and procedures.




Changes in
Internal Control over Financial Reporting




Section 404
of the Sarbanes-Oxley Act of 2002 requires us to evaluate annually the
effectiveness of our internal controls over financial reporting as of the end of
each fiscal year, and to include a management report assessing the effectiveness
of our internal control over financial reporting in all annual reports. There
were no changes in our internal control over financial reporting during the
quarter ended December 31, 2008 that have materially affected, or are
reasonably likely to materially affect, our internal control over financial
reporting.







Management’s
Annual Report on Internal Control over Financial
Reporting




Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting. Internal control over financial reporting is
defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act
as a process designed by, or under the supervision of, a company’s principal
executive and principal financial officers and effected by a company’s board of
directors, management and other personnel to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted
accounting principles. Our internal control over financial reporting includes
those policies and procedures that:


•
            pertain
      to the maintenance of records that, in reasonable detail, accurately and
      fairly reflect the transactions and dispositions of our
      assets;





•
            provide
      reasonable assurance that transactions are recorded as necessary to permit
      preparation of financial statements in accordance with generally accepted
      accounting principles, and that our receipts and expenditures are being
      made only in accordance with authorizations of our management and
      directors; and





•
            provide
      reasonable assurance regarding prevention or timely detection of
      unauthorized acquisition, use or disposition of our assets that could have
      a material effect on the financial
statements.




Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. 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.


25
 Table of Contents





Our
management assessed the effectiveness of our internal control over financial
reporting as of December 31, 2008. In making this assessment, management
used the criteria set forth by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO) in Internal Control — Integrated Framework.
Based on our assessment, our management has concluded that, as of
December 31, 2008, our internal control over financial reporting is
effective based on those criteria.


The
effectiveness of our internal control over financial reporting as of
December 31, 2008 has been audited by Kingery & Crouse, P.A., our
independent registered public accounting firm, as stated in their report, which
is attached to our audited financial statements.




ITEM9B. Other Information





None.





Part
III





ITEM10. Directors, Executive Officers, and Corporate
Governance





Set forth
below is information regarding the executive officers and directors of Bovie
Medical as of February 28, 2009:





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
                      
                      Director
                      
                      September
      2004Michael
      Norman
                      
                      Director
                      
                      September
      2004August
      Lentricchia
                      
                      Director
                      
                      October
      2007Moshe
      Citronowicz
                      
                      Executive
      Vice President and Chief Operating OfficerGary
      D. Pickett
                      
                      Chief
      Financial Officer, Treasurer, and SecretarySteve
      Livneh
                      
                      President
      of Bovie Canada and Director
                      
                      April
      2008Steven
      MacLaren
                      
                      Director
                      
                      April
      2008





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





Andrew
Makrides, Esq. Age 67, 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 56, 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.


26
 Table of Contents


George
Kromer, Jr., age 68, 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 56, 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 technology
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 of
Executive Vice President and Chief Operating Officer. Mr. Citronowicz’s
employment contract extends to December 31, 2011.





Gary D.
Pickett, CPA, age 57, 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.  Mr. Pickett 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 55, 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. 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 Association-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 49, joined Bovie as a 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.





Michael
Norman, CPA age 51, 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 54, 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).


27
 Table of Contents


Steve
Livneh, age 60, became President of Bovie Canada in October 2006 following the
asset purchase of certain intellectual properties by Bovie from Lican
Development of Ontario, Canada, and then a director in April
2008.  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.





Steven
MacLaren, age 38, joined Bovie as a director in April 2008. Mr. MacLaren is a
1991 graduate of the Ohio State University in Columbus, Ohio with a BSBA degree
in accounting. He is currently the principal owner of Ronin Consulting Group,
LLC of Belleair Bluffs, Florida, which he started in February 2004 and which has
provided consulting services for Bovie Medical since August 2005. Previous to
this he served as the CFO and a technical currency trader of Capital Management
Group, LLC, an investment company located in Naples, FL from November 2001
through February 2004. Mr. MacLaren has a history with the Company as he also
served as Bovie Medical’s Controller from November 1996 through October 2001. He
has extensive knowledge in technical analysis techniques and trading systems
applied in both U.S. equity and foreign currency markets.




Independent
Board Members




The board
has five members, Brian Madden, Randy Rossi, Michael Norman, August Lentricchia,
and Steven MacLaren that meet the existing independence requirements of the NYSE
Alternext Market and the Securities and Exchange Commission.




Audit
Committee





The Audit
Committee assists the full Board of Directors in its general oversight of our
financial reporting, internal controls, and audit functions, and is directly
responsible for the appointment, compensation and oversight of the work of our
independent registered public accounting firm. The Audit Committee reviews and
discusses with management and our independent accountants the annual audited and
quarterly financial statements (including the disclosures under “Management’s
Discussion and Analysis of Financial Condition and Results of Operations”),
reviews the integrity of the financial reporting processes, both internal and
external, reviews the qualifications, performance and independence of our
independent accountants, and prepares the Audit Committee Report included in
this Annual Report on Form 10-K in accordance with rules and regulations of the
Securities and Exchange Commission. The audit committee has the power to
investigate any matter brought to its attention within the scope of its duties.
It also has the authority to retain counsel and advisors to fulfill its
responsibilities and duties. The audit committee also acts as a qualified legal
compliance committee.





Our audit
committee consists of three independent members of the Board of Directors, Brian
Madden, Michael Norman CPA, and August Lentricchia. Michael Norman serves as a
financial expert for the Committee. The Audit Committee meets as often as it
determines necessary but not less frequently than once every fiscal
quarter.





AUDIT
COMMITTEE REPORT




Our Audit
Committee is composed of “independent” directors, as determined in accordance
with Rule 10A-3 of the Securities Exchange Act of 1934. The Audit Committee
operates pursuant to a written charter adopted by the Board of
Directors.




As
described more fully in its charter, the purpose of the Audit Committee is to
assist the Board of Directors with its oversight responsibilities regarding the
integrity of our company’s financial statements, our compliance with legal and
regulatory requirements, assessing the independent registered public accounting
firm’s qualifications and independence and the performance of the persons
performing internal audit duties for our company and the independent registered
public accounting firm. Management is responsible for preparation, presentation
and integrity of our financial statements as well as our financial reporting
process, accounting policies, internal audit function, internal accounting
controls and disclosure controls and procedures. The independent registered
public accounting firm is responsible for performing an independent audit of our
consolidated financial statements in accordance with generally accepted auditing
standards and to issue a report thereon. The Audit Committee’s responsibility is
to monitor and oversee these processes. The following is the Audit Committee’s
report submitted to the Board of Directors for 2008.


28
 Table of Contents




The Audit
Committee has:





•
            reviewed
      and discussed our audited financial statements with management and Kingery
      & Crouse, P. A., the independent
accountants




•
            discussed with Kingery &
      Crouse, P.A. matters required to be discussed by Statement on Auditing
      Standards No. 114,Communications with Audit Committees, as may be modified or
      supplemented; and





•
            received from Kingery &
      Crouse, P. A. the written disclosures and the letter regarding their
      independence as required byPCAOB Rule
      3526, Communication with Audit Committees Concerning
      Independence, as may
      be modified or supplemented, and discussed the auditors’ independence with
      them.




In
addition, the Audit Committee has met separately with management and with
Kingery & Crouse, P. A.




Based on
the review and discussions referred to above, the Audit Committee recommended to
the Board of Directors that the audited financial statements be included in our
Annual Report on Form 10-K for the year ended December 31, 2008 for filing
with the Securities and Exchange Commission.




The
foregoing audit committee report shall not be deemed incorporated by reference
into any filing under the Securities Act of 1933 or the Securities Exchange Act
of 1934, and shall not otherwise be deemed filed under these acts, except to the
extent we specifically incorporate by reference into such filings.





Governance
and Nominating Committee





The
Governance and Nominating Committee is responsible for matters relating to the
corporate governance of our company and the nomination of members of the board
and committees thereof. Our Governance and Nominating Committee consists of four
independent members of the Board of Directors, Brian Madden, Michael Norman CPA,
August Lentricchia, and Steven MacLaren. The Governance and Nominating Committee
meets as often as it determines necessary, but not less than once a
year.





Compensation
Committee





The Compensation Committee is
responsible for overseeing our compensation and employee benefit plans
(including those involving the issuance of our equity securities) and practices,
including formulating, evaluating, and approving the compensation of our
executive officers and reviewing and recommending to the full Board of Directors
the compensation of our Chief Executive Officer.  The committee is
also responsible for recommending the level of Board of Directors' compensation
to the full Board of Directors. Our Compensation Committee consists of four
independent members of the Board of Directors, Brian Madden, Michael Norman CPA,
August Lentricchia, and Steven MacLaren. The Compensation Committee meets as
often as it determines necessary, but not less than once a
year.





Ethics
Code





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.


29
 Table of Contents


ITEM11. Executive Compensation Discussion and Analysis





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
Compensation Committee and  approved 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
Compensation Committee  does not benchmark its base salaries in any
way, nor do they employ the services of a compensation consultant.





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 rewards 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 to the Compensation Committee which individuals should be
awarded stock options. The Compensation Committee considers the prior
contribution of these individuals and their expected future contributions to the
growth of Bovie then formulates and presents the recommended allocation of stock
option awards to the Board of Directors for approval. The Board of Directors
approves or, if necessary, modifies the committee’s
recommendations.




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, and President of Aaron each receive an automobile
allowance of approximately $6,400 per year.




30
 Table of Contents




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 2008 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, 2008 for services to
our company in all capacities:





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
                                                                                      
                                                                                      2008
                                                                                      
                                                                                      $
                                                                                      208,598
                                                                                      
                                                                                      
                                                                                      $
                                                                                      3,870
                                                                                      
                                                                                      
                                                                                      
                                                                                      0
                                                                                      
                                                                                      
                                                                                      
                                                                                      0
                                                                                      
                                                                                      
                                                                                      
                                                                                      0
                                                                                      
                                                                                      
                                                                                      
                                                                                      0
                                                                                      
                                                                                      
                                                                                      $
                                                                                      20,553
                                                                                      (8)
                                                                                      
                                                                                      $
                                                                                      223,022Makrides
                                                                                      
                                                                                      2007
                                                                                      
                                                                                      $
                                                                                      195,452
                                                                                      
                                                                                      
                                                                                      $
                                                                                      3,685
                                                                                      
                                                                                      
                                                                                      
                                                                                      0
                                                                                      
                                                                                      
                                                                                      
                                                                                      0
                                                                                      
                                                                                      
                                                                                      
                                                                                      0
                                                                                      
                                                                                      
                                                                                      
                                                                                      0
                                                                                      
                                                                                      
                                                                                      $
                                                                                      21,770
                                                                                      (6)
                                                                                      
                                                                                      $
                                                                                      220,907President,
                                                                                      
                                                                                      2006
                                                                                      
                                                                                      $
                                                                                      217,358
                                                                                      *
      (1)
                                                                                      
                                                                                      $
                                                                                      3,685
                                                                                      
                                                                                      
                                                                                      
                                                                                      0
                                                                                      
                                                                                      
                                                                                      
                                                                                      0
                                                                                      
                                                                                      
                                                                                      
                                                                                      0
                                                                                      
                                                                                      
                                                                                      
                                                                                      0
                                                                                      
                                                                                      
                                                                                      $
                                                                                      19,646
                                                                                      (7)
                                                                                      
                                                                                      $
                                                                                      240,689CEO,Chairman
      of the BoardGary
      D.
                                                                                      
                                                                                      2008
                                                                                      
                                                                                      $
                                                                                      104,083
                                                                                      
                                                                                      
                                                                                      $
                                                                                      1,961
                                                                                      
                                                                                      
                                                                                      
                                                                                      0
                                                                                      
                                                                                      
                                                                                      
                                                                                      0
                                                                                      
                                                                                      
                                                                                      
                                                                                      0
                                                                                      
                                                                                      
                                                                                      
                                                                                      0
                                                                                      
                                                                                      
                                                                                      $
                                                                                      3,316
                                                                                      (19)
                                                                                      
                                                                                      $
                                                                                      109,360Pickett
                                                                                      
                                                                                      2007
                                                                                      
                                                                                      $
                                                                                      94,457
                                                                                      
                                                                                      
                                                                                      $
                                                                                      1,904
                                                                                      
                                                                                      
                                                                                      
                                                                                      0
                                                                                      
                                                                                      
                                                                                      
                                                                                      88,200
                                                                                      *(5)
                                                                                      
                                                                                      
                                                                                      0
                                                                                      
                                                                                      
                                                                                      
                                                                                      0
                                                                                      
                                                                                      
                                                                                      $
                                                                                      3,097
                                                                                      (9)
                                                                                      
                                                                                      $
                                                                                      187,658CFO,
                                                                                      
                                                                                      2006
                                                                                      
                                                                                      $
                                                                                      66,442
                                                                                      *
      (A)(4)
                                                                                      
                                                                                      $
                                                                                      1,731
                                                                                      
                                                                                      
                                                                                      
                                                                                      0
                                                                                      
                                                                                      
                                                                                      
                                                                                      0
                                                                                      
                                                                                      
                                                                                      
                                                                                      0
                                                                                      
                                                                                      
                                                                                      
                                                                                      0
                                                                                      
                                                                                      
                                                                                      $
                                                                                      1,488
                                                                                      (10)
                                                                                      
                                                                                      $
                                                                                      69,661Treasurer,SecretaryJ.
      Robert
                                                                                      
                                                                                      2008
                                                                                      
                                                                                      $
                                                                                      295,650
                                                                                      
                                                                                      
                                                                                      $
                                                                                      5,480
                                                                                      
                                                                                      
                                                                                      
                                                                                      0
                                                                                      
                                                                                      
                                                                                      
                                                                                      0
                                                                                      
                                                                                      
                                                                                      
                                                                                      0
                                                                                      
                                                                                      
                                                                                      
                                                                                      0
                                                                                      
                                                                                      
                                                                                      $
                                                                                      21,312
                                                                                      (13)
                                                                                      
                                                                                      $
                                                                                      322,442Saron
                                                                                      
                                                                                      2007
                                                                                      
                                                                                      $
                                                                                      276,680
                                                                                      
                                                                                      
                                                                                      $
                                                                                      5,218
                                                                                      
                                                                                      
                                                                                      
                                                                                      0
                                                                                      
                                                                                      
                                                                                      
                                                                                      0
                                                                                      
                                                                                      
                                                                                      
                                                                                      0
                                                                                      
                                                                                      
                                                                                      
                                                                                      0
                                                                                      
                                                                                      
                                                                                      $
                                                                                      20,413
                                                                                      (11)
                                                                                      
                                                                                      $
                                                                                      302,311President
                                                                                      
                                                                                      2006
                                                                                      
                                                                                      $
                                                                                      281,109
                                                                                      *
      (2)
                                                                                      
                                                                                      $
                                                                                      5,218
                                                                                      
                                                                                      
                                                                                      
                                                                                      0
                                                                                      
                                                                                      
                                                                                      
                                                                                      0
                                                                                      
                                                                                      
                                                                                      
                                                                                      0
                                                                                      
                                                                                      
                                                                                      
                                                                                      0
                                                                                      
                                                                                      
                                                                                      $
                                                                                      16,201
                                                                                      (12)
                                                                                      
                                                                                      $
                                                                                      302,528AaronMedical
      andDirectorMoshe
                                                                                      
                                                                                      2008
                                                                                      
                                                                                      $
                                                                                      213,197
                                                                                      
                                                                                      
                                                                                      $
                                                                                      4,026
                                                                                      
                                                                                      
                                                                                      
                                                                                      0
                                                                                      
                                                                                      
                                                                                      
                                                                                      0
                                                                                      
                                                                                      
                                                                                      
                                                                                      0
                                                                                      
                                                                                      
                                                                                      
                                                                                      0
                                                                                      
                                                                                      
                                                                                      $
                                                                                      21,055
                                                                                      (16)
                                                                                      
                                                                                      $
                                                                                      238,278Citronowicz
                                                                                      
                                                                                      2007
                                                                                      
                                                                                      $
                                                                                      203,349
                                                                                      
                                                                                      
                                                                                      $
                                                                                      3,834
                                                                                      
                                                                                      
                                                                                      
                                                                                      0
                                                                                      
                                                                                      
                                                                                      
                                                                                      0
                                                                                      
                                                                                      
                                                                                      
                                                                                      0
                                                                                      
                                                                                      
                                                                                      
                                                                                      0
                                                                                      
                                                                                      
                                                                                      $
                                                                                      20,109
                                                                                      (14)
                                                                                      
                                                                                      $
                                                                                      227,292Vice
                                                                                      
                                                                                      2006
                                                                                      
                                                                                      $
                                                                                      242,947
                                                                                      *
      (3)
                                                                                      
                                                                                      $
                                                                                      3,834
                                                                                      
                                                                                      
                                                                                      
                                                                                      0
                                                                                      
                                                                                      
                                                                                      
                                                                                      0
                                                                                      
                                                                                      
                                                                                      
                                                                                      0
                                                                                      
                                                                                      
                                                                                      
                                                                                      0
                                                                                      
                                                                                      
                                                                                      $
                                                                                      18,506
                                                                                      (15)
                                                                                      
                                                                                      $
                                                                                      265,287PresidentChiefOperatingOfficerSteve
                                                                                      
                                                                                      2008
                                                                                      
                                                                                      $
                                                                                      164,959
                                                                                      
                                                                                      
                                                                                      $
                                                                                      2,747
                                                                                      
                                                                                      
                                                                                      
                                                                                      0
                                                                                      
                                                                                      
                                                                                      
                                                                                      0
                                                                                      
                                                                                      
                                                                                      
                                                                                      0
                                                                                      
                                                                                      
                                                                                      
                                                                                      0
                                                                                      
                                                                                      
                                                                                      $
                                                                                      6,575
                                                                                      (20)
                                                                                      
                                                                                      $
                                                                                      174,281Livneh
                                                                                      
                                                                                      2007
                                                                                      
                                                                                      $
                                                                                      174,155
                                                                                      
                                                                                      
                                                                                      $
                                                                                      3,523
                                                                                      
                                                                                      
                                                                                      
                                                                                      0
                                                                                      
                                                                                      
                                                                                      
                                                                                      0
                                                                                      
                                                                                      
                                                                                      
                                                                                      0
                                                                                      
                                                                                      
                                                                                      
                                                                                      0
                                                                                      
                                                                                      
                                                                                      $
                                                                                      12,664
                                                                                      (17)
                                                                                      
                                                                                      $
                                                                                      190,342President
                                                                                      
                                                                                      2006
                                                                                      
                                                                                      $
                                                                                      36,060
                                                                                      *
      (B)
                                                                                      
                                                                                      $
                                                                                      2,885
                                                                                      
                                                                                      
                                                                                      
                                                                                      0
                                                                                      
                                                                                      
                                                                                      
                                                                                      0
                                                                                      
                                                                                      
                                                                                      
                                                                                      0
                                                                                      
                                                                                      
                                                                                      
                                                                                      0
                                                                                      
                                                                                      
                                                                                      $
                                                                                      1,750
                                                                                      (18)
                                                                                      
                                                                                      $
                                                                                      40,695BovieCanada


31
 Table of Contents




__________________________________________





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.





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





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





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





*(4)
Includes $865 for unused vacation pay, which had been expensed  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: $4,151 of employer contributions under the Bovie Employee
401(k) savings plan; car allowance of $6,431; life insurance premiums of $396;
and health insurance premiums of $9,576.





(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 $4,145.





(13) This
amount includes: $8,738 of employer contributions under the Bovie Employee
401(k) savings plan; car allowance of $6,431; life insurance premiums of $434;
and health insurance premiums of $5,709.


32
 Table of Contents




(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: $6,470 of employer contributions under the Bovie Employee
401(k) savings plan; car allowance of $6,431; life insurance premiums of $434;
and health insurance premiums of $7,720.





(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 $1,571.





(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.





(19) This
amount includes: $2,970 of employer contributions under the Bovie Employee
401(k) savings plan; and life insurance premiums of $346.





(20) This
amount includes: $4,976 of employer contributions under the Bovie Employee
401(k) savings plan;  life insurance premiums of $192; and health
insurance premiums of $1,407.





Employment
Agreements and Potential Payments Upon Termination or Change in
Control





At
December 31, 2008, we were obligated under  employment contracts with
Mr. Makrides, Mr. Saron, and Mr. Citronowicz that were set to expire in January
2011. In January 2009 these maturity dates were extended to January 2012, and
such maturity dates will continue to automatically extend for a period of one
year unless we provide the executives with appropriate written notice pursuant
to the contracts).  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 non-competition provisions of his employment
      agreement, 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.


33
 Table of Contents




On June
18, 2007, the Company entered into a two year employment contract with Mr.
Pickett to serve as Chief Financial Officer, which contract allowed for a one
year extension unless the Company provided written notification conveying its
intention not to renew.  Since no such notification was provided, the
contract has a current expiration date of June 2010.  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 which contract allows
for a two year extension, unless the Company provides written notice of its
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.





There are
no other employment contracts that have non-cancelable terms in excess of one
year.





Grants
of Plan-Based Awards




There
were no incentive awards granted to Bovie's Named Executive Officers in fiscal
2008.




Options
Exercises During Fiscal 2008







The
following table summarizes the options exercised during the year ended
December 31, 2008 and the value realized upon exercise:




Option
      AwardsName
                  
                  Number
      of Shares
                    Acquired
      on Exercise
                  
                  
                  Value
      Realized Upon
                    Exercise ($) (1)Andrew
      Makrides
                  
                  
                  390,000
                  
                  
                  $
                  2,313,700J.
      Robert Saron
                  
                  
                  195,000
                  
                  
                  $
                  1,156,850Moshe
      Citronowicz
                  
                  
                  390,000
                  
                  
                  $
                  2,313,700Steve
      Livneh
                  
                  
                  --
                  
                  
                  
                  --Gary
      Pickett
                  
                  
                  --
                  
                  
                  
                  --





(1)
                The
      value realized equals the excess of the fair market value of our common
      stock on the exercise date over the option exercise price, multiplied by
      the number of  options
exercised.




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,
2008.





Outstanding
      Equity Awards at 12/31/08Name
                                                        
                                                        
                                                        
                                                        # of Securities Underlying
      Unexercised Options
                                                          (# Exercisable)
                                                        
                                                        
                                                        #
      of Securities Underlying Unexercised Options
                                                          (# Unexercisable)
                                                          (*)
                                                        
                                                        
                                                        Option
      Exercise Price
                                                          ($/sh)
                                                        
                                                        Option
      Expiration DateAndrew
      Makrides
                                                        
                                                        
                                                        
                                                        
                                                        25,000
                                                        
                                                        
                                                        
                                                        --
                                                        
                                                        
                                                        
                                                        3.25
                                                        
                                                        9/29/201325,000
                                                        
                                                        
                                                        
                                                        --
                                                        
                                                        
                                                        
                                                        2.13
                                                        
                                                        9/23/201425,000
                                                        
                                                        
                                                        
                                                        --
                                                        
                                                        
                                                        
                                                        2.25
                                                        
                                                        5/5/2015J.
      Robert Saron
                                                        
                                                        
                                                        
                                                        
                                                        12,500
                                                        
                                                        
                                                        
                                                        --
                                                        
                                                        
                                                        
                                                        3.25
                                                        
                                                        9/29/201312,500
                                                        
                                                        
                                                        
                                                        --
                                                        
                                                        
                                                        
                                                        2.13
                                                        
                                                        9/23/201412,500
                                                        
                                                        
                                                        
                                                        --
                                                        
                                                        
                                                        
                                                        2.25
                                                        
                                                        5/5/2015Moshe
      Citronowicz
                                                        
                                                        
                                                        
                                                        
                                                        25,000
                                                        
                                                        
                                                        
                                                        --
                                                        
                                                        
                                                        
                                                        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 Business
- New Products)


34
 Table of Contents




Compensation
of Non-Employee Directors





The
following is a table showing the director compensation for the year ended
December 31, 2008:





Name
                                  
                                  Fees
      Earned Or Paid In Cash ($)
                                  
                                  
                                  Stock
      Awards
                                    ($)
                                  
                                  
                                  Option
      Awards
                                    ($)
                                  
                                  
                                  Non-Equity
      Incentive Plan
                                    Compensation
                                    ($)
                                  
                                  
                                  Change
      in Pension Value and Nonqualified Deferred Compensation
      Earnings
                                    ($)
                                  
                                  
                                  All
      Other Compensation
                                    ($)
                                  
                                  
                                  Total
                                    ($)(a)
                                  
                                  (b)
                                  
                                  
                                  (c)
                                  
                                  
                                  (d)
                                  
                                  
                                  (e)
                                  
                                  
                                  (f)
                                  
                                  
                                  (g)
                                  
                                  
                                  (h)Brian
      Madden
                                  
                                  
                                  0
                                  
                                  
                                  
                                  0
                                  
                                  
                                  $
                                  32,250
                                  *
      (1)
                                  
                                  
                                  0
                                  
                                  
                                  
                                  0
                                  
                                  
                                  
                                  0
                                  
                                  
                                  $
                                  32,250Michael
      Norman
                                  
                                  
                                  0
                                  
                                  
                                  
                                  0
                                  
                                  
                                  $
                                  32,250
                                  *
      (2)
                                  
                                  
                                  0
                                  
                                  
                                  
                                  0
                                  
                                  
                                  
                                  0
                                  
                                  
                                  $
                                  32,250Randy
      Rossi
                                  
                                  
                                  0
                                  
                                  
                                  
                                  0
                                  
                                  
                                  $
                                  28,200
                                  *
      (3)
                                  
                                  
                                  0
                                  
                                  
                                  
                                  0
                                  
                                  
                                  
                                  0
                                  
                                  
                                  $
                                  28,200Steven
      MacLaren
                                  
                                  
                                  0
                                  
                                  
                                  
                                  0
                                  
                                  
                                  $
                                  21,150
                                  *
      (4)
                                  
                                  
                                  0
                                  
                                  
                                  
                                  0
                                  
                                  
                                  
                                  0
                                  
                                  
                                  $
                                  21,150





*
(1)  Mr. Madden was granted 12,500 stock options on August 28, 2008
which had a fair value of $2.82 per option.





*
(2)  Mr. Norman was granted 12,500 stock options on August 28, 2008
which had a fair value of $2.82 per option.





*
(3)  Mr. Rossi was granted 10,000 stock options on August 28, 2008
which had a fair value of $2.82 per option.





* (4) Mr.
MacLaren was granted 7,500 stock options on August 28, 2008 which had a fair
value of $2.82 per option.





Directors'
compensation is determined by the Board of Directors based upon recommendations
from the Compensation Committee. The Board periodically grants directors stock
options in order to assure that they have proper incentives and 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, August Lentricchia, Steve Livneh, and Steven MacLaren.


35
 Table of Contents




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 2001,
the Board of Directors adopted the 2001 Executive and Employee Stock Option Plan
which reserved for issuance 1,200,000 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 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 Plan, the Plan remains otherwise
unchanged from its present status. In 2008, the Board of Directors granted
207,500 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.





COMPENSATION
COMMITTEE REPORT




Our
Committee has reviewed and discussed the Compensation Discussion and Analysis
contained in this Annual Report on Form 10-K with management. Based on our
Committee’s review of and the discussions with management with respect to the
Compensation Discussion and Analysis, our Committee recommended to the Board of
Directors that the Compensation Discussion and Analysis be included in our Proxy
Statement and in this Annual Report on Form 10-K for the fiscal year ended
December 31, 2008 for filing with the SEC.   Our
compensation committees’ members are Steven MacLaren, Brian Madden, Michael
Norman (CPA) and August Lentricchia.





ITEM12. Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters





The
following table sets forth certain information as of December 31, 2008, with
respect to the beneficial ownership of the Company’s common stock by its
executive officers, directors, all persons known by the Company to be the
beneficial owners of more than 5% of its outstanding shares and by all officers
and directors as a group.





Number
      of Shares
                                                                  
                                                                  Nature
      of
                                                                  
                                                                  Percentage
      ofName
      and Address
                                                                  
                                                                  Title
                                                                  
                                                                  Owned
      (i)
                                                                  
                                                                  Ownership
                                                                  
                                                                  Ownership
      (i)The
      Frost National Bank
                                                                  
                                                                  Common
                                                                  
                                                                  300,000
                                                                  
                                                                  Beneficial
                                                                  
                                                                  1.8%FBO
      RenaissanceUS
      Growth InvestmentTrust
      PLC.Trust
      no. W00740100The
      Frost National Bank
                                                                  
                                                                  Common
                                                                  
                                                                  1,000,000
                                                                  
                                                                  Beneficial
                                                                  
                                                                  5.9%FBO,
      BFS US SpecialOpportunities
      Trust PLC.Trust
      no. W00118000Directors
      and OfficersAndrew
      Makrides
                                                                  
                                                                  Common
                                                                  
                                                                  779,213(ii)
                                                                  
                                                                  Beneficial
                                                                  
                                                                  4.6%734
      Walt Whitman RoadMelville,
      NY 11746George
      Kromer
                                                                  
                                                                  Common
                                                                  
                                                                  357,008(iii)
                                                                  
                                                                  Beneficial
                                                                  
                                                                  2.1%P.O.
      Box 188Farmingville,
      NY 11738


36
 Table of Contents




J.
      Robert Saron
                                                                  
                                                                  Common
                                                                  
                                                                  484,819(iv)
                                                                  
                                                                  Beneficial
                                                                  
                                                                  2.9%7100
      30th
      Avenue NorthSt.
      Petersburg, FL 33710Brian
      Madden
                                                                  
                                                                  Common
                                                                  
                                                                  115,500
      (vi)
                                                                  
                                                                  Beneficial
                                                                  
                                                                  0.7%300
      Garden City PlazaGarden
      City, NY 11530Mike
      Norman
                                                                  
                                                                  Common
                                                                  
                                                                  85,000(vii)
                                                                  
                                                                  Beneficial
                                                                  
                                                                  0.5%410
      Jericho Tpke.Jericho,
      NYRandy
      Rossi
                                                                  
                                                                  Common
                                                                  
                                                                  55,000(viii)
                                                                  
                                                                  Beneficial
                                                                  
                                                                  0.3%2641
      Kelliwood CircleShreveport,
      LAMoshe
      Citronowicz
                                                                  
                                                                  Common
                                                                  
                                                                  541,504
      (v)
                                                                  
                                                                  Beneficial
                                                                  
                                                                  3.2%7100
      30th
      Avenue NorthSt.
      Petersburg, FL 33710Gary
      Pickett
                                                                  
                                                                  Common
                                                                  
                                                                  25,000
      (ix)
                                                                  
                                                                  Beneficial
                                                                  
                                                                  0.2%7100
      30th
      Avenue NorthSt.
      Petersburg, FL 33710Steve
      Livneh
                                                                  
                                                                  Common
                                                                  
                                                                  300,000
      (x)
                                                                  
                                                                  Beneficial
                                                                  
                                                                  1.8%4056
      North Services Rd. E.Windsor,
      CanadaAugust
      Lentricchia
                                                                  
                                                                  Common
                                                                  
                                                                  9,100
      (xi)
                                                                  
                                                                  Beneficial
                                                                  
                                                                  0.1%734
      Walt Whitman RoadMelville,
      NY 11746Steven
      MacLaren
                                                                  
                                                                  Common
                                                                  
                                                                  12,500
      (xii)
                                                                  
                                                                  Beneficial
                                                                  
                                                                  0.1%7100
      30th
      Avenue NorthSt.
      Petersburg, FL 33710Officers
      and Directors as a group (11 Persons)
                                                                  
                                                                  
                                                                  
                                                                  2,764,644(xiii)
                                                                  
                                                                  
                                                                  
                                                                  16.3%


__________________________________________





(i) Based
on 16,795,269 outstanding shares of Common Stock and 1,867,150 outstanding
options to acquire a like number of shares of Common Stock as of December 31,
2008, of which officers and directors owned a total of 622,500 options and
2,142,144 shares at December 31, 2008.  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 704,213 shares and 75,000 ten year options owned by Mr. Makrides to
purchase shares of Common Stock of the Company. Exercise prices for his options
range from $2.13 for 25,000 shares to $3.25 for 25,000 shares.


37
 Table of Contents




(iii)
Includes 282,008 shares and 75,000 ten year options owned by Mr. Kromer to
purchase shares of the Company. Exercise prices for his options range from $2.13
for 25,000 shares to $3.25 for 25,000 shares.





(iv)
Includes 447,319 shares and 37,500 ten year options owned by Mr. Saron,
exercisable at prices ranging from $2.13 per share for 12,500 shares, and $3.25
per share for 12,500 shares.





(v)
Includes 466,504 shares and 75,000 ten year options owned by Mr. Citronowicz
exercisable at prices ranging from $2.13 for 25,000 shares to $3.25 for 25,000
shares.





(vi)
Includes 5,500 shares and 110,000 ten year options owned by Mr. Madden
exercisable at prices ranging from $3.25 for 25,000 shares to $8.66 for 12,500
shares.  Mr. Madden has no financial interest in 25,000 shares of
Bovie owned by his wife.





(vii)
Includes 85,000 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 55,000 ten year options owned by Mr. Rossi exercisable at prices
ranging from $7.33 for 10,000 shares to $8.66 for 10,000 shares.





(ix)
Includes 25,000 ten year options owned 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 7 year period.





(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 Business - 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 12,500 ten year options issued to Mr. MacLaren exercisable at prices
ranging from $7.33 for 7,500 shares to $8.66 for 5,000 shares. These options
vest over a 7 year period.





(xiii)
Includes 622,500 shares reserved for outstanding options owned by all Executive
Officers and directors as a group. The last date options can be exercised is
August 28, 2018.





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, 2008 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.





ITEM13. 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:




38
 Table of Contents




·
            Cash
      of $350,000; $150,000 of which was paid at inception and $100,000 of which
      was paid in two installments of $50,000 in October 2007 and October 2008.
      The remaining $100,000 is to be paid in $50,000 installments in October
      2009 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 vested 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.





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 until October 2011.  Because the cost
of these royalties was not determinable at the time of the purchase, they were
not included in the purchase price computations, and any amounts paid under this
arrangement will be reflected as an increase in the intangible asset in the year
the royalty payments become due.





On
October 1, 2006, Steve Livneh, a founder and principal of Lican, became an
officer of Bovie and in   December 2006 he became President of
Bovie Canada ULC, a 100% owned subsidiary of BVX Holdings LLC (which is 100%
owned by Bovie). He became a Director of Bovie in April of 2008.





A former
director, Alfred V. Greco Esq., is the principal of Alfred Greco PLLC and a
former partner of Sierchio, Greco and Greco (SG&G), the Company’s counsel
through June 2008.  At such time, SG&G was dissolved and Alfred V.
Greco PLLC has continued as the Company’s counsel.  We paid total
legal fees of  $68,400, $128,553, and $87,550 for the respective years
ended December 31, 2008, 2007 and 2006,to these firms.





Steven
MacLaren is the principal owner of Ronin Consulting Group, LLC, which provided
consulting services to the Company during 2008. Ronin Consulting Group, LLC
received consulting fees totaling approximately $72,400 since he became a
director in 2008.





Two
relatives of Bovie’s chief operating officer are employed by the Company.
Yechiel Tsitrinovich, an engineering consultant received compensation for 2008,
2007 and 2006 of $88,590, $85,926, 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 2008, 2007 and 2006 he was paid $197,272,
$166,487, and $162,562 respectively, which includes living expenses and
benefits.


39
 Table of Contents




ITEM14. Principal Accountant Fees and Services





The
following table sets forth the aggregate fees billed to us for fiscal years
ended December 31, 2008 and 2007 by our current and previous accountants
(Kingery & Crouse P.A. and Bloom & Co. LLP, respectively):





2008
                          
                          
                          2007Audit
      Fees (1)
                          
                          $
                          162,651
                          
                          
                          $
                          133,652Non-Audit
      Fees:Related
      Fees(2)
                          
                          
                          52,935
                          
                          
                          
                          --Tax
      Fees(3)
                          
                          
                          5,689
                          
                          
                          
                          4,400All
      other Fees(4)
                          
                          
                          12,882
                          
                          
                          
                          15,206Total
      Fees billed
                          
                          $
                          234,157
                          
                          
                          $
                          153,258





(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 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.








SIGNATURES





Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized, in Melville, New York on March 24,
2008.





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


40
 Table of Contents




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






Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.  <needs directors’
signatures>




41
 Table of Contents


PART
II





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, 2008 and 2007
                F-3Consolidated
      Statements of Operations for the years ended December 31, 2008, 2007 and
      2006
                F-5Consolidated
      Statements of Stockholders' Equity and Comprehensive Loss for the years
      ended December 31, 2008, 2007 and 2006
                F-6Consolidated
      Statements of Cash Flows for the years ended December 31, 2008, 2007 and
      2006
                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 consolidated balance sheets of Bovie Medical
Corporation (the “Company”), as of December 31, 2008 and 2007, and the related
consolidated statements of operations, stockholders’ equity and comprehensive
income,  and cash flows for the years then ended.  We also
have audited the Company’s internal control over financial reporting as of
December 31, 2008, based on criteria established in ”nternal Control –
Integrated Framework”  issued by the Committee of Sponsoring
Organizations of the Treadway Commission (“COSO”).  The Company’s
management is responsible for these financial statements, for maintaining
effective control over financial reporting, and for its assessment of the
effectiveness of internal control over financial reporting, included in
Management’s Annual Report on Internal Control over Financial
Reporting.  Our responsibility is to express an opinion on these
financial statements and an opinion on the Company’s internal control over
financial reporting based on our audits.





We
conducted our audits 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 audits to obtain reasonable
assurance about whether the financial statements are free of material
misstatement and whether effective internal control over financial reporting was
maintained in all material respects. Our audits of the financial statements
included examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation.  Our audit of internal control over
financial reporting included obtaining an understanding of internal control over
financial reporting, assessing the risk that a material weakness exists, and
testing and evaluating the design and operating effectiveness of internal
control based on the assessed risk.  Our audits also included
performing such other procedures as we considered necessary in the
circumstances.  We believe that our audits provide a reasonable basis
for our opinions.





A
company’s internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company’s internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company’s
assets that could have a material effect on the financial
statements.





Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. 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.





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, 2008
and 2007, and the results of its operations and its cash flows for the years
then ended, in conformity with accounting principles generally accepted in the
United States of America.  Also in our opinion, the Company
maintained, in all material respects, effective internal control over financial
reporting as of December 31, 2008, based on criteria established in “Internal
Control – Integrated Framework” issued by the Committee of Sponsoring
Organizations of the Treadway Commission (“COSO”).








Kingery
& Crouse, P.A s/s


Tampa,
FL


March
13, 2009


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 statements of operations, cash flows and
stockholders’ equity of Bovie Medical Corporation for the year 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 audit.





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





In our
opinion, the financial statements referred to above present fairly, in all
material respects, the consolidated results of operations and cash flows and
changes in stockholders’ equity of Bovie Medical Corporation for the year ended
December 31, 2006, 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, 2008 AND 2007




ASSETS
                                                                
                                                                2008
                                                                
                                                                
                                                                2007Current
      assets:Cash
      and cash equivalents
                                                                
                                                                $
                                                                2,564,443
                                                                
                                                                
                                                                $
                                                                3,534,759Trade
      accounts receivable, net
                                                                
                                                                
                                                                2,991,715
                                                                
                                                                
                                                                
                                                                2,525,451Inventories
                                                                
                                                                
                                                                5,838,464
                                                                
                                                                
                                                                
                                                                4,521,992Prepaid
      expenses
                                                                
                                                                
                                                                501,097
                                                                
                                                                
                                                                
                                                                278,262Deferred
      income tax asset, net
                                                                
                                                                
                                                                216,885
                                                                
                                                                
                                                                
                                                                848,223Total
      current assets
                                                                
                                                                
                                                                12,112,604
                                                                
                                                                
                                                                
                                                                11,708,687Property
      and equipment, net
                                                                
                                                                
                                                                7,125,943
                                                                
                                                                
                                                                
                                                                3,421,455Other
      assets:Brand
      name and trademark
                                                                
                                                                
                                                                1,509,662
                                                                
                                                                
                                                                
                                                                1,509,662Purchased
      technology, net
                                                                
                                                                
                                                                3,479,752
                                                                
                                                                
                                                                
                                                                2,102,844License
      rights, net
                                                                
                                                                
                                                                215,673
                                                                
                                                                
                                                                
                                                                278,797Restricted
      cash held in escrow
                                                                
                                                                
                                                                1,285,117
                                                                
                                                                
                                                                
                                                                -Deposits
                                                                
                                                                
                                                                50,144
                                                                
                                                                
                                                                
                                                                44,438Total
      other assets
                                                                
                                                                
                                                                6,540,348
                                                                
                                                                
                                                                
                                                                3,935,741Total
      Assets
                                                                
                                                                $
                                                                25,778,895
                                                                
                                                                
                                                                $
                                                                19,065,883The
      accompanying notes are an integral part of the consolidated financial
      statements.
 F-3
 Table of Contents


BOVIE
MEDICAL CORPORATION


CONSOLIDATED
BALANCE SHEETS


DECEMBER
31, 2008 AND 2007


(Continued)





LIABILITIES
AND STOCKHOLDERS' EQUITY





LIABILITIES
                              
                              2008
                              
                              
                              2007Current
      liabilities:Accounts
      payable
                              
                              $
                              1,317,578
                              
                              
                              $
                              807,437Deferred
      revenue
                              
                              
                              24,538
                              
                              
                              
                              56,386Accrued
      payroll
                              
                              
                              61,168
                              
                              
                              
                              113,308Accrued
      vacation
                              
                              
                              237,633
                              
                              
                              
                              229,591Customers
      deposits
                              
                              
                              168
                              
                              
                              
                              36,077Current
      portion of amounts due to Lican
                              
                              
                              50,000
                              
                              
                              
                              50,000Current
      income taxes payable
                              
                              
                              77,943
                              
                              
                              
                              -Current
      portion of mortgage note payable to bank
                              
                              
                              125,000
                              
                              
                              
                              -Accrued
      and other liabilities
                              
                              
                              422,941
                              
                              
                              
                              409,880Total
      current liabilities
                              
                              
                              2,316,969
                              
                              
                              
                              1,702,679Deferred
      income taxes payable
                              
                              
                              530,863
                              
                              
                              
                              408,188Mortgage
      note payable to bank, net of current portion
                              
                              
                              3,875,000
                              
                              
                              
                              -Due
      to Lican, net of current portion
                              
                              
                              268,150
                              
                              
                              
                              318,150Total
      liabilities
                              
                              
                              6,990,982
                              
                              
                              
                              2,429,017Commitments
      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; 16,795,269
      and 15,547,088 issued and 16,652,694 and 15,404,513 outstanding on
      December 31, 2008 and December 31, 2007 respectively,
                              
                              
                              16,796
                              
                              
                              
                              15,457Additional
      paid-in capital
                              
                              
                              22,841,545
                              
                              
                              
                              22,435,161Accumulated
      other comprehensive income (loss)
                              
                              
                              (88,464
                              )
                              
                              
                              -Deficit
                              
                              
                              (3,981,964
                              )
                              
                              
                              (5,813,752
                              )
      )Total
      stockholders' equity
                              
                              
                              18,787,913
                              
                              
                              
                              16,636,866Total
      Liabilities and Stockholders' Equity
                              
                              $
                              25,778,895
                              
                              
                              $
                              19,065,883The
      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, 2008, 2007 AND 2006





2008
                                                    
                                                    
                                                    2007
                                                    
                                                    
                                                    2006Sales,
      net
                                                    
                                                    $
                                                    28,096,510
                                                    
                                                    
                                                    $
                                                    28,779,157
                                                    
                                                    
                                                    $
                                                    26,676,182Cost
      of sales
                                                    
                                                    
                                                    16,247,702
                                                    
                                                    
                                                    
                                                    17,463,644
                                                    
                                                    
                                                    
                                                    16,075,426Gross
      Profit
                                                    
                                                    
                                                    11,848,808
                                                    
                                                    
                                                    
                                                    11,315,513
                                                    
                                                    
                                                    
                                                    10,600,756Other
      costs:Research
      and development
                                                    
                                                    
                                                    2,060,854
                                                    
                                                    
                                                    
                                                    1,643,092
                                                    
                                                    
                                                    
                                                    1,048,175Professional
      services
                                                    
                                                    
                                                    990,814
                                                    
                                                    
                                                    
                                                    737,800
                                                    
                                                    
                                                    
                                                    519,861Salaries
      and related costs
                                                    
                                                    
                                                    3,016,447
                                                    
                                                    
                                                    
                                                    2,805,082
                                                    
                                                    
                                                    
                                                    2,558,170Selling,
      general and administration
                                                    
                                                    
                                                    4,489,415
                                                    
                                                    
                                                    
                                                    4,023,033
                                                    
                                                    
                                                    
                                                    3,711,795Development
      cost - joint venture
                                                    
                                                    
                                                    --
                                                    
                                                    
                                                    
                                                    --
                                                    
                                                    
                                                    
                                                    138,913Total
      other costs
                                                    
                                                    
                                                    10,557,530
                                                    
                                                    
                                                    
                                                    9,209,007
                                                    
                                                    
                                                    
                                                    7,976,914Income
      from operations
                                                    
                                                    
                                                    1,291,278
                                                    
                                                    
                                                    
                                                    2,106,506
                                                    
                                                    
                                                    
                                                    2,623,842Other
      income (expense):Interest
      income
                                                    
                                                    
                                                    48,762
                                                    
                                                    
                                                    
                                                    142,721
                                                    
                                                    
                                                    
                                                    103,088Minority
      interest
                                                    
                                                    
                                                    --
                                                    
                                                    
                                                    
                                                    5,000
                                                    
                                                    
                                                    
                                                    20,000Interest
      expense
                                                    
                                                    
                                                    (58,463
                                                    )
                                                    
                                                    
                                                    (2,471
                                                    )
                                                    
                                                    
                                                    (16,157
                                                    )Gain
      from contract settlement
                                                    
                                                    
                                                    1,495,634
                                                    
                                                    
                                                    
                                                    --
                                                    
                                                    
                                                    
                                                    --Total
      other income,  net
                                                    
                                                    
                                                    1,485,933
                                                    
                                                    
                                                    
                                                    145,250
                                                    
                                                    
                                                    
                                                    106,931Income
      before income taxes
                                                    
                                                    
                                                    2,777,211
                                                    
                                                    
                                                    
                                                    2,251,756
                                                    
                                                    
                                                    
                                                    2,730,773Provision
      for current income taxes
                                                    
                                                    
                                                    (200,410
                                                    )
                                                    
                                                    
                                                    (60,000
                                                    )
                                                    
                                                    
                                                    (47,567
                                                    )Benefit
      (provision) for deferred income taxes
                                                    
                                                    
                                                    (745,013
                                                    )
                                                    
                                                    
                                                    53,835
                                                    
                                                    
                                                    
                                                    --Total
      provision for income taxes - net
                                                    
                                                    
                                                    (945,423
                                                    )
                                                    
                                                    
                                                    (6,165
                                                    )
                                                    
                                                    
                                                    (47,567
                                                    )Net
      income
                                                    
                                                    $
                                                    1,831,788
                                                    
                                                    
                                                    $
                                                    2,245,591
                                                    
                                                    
                                                    $
                                                    2,683,206Earnings
      per common share:Basic
                                                    
                                                    $
                                                    0.11
                                                    
                                                    
                                                    $
                                                    0.15
                                                    
                                                    
                                                    $
                                                    0.19Diluted
                                                    
                                                    $
                                                    0.11
                                                    
                                                    
                                                    $
                                                    0.13
                                                    
                                                    
                                                    $
                                                    0.16Weighted
      average number of common shares outstanding
                                                    
                                                    
                                                    16,071,229
                                                    
                                                    
                                                    
                                                    15,324,508
                                                    
                                                    
                                                    
                                                    14,537,025Weighted
      average number of common shares outstanding adjusted for dilutive
      securities
                                                    
                                                    
                                                    17,086,798
                                                    
                                                    
                                                    
                                                    17,684,705
                                                    
                                                    
                                                    
                                                    16,909,103The
      accompanying notes are an integral part of the consolidated financial
      statements.


F-5
 Table of Contents


BOVIE
MEDICAL CORPORATION


CONSOLIDATED
STATEMENTS OF STOCKHOLDERS’ EQUITY AND COMPREHENSIVE INCOME


FOR
THE YEARS ENDED DECEMBER 31, 2008, 2007 AND 2006




AccumulatedAdditional
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          OtherCommon
                                                          
                                                          
                                                          Paid-in
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          ComprehensiveShares
                                                          
                                                          
                                                          Par
      Value
                                                          
                                                          
                                                          Capital
                                                          
                                                          
                                                          Deficit
                                                          
                                                          
                                                          Loss
                                                          
                                                          
                                                          TotalJanuary
      1, 2006
                                                          
                                                          
                                                          14,040,728
                                                          
                                                          
                                                          
                                                          14,059
                                                          
                                                          
                                                          $
                                                          20,530,090
                                                          
                                                          
                                                          $
                                                          (10,742,549
                                                          )
                                                          
                                                          $
                                                          -
                                                          
                                                          
                                                          $
                                                          9,801,600Options
      exercised
                                                          
                                                          
                                                          982,810
                                                          
                                                          
                                                          
                                                          982
                                                          
                                                          
                                                          
                                                          794,944
                                                          
                                                          
                                                          
                                                          -
                                                          
                                                          
                                                          
                                                          -
                                                          
                                                          
                                                          
                                                          795,926Stock
      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 year
                                                          
                                                          
                                                          -
                                                          
                                                          
                                                          
                                                          -
                                                          
                                                          
                                                          
                                                          -
                                                          
                                                          
                                                          
                                                          2,683,206
                                                          
                                                          
                                                          
                                                          -
                                                          
                                                          
                                                          
                                                          2,683,206December
      31, 2006
                                                          
                                                          
                                                          15,223,538
                                                          
                                                          
                                                          
                                                          15,241
                                                          
                                                          
                                                          
                                                          22,104,399
                                                          
                                                          
                                                          
                                                          (8,059,343
                                                          )
                                                          
                                                          
                                                          -
                                                          
                                                          
                                                          
                                                          14,060,297Options
      exercised
                                                          
                                                          
                                                          225,300
                                                          
                                                          
                                                          
                                                          225
                                                          
                                                          
                                                          
                                                          309,925
                                                          
                                                          
                                                          
                                                          -
                                                          
                                                          
                                                          
                                                          -
                                                          
                                                          
                                                          
                                                          310,150Stock
      based compensation
                                                          
                                                          
                                                          -
                                                          
                                                          
                                                          
                                                          -
                                                          
                                                          
                                                          
                                                          72,089
                                                          
                                                          
                                                          
                                                          -
                                                          
                                                          
                                                          
                                                          -
                                                          
                                                          
                                                          
                                                          72,089Stock Tender
      to acquire options
                                                          
                                                          
                                                          (9,179
                                                          )
                                                          
                                                          
                                                          (9
                                                          )
                                                          
                                                          
                                                          (56,241
                                                          )
                                                          
                                                          
                                                          -
                                                          
                                                          
                                                          
                                                          -
                                                          
                                                          
                                                          
                                                          (56,250
                                                          )Other
                                                          
                                                          
                                                          17,429
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          4,989
                                                          
                                                          
                                                          
                                                          -
                                                          
                                                          
                                                          
                                                          -
                                                          
                                                          
                                                          
                                                          4,989Income
      for year
                                                          
                                                          
                                                          -
                                                          
                                                          
                                                          
                                                          -
                                                          
                                                          
                                                          
                                                          -
                                                          
                                                          
                                                          
                                                          2,245,591
                                                          
                                                          
                                                          
                                                          -
                                                          
                                                          
                                                          
                                                          2,245,591December
      31, 2007
                                                          
                                                          
                                                          15,457,088
                                                          
                                                          
                                                          
                                                          15,457
                                                          
                                                          
                                                          
                                                          22,435,161
                                                          
                                                          
                                                          
                                                          (5,813,752
                                                          )
                                                          
                                                          
                                                          -
                                                          
                                                          
                                                          
                                                          16,636,866Options
      exercised
                                                          
                                                          
                                                          1,488,750
                                                          
                                                          
                                                          
                                                          1,489
                                                          
                                                          
                                                          
                                                          1,195,606
                                                          
                                                          
                                                          
                                                          -
                                                          
                                                          
                                                          
                                                          -
                                                          
                                                          
                                                          
                                                          1,197,095Stock
      based compensation
                                                          
                                                          
                                                          -
                                                          
                                                          
                                                          
                                                          -
                                                          
                                                          
                                                          
                                                          184,697
                                                          
                                                          
                                                          
                                                          -
                                                          
                                                          
                                                          
                                                          -
                                                          
                                                          
                                                          
                                                          184,697Stock
      Tender to acquire options
                                                          
                                                          
                                                          (150,569
                                                          )
                                                          
                                                          
                                                          (150
                                                          )
                                                          
                                                          
                                                          (973,919
                                                          )
                                                          
                                                          
                                                          -
                                                          
                                                          
                                                          
                                                          -
                                                          
                                                          
                                                          
                                                          (974,069
                                                          )Income
      for year
                                                          
                                                          
                                                          -
                                                          
                                                          
                                                          
                                                          -
                                                          
                                                          
                                                          
                                                          -
                                                          
                                                          
                                                          
                                                          1,831,788
                                                          
                                                          
                                                          
                                                          -
                                                          
                                                          
                                                          
                                                          1,831,788Foreign
      currency remeasurement
                                                          
                                                          
                                                          -
                                                          
                                                          
                                                          
                                                          -
                                                          
                                                          
                                                          
                                                          -
                                                          
                                                          
                                                          
                                                          -
                                                          
                                                          
                                                          
                                                          (88,464
                                                          )
                                                          
                                                          
                                                          (88,464
                                                          )Comprehensive
      income
                                                          
                                                          
                                                          -
                                                          
                                                          
                                                          
                                                          -
                                                          
                                                          
                                                          
                                                          -
                                                          
                                                          
                                                          
                                                          -
                                                          
                                                          
                                                          
                                                          -
                                                          
                                                          
                                                          
                                                          1,743,324December
      31, 2008
                                                          
                                                          
                                                          16,795,269
                                                          
                                                          
                                                          $
                                                          16,796
                                                          
                                                          
                                                          $
                                                          22,841,545
                                                          
                                                          
                                                          $
                                                          (3,981,964
                                                          )
                                                          
                                                          $
                                                          (88,464
                                                          )
                                                          
                                                          $
                                                          18,787,913





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, 2008, 2007 AND 2006





2008
                                                  
                                                  
                                                  2007
                                                  
                                                  
                                                  2006Cash flows from operating
      activities:Net
      income
                                                  
                                                  $
                                                  1,831,788
                                                  
                                                  
                                                  $
                                                  2,245,591
                                                  
                                                  
                                                  $
                                                  2,683,206Adjustments
      to reconcile net income to net cash provided by operating
      activities:Depreciation
      and amortization of property and equipment
                                                  
                                                  
                                                  784,411
                                                  
                                                  
                                                  
                                                  666,162
                                                  
                                                  
                                                  
                                                  479,826Amortization
      of intangible assets
                                                  
                                                  
                                                  188,658
                                                  
                                                  
                                                  
                                                  104,664
                                                  
                                                  
                                                  
                                                  69,434Provision
      for (recovery of) inventory obsolescence
                                                  
                                                  
                                                  (29,118
                                                  )
                                                  
                                                  
                                                  (100,565
                                                  )
                                                  
                                                  
                                                  (141,370
                                                  )Loss
      on disposal of fixed assets
                                                  
                                                  
                                                  6,557
                                                  
                                                  
                                                  
                                                  10,806
                                                  
                                                  
                                                  
                                                  29,422Stock-based
      compensation
                                                  
                                                  
                                                  184,698
                                                  
                                                  
                                                  
                                                  72,089
                                                  
                                                  
                                                  
                                                  41,098Stock-based
      expense for Henvil asset purchase
                                                  
                                                  
                                                  --
                                                  
                                                  
                                                  
                                                  --
                                                  
                                                  
                                                  
                                                  20,886Noncash
      reclassification adjustment
                                                  
                                                  
                                                  10,325
                                                  
                                                  
                                                  
                                                  4,989
                                                  
                                                  
                                                  
                                                  --Provision
      (benefit) for deferred income taxes
                                                  
                                                  
                                                  754,013
                                                  
                                                  
                                                  
                                                  (53,,835
                                                  )
                                                  
                                                  
                                                  --Provision
      for (recovery of) bad debts
                                                  
                                                  
                                                  (89
                                                  )
                                                  
                                                  
                                                  3,375
                                                  
                                                  
                                                  
                                                  (7,506
                                                  )Minority
      interest in net loss of joint venture
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  (5,000
                                                  )
                                                  
                                                  
                                                  (20,000
                                                  )Gain
      on cancellation of agreement
                                                  
                                                  
                                                  (1,495,634
                                                  )
                                                  
                                                  
                                                  --
                                                  
                                                  
                                                  
                                                  --Change
      in assets and liabilities:Trade
      receivables
                                                  
                                                  
                                                  (466,175
                                                  )
                                                  
                                                  
                                                  288,731
                                                  
                                                  
                                                  
                                                  (493,290
                                                  )Prepaid
      expenses
                                                  
                                                  
                                                  (222,835
                                                  )
                                                  
                                                  
                                                  124,161
                                                  
                                                  
                                                  
                                                  (66,931
                                                  )Inventories
                                                  
                                                  
                                                  (1,287,354
                                                  )
                                                  
                                                  
                                                  (812,127
                                                  )
                                                  
                                                  
                                                  (471,099
                                                  )Deposits
                                                  
                                                  
                                                  (5,706
                                                  )
                                                  
                                                  
                                                  (23,223
                                                  )
                                                  
                                                  
                                                  --Accounts
      payable
                                                  
                                                  
                                                  510,141
                                                  
                                                  
                                                  
                                                  (108,816
                                                  )
                                                  
                                                  
                                                  118,130Accrued
      and other liabilities
                                                  
                                                  
                                                  91,004
                                                  
                                                  
                                                  
                                                  (53,789
                                                  )
                                                  
                                                  
                                                  263,895Accrued
      payroll
                                                  
                                                  
                                                  (52,140
                                                  )
                                                  
                                                  
                                                  23,401
                                                  
                                                  
                                                  
                                                  14,387Accrued
      vacation
                                                  
                                                  
                                                  8,042
                                                  
                                                  
                                                  
                                                  39,399
                                                  
                                                  
                                                  
                                                  15,498Insurance
      premium payable
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  (161,948
                                                  )
                                                  
                                                  
                                                  161,948Customer
      deposits
                                                  
                                                  
                                                  (35,909
                                                  )
                                                  
                                                  
                                                  (55,121
                                                  )
                                                  
                                                  
                                                  -Deferred
      revenue
                                                  
                                                  
                                                  (31,848
                                                  )
                                                  
                                                  
                                                  (117,600
                                                  )
                                                  
                                                  
                                                  32,400Net
      cash provided by operating activities
                                                  
                                                  
                                                  742,829
                                                  
                                                  
                                                  
                                                  2,091,344
                                                  
                                                  
                                                  
                                                  2,729,934Cash
      flows from investing activities:Purchases
      of property and equipment
                                                  
                                                  
                                                  (4,465,879
                                                  )
                                                  
                                                  
                                                  (881,401
                                                  )
                                                  
                                                  
                                                  (1,130,627
                                                  )Proceeds
      from sale of property and equipment
                                                  
                                                  
                                                  10,573
                                                  
                                                  
                                                  
                                                  --
                                                  
                                                  
                                                  
                                                  --Increase
      in purchased technology
                                                  
                                                  
                                                  (57,283
                                                  )
                                                  
                                                  
                                                  (516,356
                                                  )
                                                  
                                                  
                                                  (926,193
                                                  )Increase
      in license rights
                                                  
                                                  
                                                  --
                                                  
                                                  
                                                  
                                                  (315,620
                                                  )
                                                  
                                                  
                                                  --Net
      cash used in investing activities
                                                  
                                                  
                                                  (4,512,589
                                                  )
                                                  
                                                  
                                                  (1,713,377
                                                  )
                                                  
                                                  
                                                  (2,056,820
                                                  )Cash
      flows from financing activities:Proceeds
      from mortgage note payable to bank (net of $1,285,117 placed in
      escrow)
                                                  
                                                  
                                                  2,714,883Proceeds
      from sales of common stock
                                                  
                                                  
                                                  223,025
                                                  
                                                  
                                                  
                                                  253,900
                                                  
                                                  
                                                  
                                                  1,332,840Repayments
      of long-term debt
                                                  
                                                  
                                                  (50,000
                                                  )
                                                  
                                                  
                                                  (50,000
                                                  )
                                                  
                                                  
                                                  (348,328
                                                  )Net
      cash provided by financing activities
                                                  
                                                  
                                                  2,887,908
                                                  
                                                  
                                                  
                                                  203,900
                                                  
                                                  
                                                  
                                                  984,512Effect
      of exchange rate changes on cash and cash equivalents
                                                  
                                                  
                                                  (88,464
                                                  )
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  -Net
      change in cash and cash equivalents
                                                  
                                                  
                                                  (970,316
                                                  )
                                                  
                                                  
                                                  581,867
                                                  
                                                  
                                                  
                                                  1,657,626Cash
      and cash equivalents at beginning of year
                                                  
                                                  
                                                  3,534,759
                                                  
                                                  
                                                  
                                                  2,952,892
                                                  
                                                  
                                                  
                                                  1,295,266Cash
      and cash equivalents  at end of year
                                                  
                                                  $
                                                  2,564,443
                                                  
                                                  
                                                  $
                                                  3,534,759
                                                  
                                                  
                                                  $
                                                  2,952,892Cash
      paid for:Interest
                                                  
                                                  $
                                                  58,463
                                                  
                                                  
                                                  $
                                                  2,471
                                                  
                                                  
                                                  $
                                                  16,156Income
      taxes
                                                  
                                                  $
                                                  136,859
                                                  
                                                  
                                                  $
                                                  73,504
                                                  
                                                  
                                                  $
                                                  32,557The
      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





Consolidated
Financial Statements





The
accompanying consolidated financial statements include the accounts of Bovie and
its wholly owned subsidiaries, Aaron Medical Industries, Inc., BVX Holdings,
LLC  (which in turn owns 100% of Bovie Canada ULC) and Jump Agentur
Fur Electrotechnik GMBH (“JAG”) (collectively, the “Company” or “we”, “our” or
“us”).  The latter entity was a 50% owned joint venture until May 2007
(see Note 12).   All intercompany transactions and balances have
been eliminated in consolidation.





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,
as well as the recoverability of certain intangibles.  In addition,
stock-based compensation expense represents a significant estimate as such
expense is derived from a formula that uses various assumptions to estimate the
future but unknown value of our common stock.  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.





Upon
completion of our 2007 tax return and further analysis of our tax credits and
net operating loss carryforwards,  the Company became aware that
its  income tax provisions and related assets and liabilities were
incorrectly reported in its December 31, 2007 10-K. This issue was reviewed by
the Company pursuant to SEC Staff Accounting Bulletin No. 99 and determined to
be not material to the December 31, 2007 financial statements. Pursuant to SEC
Staff Accounting Bulletin No. 108 (“SAB 108”), the Company has revised its
December 31, 2007 consolidated audited balance sheet to reflect the corrected
amounts. Pursuant to SAB 108, correcting prior period financial statements for
immaterial errors would not require previously filed reports to be amended. The
following table reflects the adjustments to the financial statements as of and
for the year ended December 31, 2007 (all amounts in thousands):





Statement
      of operations
                      
                      Year
      Ended December 31, 2007As
      Reported
                      
                      
                      Adjustment
                      
                      
                      RevisedBenefit
      (provision) for income taxes
                      
                      $
                      149
                      
                      
                      $
                      (155
                      )
                      
                      $
                      (6
                      )Net
      income
                      
                      $
                      2,401
                      
                      
                      $
                      (155
                      )
                      
                      $
                      2,246Earnings
      per share - basic
                      
                      $
                      0.16
                      
                      
                      $
                      (
      0.1
                      )
                      
                      $
                      0.15Earnings
      per share - diluted
                      
                      $
                      0.14
                      
                      
                      $
                      (
      0.1
                      )
                      
                      $
                      0.13Balance
      sheet
                      
                      As
      of December 31, 2007As
      Reported
                      
                      
                      Adjustment
                      
                      
                      RevisedDeferred
      income tax assets
                      
                      $
                      603
                      
                      
                      $
                      245
                      
                      
                      $
                      848Total
      assets
                      
                      $
                      18,821
                      
                      
                      $
                      245
                      
                      
                      $
                      19,066Income
      tax liabilities
                      
                      $
                      8
                      
                      
                      $
                      400
                      
                      
                      $
                      408Total
      liabilities
                      
                      $
                      2,029
                      
                      
                      $
                      400
                      
                      
                      $
                      2.429Total
      liabilities and stockholders’ equity
                      
                      $
                      18,821
                      
                      
                      $
                      245
                      
                      
                      $
                      19,066




F-8
 Table of Contents




Cash
and Cash Equivalents




Holdings
of highly liquid investments with initial maturities of three months or less 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. Finally, we believe the book value of our
note payable obligation approximates its fair values as the terms of such
obligation approximates the terms at which similar types of borrowing
arrangements could be currently obtained.





Financial
instruments, which potentially subject us to significant concentrations of
credit risk, consist primarily of cash and cash equivalents, and trade accounts
receivable. With respect to cash, 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
70%, 73% and 79% of trade receivables as of December 31, 2008, 2007 and 2006,
respectively, and 76%, 71% and 73% of net


revenues
for the respective years then ended.   In 2008 and 2007, Arthrex
was our only customer that accounted for over 10% of total revenues, accounting
for 20% and 21%, 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.  We perform ongoing credit evaluations of our customers
and generally do not require collateral because we believe we have procedures in
place to limit potential for significant losses, and because of the nature of
our customer base.





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 payments are not made in accordance with such agreements and a
reserve is created for them when they become three months past due or sooner if
there are other indicators that the receivables may not be
recovered.  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
$500,225, $580,605 and $578,135 for 2008, 2007 and 2006, respectively. Sales are
reported 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.  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 $8,645 and $8,734 at December 31, 2008 and
2007, respectively, are adequate to provide for possible bad
debts.


F-9
 Table of Contents


Inventories
and Repair Parts





Inventories
are stated at the lower of average cost or market. 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 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-downs may be required.





Inventory
at December 31, 2008 and 2007 was as follows:





2008
                      
                      
                      2007Raw
      materials (net of reserves)
                      
                      $
                      3,326,378
                      
                      
                      $
                      2,447,090Work
      in process
                      
                      
                      1,621,032
                      
                      
                      
                      1,230,172Finished
      goods
                      
                      
                      891,054
                      
                      
                      
                      844,730Total
                      
                      $
                      5,838,464
                      
                      
                      $
                      4,521,992





Reserves
for obsolescence of raw materials were $371,191 and $400,309 at December 31,
2008 and 2007, respectively. There were no reserves for finished goods or work
in progress.   During 2008, 2007 and 2006, these reserves and
related cost of sales were reduced by $29,118, $100,565, and $141,370
respectively as a result of changes in estimates regarding the recoverability of
our inventories.





Property
and Equipment





These
assets are recorded at cost.  Depreciation and amortization are
provided for using the straight-line method over the estimated useful lives of
the assets. The amortization of leasehold improvements is based on the shorter
of the lease term or the life of the improvement. Betterments and large
improvements, which extend the life of the asset, are capitalized, whereas
maintenance and repairs and small improvements are expensed 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 and
trademark  .The licenses and purchased technology (other intangibles)
are being amortized by the straight-line method over a 5-17 year period
commencing with the date they were placed in service. Estimated aggregate
amortization expense for the five years ending December 31, 2013 is expected to
approximate $1,560,000.  Brand name and trademark qualifies as an
indefinite-lived intangible asset and is not subject to amortization; rather it
is reviewed for impairment on an annual basis (see Long-Lived
Assets)




Long-Lived
Assets




We review
our  long-lived assets for recoverability if events or changes in
circumstances indicate that he assets 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 an impairment loss. Any impairment losses are not
restored in the future if the fair value increases. At December 31, 2008, we
believe all of our long-lived assets are recoverable.




Restricted
Cash




At
December 31, 2008, restricted cash of $1.3 million represents the amount of
cash held in escrow related to the issuance of industrial revenue bonds. These
funds will be disbursed in 2009 upon completion of renovations to our new
facility.


F-10
 Table of Contents




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 are included in net
      sales. Shipping and handling costs included in cost of sales were
      $118,891, $124,424 and $125,927 in  2008, 2007 and 2006,
      respectively.





We have
no consignment inventory with customers but we do have inventory located at
contract manufacturers that produce components for us.  At December
31, 2008 and 2007, we had consigned work in progress of $527,906 and $331,866,
respectively.





Advertising
Costs





All
advertising costs are expensed as incurred. The amounts of advertising costs
were $397,068, $470,890, and $451,093 for 2008, 2007 and 2006,
respectively.





Net
Earnings Per Common Share





We
compute basic earnings per share by dividing net income by the weighted average
number of common shares outstanding for the reporting period.  Diluted
earnings per share gives effect to all potential dilutive shares outstanding (in
our case, 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 (see Note 6).





Income
Taxes





Bovie and
its 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, 2008 and 2007, significant temporary differences arise primarily from
allowances recorded in our financial statements for inventories 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.


F-11
 Table of Contents


Foreign
Currency Transactions





The
United States dollar is the functional currency of the Company’s operations in
the United States and in line with determining guidance outlined in FASB 52, has
also been determined to be the functional currency for the Company’s Canadian
subsidiary. FASB 52 provides for using the remeasurement method in converting
the foreign subsidiary’s financial statements into U.S.
dollars.  Monetary assets and liabilities denominated in foreign
currency are converted at the current rate, while nonmonetary assets,
liabilities, and shareholder equity accounts are converted at the appropriate
historical rate. Revenue and expenses are converted at the weighted-average
exchange rate for the period. FASB 52 requires any gain or loss as a result of
remeasurement to be included in current period income unless the investment in
the subsidiary is not expected to be recovered in the foreseeable
future.  As our investment in the Canadian subsidiary is not expected
to be recovered in the near future, we have reflected the net  gains
and  losses from the remeasurement as other accumulated
comprehensive  loss in the accompanying 2008 statements of
stockholders’ equity and comprehensive income.  The impact of remeasuring
these accounts and balances were insignificant as of December 31, 2007 and
2006.






Recent
Pronouncements





SFAS
No. 141 (revised 2007), “Business Combinations” (SFAS No. 141)





In
December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business
Combinations” (SFAS No. 141(R)), which replaces SFAS No. 141, “Business
Combinations.” SFAS No. 141(R) retains the underlying concepts of SFAS
No. 141 in that all business combinations are still required to be
accounted for at fair value under the acquisition method of accounting, but SFAS
No. 141(R) changes the method of applying the acquisition method in a
number of significant aspects. Acquisition costs will generally be expensed as
incurred; non-controlling interests will be valued at fair value at the
acquisition date; in-process research and development will be recorded at fair
value as an indefinite-lived intangible asset at the acquisition date;
restructuring costs associated with a business combination will generally be
expensed subsequent to the acquisition date; and changes in deferred tax asset
valuation allowances and income tax uncertainties after the acquisition date
generally will affect income tax expense. SFAS No. 141(R) is effective on a
prospective basis for all business combinations for which the acquisition date
is on or after the beginning of the first annual period subsequent to
December 15, 2008, with an exception related to the accounting for
valuation allowances on deferred taxes and acquired contingencies related to
acquisitions completed before the effective date. SFAS No. 141(R) amends
SFAS No. 109 to require adjustments, made after the effective date of this
statement, to valuation allowances for acquired deferred tax assets and income
tax positions to be recognized as income tax expense. The impact of our adoption
of SFAS 141R will depend upon the nature and terms of business combinations, if
any, that we consummate on or after January 1, 2009.





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” 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 was effective beginning in fiscal year
2007.  Adoption did not have a material impact on our consolidated
earnings, financial position or cash flows.


F-12
 Table of Contents


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.”





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 has to date not impacted our consolidated earnings, financial position
or cash flows because the deduction was not available to us nor do we believe it
will have a material impact on our financial position or  results of
operations in 2009.





FASB
Interpretation No. 48, "Accounting for Uncertainty in Income Taxes" (“FIN
48”)





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.





SFAS
No. 157, “Fair Value Measurements,”





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 was 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 did not have a significant
effect on our financial statements.





SFAS
No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities,
including an amendment of FASB Statement No. 115”,





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. The adoption of this statement did not have a significant
impact on  our results of operations or financial
condition.





SFAS
No. 160, Non-controlling Interests in Consolidated Financial Statements—an
amendment of ARB No. 51 (“FAS 160”)





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.


F-13
 Table of Contents


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.





FASB
Staff Position (“FSP”) FSP FAS 142-3, Determination of the Useful Life of
Intangible Assets or FSP FAS 142-3.





In April
2008, the FASB issued FSP FAS 142-3, Determination of the Useful Life of
Intangible Assets or FSP FAS 142-3. FSP FAS 142-3 amends the factors that should
be considered in developing renewal or extension assumptions used to determine
the useful life of a recognized intangible asset under SFAS No. 142, Goodwill
and Other Intangible Assets. The intent of the position is to improve the
consistency between the useful life of a recognized intangible asset under SFAS
No. 142 and the period of expected cash flows used to measure the fair value of
the intangible asset. FSP FAS 142-3 is effective for fiscal years beginning
after December 15, 2008. The Company is currently evaluating the impact that the
adoption of FSP FAS 142-3 will have, but does not believe it will be material to
the consolidated financial position or results of operations.





SFAS
No. 162 - The Hierarchy of Generally Accepted Accounting Principles





In May
2008, the FASB issued SFAS No. 162, The Hierarchy of Generally Accepted
Accounting Principles or SFAS No. 162. SFAS No. 162 identifies the sources of
accounting principles and the framework for selecting the principles used in the
preparation of financial statements of nongovernmental entities that are
presented in conformity with GAAP. This statement shall be effective 60 days
following the Securities and Exchange Commission’s approval of the Public
Company Accounting Oversight Board amendments to AU Section 411, The Meaning of
Present Fairly in Conformity With Generally Accepted Accounting Principles. The
Company does not believe that implementation of this standard will have a
material impact on its consolidated financial position, results of operations or
cash flows.





SFAS
No. 163 - Accounting for Financial Guarantee Insurance Contracts





In May
2008, the FASB issued SFAS No. 163, “Accounting for Financial Guarantee
Insurance Contracts, an interpretation of FASB Statement No. 60”.  The
scope of this Statement is limited to financial guarantee insurance (and
reinsurance) contracts, as described in FAS 163, issued by enterprises included
within the scope of FAS 60. Accordingly, SFAS 163 does not apply to financial
guarantee contracts issued by enterprises excluded from the scope of Statement
60 or to some insurance contracts that seem similar to financial guarantee
insurance contracts issued by insurance enterprises (such as mortgage guaranty
insurance or credit insurance on trade receivables). SFAS 163 also does not
apply to financial guarantee insurance contracts that are derivative instruments
included within the scope of FASB Statement No. 133, “Accounting for Derivative
Instruments and Hedging Activities.”  SFAS 163, which is effective for
fiscal years beginning after December 15, 2008, is not expected to have any
effect on our financial statements.


F-14
 Table of Contents




FASB
Staff Position (“FSP”) Accounting Principles Board (“APB”) 14-1, Accounting for
Convertible Debt Instruments That May Be Settled in Cash upon Conversion
(Including Partial Cash Settlement)





In May
2008, the FASB issued FASB Staff Position (“FSP”) Accounting Principles Board
(“APB”) 14-1, “Accounting for Convertible Debt Instruments That May Be Settled
in Cash upon Conversion (Including Partial Cash Settlement).” FSP APB 14-1
applies to convertible debt instruments that, by their stated terms, may be
settled in cash (or other assets) upon conversion, including partial cash
settlement of the conversion option. FSP APB 14-1 requires bifurcation of the
instrument into a debt component that is initially recorded at fair value and an
equity component. The difference between the fair value of the debt component
and the initial proceeds from issuance of the instrument is recorded as a
component of equity. The liability component of the debt instrument is accreted
to par using the effective yield method; accretion is reported as a component of
interest expense. The equity component is not subsequently re-valued as long as
it continues to qualify for equity treatment. FSP APB 14-1 must be applied
retrospectively to previously issued cash-settleable convertible instruments as
well as prospectively to newly issued instruments. FSP APB 14-1 is effective for
fiscal years beginning after December 15, 2008, and interim periods within
those fiscal years. Currently this has no impact on the Company.





FASB
Staff Position (“FSP”) No. EITF 03-6-1, Determining Whether Instruments Granted
in Share-Based Payment Transactions Are Participating Securities





In June
2008, the FASB issued FASB Staff Position (“FSP”) No. EITF 03-6-1, Determining
Whether Instruments Granted in Share-Based Payment Transactions Are
Participating Securities. This FASB Staff Position (FSP) addresses whether
instruments granted in share-based payment transactions are participating
securities prior to vesting and, therefore, need to be included in the earnings
allocation in computing earnings per share (EPS) under the two-class method
described in paragraphs 60 and 61 of FASB Statement No. 128, Earnings per Share. Unvested
share-based payment awards that contain non-forfeitable rights to dividends or
dividend equivalents (whether paid or unpaid) are participating securities and
shall be included in the computation of EPS pursuant to the two-class method. At
this time, the Company does not believe FSP EITF 03-6-1 will have any impact on
our earnings per share calculations.





Reclassifications





Certain
amounts in 2007 and 2006   financial statements have been
reclassified to conform to the current year presentation.





NOTE
3. TRADE ACCOUNTS RECEIVABLE





As of
December 31, 2008 and 2007, trade accounts receivable were as
follows:





2008
                      
                      
                      2007Trade
      accounts receivable
                      
                      $
                      3,000,360
                      
                      
                      $
                      2,534,185Less:
      allowance for doubtful accounts
                      
                      
                      (8,645
                      )
                      
                      
                      (8,734
                      )Trade
      accounts receivable, net
                      
                      $
                      2,991,715
                      
                      
                      $
                      2,525,451


F-15
 Table of Contents


NOTE
4. PROPERTY, PLANT AND EQUIPMENT





As of
December 31, 2008 and 2007, property, plant and equipment consisted of the
following:





2008
                        
                        
                        2007Equipment
                        
                        $
                        2,992,694
                        
                        
                        $
                        2,339,106Building
                        
                        
                        4,248,348
                        
                        
                        
                        791,618Furniture
      and fixtures
                        
                        
                        1,601,671
                        
                        
                        
                        1,461,716Leasehold
      improvements
                        
                        
                        1,035,261
                        
                        
                        
                        990,051Molds
                        
                        
                        964,813
                        
                        
                        
                        856,30810,842,787
                        
                        
                        
                        6,438,799Less:
      accumulated depreciation and amortization
                        
                        
                        (3,716,844
                        )
                        
                        
                        (3,017,344
                        )Net
      property, plant, and equipment
                        
                        $
                        7,125,943
                        
                        
                        $
                        3,421,455





NOTE
5. INTANGIBLE ASSETS





At
December 31, 2008 and 2007, intangible assets consisted of the
following:





2008
                
                
                2007Trade
      name (life indefinite)
                
                $
                1,509,662
                
                
                $
                1,509,662Purchased
      technology (9-17 year lives)
                
                $
                3,940,618
                
                
                $
                2,438,175Less
      accumulated amortization
                
                
                (460,866
                )
                
                
                (335,331
                )Net
      carrying amount
                
                $
                3,479,752
                
                
                $
                2,102,844License
      rights (5 year life)
                
                $
                315,619
                
                
                $
                315,619Less
      accumulated amortization
                
                
                (99,946
                )
                
                
                (36,822
                )Net
      carrying amount
                
                $
                215,673
                
                
                $
                278,797





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.





NOTE
6. LINE OF CREDIT AND NOTE PAYABLE TO BANK





Line
of Credit





In  2008,
we terminated our previous $1.5 million line of credit with Bank of America and
subsequently secured a new line of credit facility with RBC Bank in the amount
of $5.0 million. We used this line of credit to fund a substantial portion of
the cost of a building we purchased in September 2008 and subsequently repaid
the balance when we closed on the mortgage note payable discussed below in
November 2008.   The line of credit allows for maximum borrowings
of $5,000,000, and advances under the line bear interest at 4.39% and are
secured by a perfected first security interest in all business assets, namely
inventory, accounts receivable, equipment, and general
intangibles.   Through May 12, 2009, For the full amount of the
line is available, and subsequent to such time, available borrowings will be
based on a borrowing base utilizing a percentage of eligible receivables and
inventories.  The line of credit has no definitive maturity date;
rather it is due on demand   At December 31, 2008, no amount was
outstanding under this facility.


F-16
 Table of Contents


Mortgage
Payable





In
November 2008,  we received $4.0 million from industrial revenue bonds
issued through RBC Bank.  These bonds, which have a current fixed
interest rate of 4.6%, are repayable over a 20 year amortization period but
mature after 10 years, with a balloon payment due at that time. The $4.0 million
that was financed covered approximately $2.7 million of the $3 million purchase
price for the facility plus approximately $1.3 million worth of the renovation
costs to prepare the facility for our manufacturing needs and requirements. At
December 31, 2008 approximately $1.3 million of the $4.0 million was being held
in escrow pending completion of the renovations.  Scheduled
maturities of this indebtedness are $125,000, $135,000, $140,000, $145,000 and
$155,000 for 2009, 2010, 2011, 2012 and 2013 respectively.





NOTE
7. TAXES AND NET OPERATING LOSS CARRYFORWARDS





As of
December 31, 2008 and 2007, the components of deferred income tax assets and
liabilities, assuming statutory income tax rates of approximately 39.75%, were
as follows:


Current
      deferred income tax assets:
                    
                    2008
                    
                    
                    2007Allowance
      for doubtful accounts
                    
                    $
                    3,245
                    
                    
                    $
                    3,278Inventory
      reserves
                    
                    
                    203,030
                    
                    
                    
                    236,669Net
      operating loss carry forwards (“NOLS”)
                    
                    
                    -
                    
                    
                    
                    226,677R
      & D credit carry forwards
                    
                    
                    -
                    
                    
                    
                    371,300Charitable
      contribution carry forwards
                    
                    
                    10,610
                    
                    
                    
                    10,299Current
      deferred income tax asset – net
                    
                    $
                    216,885
                    
                    
                    $
                    848,223Non-current
      deferred income tax assets (liabilities):Accumulated
      amortization - intangibles
                    
                    $
                    (234,933
                    )
                    
                    $
                    (220,146
                    )Accumulated
      depreciation and amortization - property and equipment
                    
                    
                    (295,930
                    )
                    
                    
                    (188,042
                    )Non-current
      deferred income tax asset, liability, net
                    
                    $
                    (530,863
                    )
                    
                    $
                    (408,188
                    )





Under the
provisions of SFAS 109, net operating loss carryforwards (“NOLs”) represent
temporary differences that enter into the calculation of deferred tax assets.
Realization of deferred tax assets associated with the NOLs 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.  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.  Our remaining net operating loss
carryforwards of approximately $600,000 were fully utilized in
2008.


F-17
 Table of Contents





A
reconciliation of the Federal statutory tax rate to Bovie’s effective tax rate
is as follows for the years ended December 31, 2008, 2007 and 2006:





2008
                  
                  
                  2007
                  
                  
                  2006Tax
      at statutory rates, net of state income taxes
                  
                  
                  34
                  %
                  
                  
                  34
                  %
                  
                  
                  34.0
                  %Research
      and development credits
                  
                  
                  (5.75
                  %)State
      income taxes, net of U.S. federal benefit
                  
                  
                  5.75
                  %
                  
                  
                  5.75
                  %
                  
                  
                  5.75
                  %Tax
      benefit of loss carry forward
                  
                  
                  
                  
                  
                  
                  (39.45
                  %)
                  
                  
                  (37.75
                  %)Effective
      tax rate
                  
                  
                  34
                  %
                  
                  
                  0.3
                  %
                  
                  
                  2
                  %





NOTE
8. RETIREMENT PLAN





The
Company provides a tax-qualified profit-sharing retirement plan under section
401k of the Internal Revenue Code 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 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 2008, 2007 and 2006 approximated
$167,000, $149,000 and $107,500, 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  vested 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 fair
value of these shares will be reflected as an adjustment to the purchase price
when it becomes probable that they will be issued.




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.




·
            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.  F-18
 Table of Contents




·
            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 determinable, they were not been included in the
purchase price computations, and any amounts paid under this arrangement will be
reflected as an increase in the intangible asset in the year the royalty
payments become due.





Compensation
of Non-Employee Directors





During
the year ended December 31, 2008, we granted 42,500 options having a fair value
of approximately $114,000 to our independent directors as consideration for
their service on our Board of Directors.





Professional
Services





A former
director, Alfred V. Greco Esq., is the principal of Alfred Greco PLLC, a former
partner of Sierchio, Greco and Greco, the Company’s former counsel, received
$68,400, $128,553, and $87,550 in legal fees for the years 2008, 2007 and 2006,
respectively.  In June 2008, Sierchio, Greco and Greco (SG&G)
dissolved and Alfred V. Greco PLLC has continued as the Company’s
counsel.





A newly
elected director, Steven MacLaren, is the principal owner of Ronin Consulting
Group, LLC, which provided consulting services to the Company during 2008. Ronin
Consulting Group, LLC received consulting fees of approximately $72,400 since he
became a related party in 2008.





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), 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 (under a month to month arrangement requiring
monthly payments of approximately $1,500).  The following is a
schedule of approximate future minimum lease payments under operating leases as
of December 31, 2008 and assuming the renewal of all month to month
leases:





2009
                
                $
                282,0002010
                
                
                278,1002011
                
                
                251,9002012
                
                
                246,8002013
                
                
                223,100Thereafter
                
                
                11,000Total
                
                $
                1,292,900





Rent
expense for the years ended December 31, 2008, 2007 and 2006 approximated
$280,300, $283,100 and $235,400, respectively.


F-19
 Table of Contents


Purchase
Commitments





At  December
31, 2008, we had non-cancelable purchase commitments for inventories totaling
approximately $5.7 million, substantially all of which is expected to be paid by
mid 2009.





Employment
Agreements





At
December 31, 2008, the  Company is obligated under employment
agreements with five employees which have expiration dates between October 2009
and January 2011. Approximate future minimum payments under these agreements are
as follows as of December 31, 2008:





2009
              
              $
              1,038,2002010
              
              
              813,6002011
              
              
              63,600Total
              
              $
              1,915,400





In January 2009,
three of these agreements requiring annual base compensation of approximately
$725,000 were automatically extended through January 2012.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, 2010 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 2009 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 Product. 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 $3.26 per
share (the closing price of Bovie common stock on the date of execution of the
agreement).  The options vested upon FDA clearance for marketing the
product.





Litigation





In 2008,
a civil action was instituted by Erbe USA, Inc. (“Erbe”) in the US District
Court for the Northern District of Georgia, Atlanta Division, against Bovie and
a recently hired employee, seeking equitable relief and unspecified
damages.  The complaint essentially alleges that the newly hired
employee, among other things, breached his employment agreement with Erbe by
wrongfully taking Erbe’s confidential information and trade secrets for use in
his new employment, with the assistance of Bovie.  Bovie denies the
allegations and pursuant to a Consent and Protective Order, the action has been
stayed pending mutual discovery by the parties.  It is too early in
the proceeding to determine the extent, if any, of Bovie’s possible exposure in
the lawsuit.  As such, no effect has been given in the accompanying
consolidated financial statements  to any loss that may result from
the resolution of this matter.


F-20
 Table of Contents




We may
also become involved in certain other litigation from time to time in the
ordinary course of business.





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
incurred prior to termination. The customer must fulfill its agreement if Bovie
delivers its working prototypes on a timely basis.





The
following is research and development revenue and costs related to OEM contracts
for 2008, 2007 and 2006:





Contracted
Development Payments Received:


2008
                
                
                2007
                
                
                2006Revenues
      included in sales revenue
                
                $
                -
                
                
                $
                126,098
                
                
                $
                463,926Cost
      of OEM research  and development contracts included in costs of
      sales
                
                $
                -
                
                
                $
                45,860
                
                
                $
                452,585





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”.





NOTE
13 – GAIN FROM CONTRACT SETTLEMENT





On April
29, 2008 we signed an agreement with Boston Scientific Corporation to acquire
technology, patents, and assets related to the use of conductive sintered steel
as an electrode for radio frequency cutting and coagulation, intended to lower
blood loss, quicken procedure times and provide cost savings for hospitals. The
original development and manufacturing agreement signed in 2007 required us to
develop and manufacture certain products using Boston Scientifics’ intellectual
property, with which we complied. Boston Scientific terminated the original
agreement and through the contract settlement negotiations we acquired the
rights to the intellectual property and equipment in consideration for releasing
Boston Scientific from any further obligations as outlined in the original
development and manufacturing agreement. A new agreement was signed in place of
the previous distribution and marketing agreement between the companies for the
technology’s use in Boston Scientifics’ oncology business. As part of this new
agreement, we granted a limited license to Boston Scientific until 2016 for uses
outside of our intended fields listed above. In accordance with Accounting
Principles Board Statement No. 29 “Accounting for Nonmonetary Transactions” as
amended by SAS No. 153 “Exchanges of Nonmonetary Assets”,
and accordingly we recorded a gain from contract settlement
of  approximately $1,495,000 based on the fair values of the assets we
received  (i.e.  intellectual property and molds of
approximately  $1,455,000 and $40,000,
respectively)  .


F-21
 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 remained otherwise unchanged.
In 2001, the Board of Directors adopted the 2001 Executive and Employee Stock
Option Plan which reserved for issuance 1,200,000 stock options. Stock options
typically have a ten year life and currently vest over a seven year
period.





As of
December 31, 2008, there was approximately $623,000 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, 2006
                          
                          
                          3,278,700
                          
                          
                          $
                          1.52Granted
                          
                          
                          137,500
                          
                          
                          $
                          8.27Exercised
                          
                          
                          (225,300
                          )
                          
                          $
                          1.38Canceled
                          
                          
                          (42,500
                          )
                          
                          $
                          1.01Outstanding
      at December 31, 2007
                          
                          
                          3,148,400
                          
                          
                          $
                          1.83Granted
                          
                          
                          207,500
                          
                          
                          $
                          7.29Exercised
                          
                          
                          (1,488,750
                          )
                          
                          $
                          0.81Canceled
                          
                          
                          -
                          
                          
                          
                          -Outstanding
      at December 31, 2008
                          
                          
                          1,867,150
                          
                          
                          $
                          3.25Exercisable
      at December 31, 2008
                          
                          
                          1,572,793
                          
                          
                          $
                          2.18


F-22
 Table of Contents




The
following table summarizes information about our options outstanding at December
31, 2008:





Exercise
      Prices
                                                      
                                                      
                                                      Number
                                                        Outstanding
                                                      
                                                      Weighted
      AverageRemaining
      Contractual
                                                        Life
      (in years)
                                                      
                                                      Exercise
      Prices
                                                      
                                                      
                                                      Options
      Exercisable
                                                      
                                                      
                                                      Exercise
      Prices0.50
                                                      
                                                      
                                                      
                                                      190,700
                                                      
                                                      3
      years
                                                      
                                                      
                                                      .50
                                                      
                                                      
                                                      
                                                      190,700
                                                      
                                                      
                                                      
                                                      .500.70
                                                      
                                                      
                                                      
                                                      88,000
                                                      
                                                      5
      years
                                                      
                                                      
                                                      .70
                                                      
                                                      
                                                      
                                                      88,000
                                                      
                                                      
                                                      
                                                      .700.75
                                                      
                                                      
                                                      
                                                      71,500
                                                      
                                                      3 –
      5 years
                                                      
                                                      
                                                      .75
                                                      
                                                      
                                                      
                                                      71,500
                                                      
                                                      
                                                      
                                                      .751.30
                                                      
                                                      
                                                      
                                                      35,000
                                                      
                                                      5
      years
                                                      
                                                      
                                                      1.30
                                                      
                                                      
                                                      
                                                      35,000
                                                      
                                                      
                                                      
                                                      1.302.13
                                                      
                                                      
                                                      
                                                      175,000
                                                      
                                                      6
      years
                                                      
                                                      
                                                      2.13
                                                      
                                                      
                                                      
                                                      175,000
                                                      
                                                      
                                                      
                                                      2.132.25
                                                      
                                                      
                                                      
                                                      360,000
                                                      
                                                      7
      years
                                                      
                                                      
                                                      2.25
                                                      
                                                      
                                                      
                                                      353,000
                                                      
                                                      
                                                      
                                                      2.252.41
                                                      
                                                      
                                                      
                                                      40,000
                                                      
                                                      6
      years
                                                      
                                                      
                                                      2.41
                                                      
                                                      
                                                      
                                                      40,000
                                                      
                                                      
                                                      
                                                      2.412.93
                                                      
                                                      
                                                      
                                                      35,000
                                                      
                                                      7
      years
                                                      
                                                      
                                                      2.93
                                                      
                                                      
                                                      
                                                      35,000
                                                      
                                                      
                                                      
                                                      2.932.95
                                                      
                                                      
                                                      
                                                      27,500
                                                      
                                                      6
      years
                                                      
                                                      
                                                      2.95
                                                      
                                                      
                                                      
                                                      27,500
                                                      
                                                      
                                                      
                                                      2.953.25
                                                      
                                                      
                                                      
                                                      379,450
                                                      
                                                      5
      years
                                                      
                                                      
                                                      3.25
                                                      
                                                      
                                                      
                                                      379,450
                                                      
                                                      
                                                      
                                                      3.253.26
                                                      
                                                      
                                                      
                                                      100,000
                                                      
                                                      7
      years
                                                      
                                                      
                                                      3.26
                                                      
                                                      
                                                      
                                                      100,000
                                                      
                                                      
                                                      
                                                      3.266.93
                                                      
                                                      
                                                      
                                                      20,000
                                                      
                                                      8
      years
                                                      
                                                      
                                                      6.93
                                                      
                                                      
                                                      
                                                      8,000
                                                      
                                                      
                                                      
                                                      6.937.10
                                                      
                                                      
                                                      
                                                      30,000
                                                      
                                                      9
      years
                                                      
                                                      
                                                      7.10
                                                      
                                                      
                                                      
                                                      4,286
                                                      
                                                      
                                                      
                                                      7.107.18
                                                      
                                                      
                                                      
                                                      50,000
                                                      
                                                      10
      years
                                                      
                                                      
                                                      7.18
                                                      
                                                      
                                                      
                                                      50,000
                                                      
                                                      
                                                      
                                                      7.187.33
                                                      
                                                      
                                                      
                                                      157,500
                                                      
                                                      10
      years
                                                      
                                                      
                                                      7.33
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      7.337.68
                                                      
                                                      
                                                      
                                                      7,500
                                                      
                                                      9
      years
                                                      
                                                      
                                                      7.68
                                                      
                                                      
                                                      
                                                      1,071
                                                      
                                                      
                                                      
                                                      7.688.66
                                                      
                                                      
                                                      
                                                      100,000
                                                      
                                                      9
      years
                                                      
                                                      
                                                      8.66
                                                      
                                                      
                                                      
                                                      14,286
                                                      
                                                      
                                                      
                                                      8.661,867,150
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      1,572,793





The
number and weighted average grant-date fair values of options non-vested at the
beginning and end of 2008, as well as options granted, vested and forfeited
during the year was as follows:





NumberOf
                      Options
                    
                    
                    Weighted
      Average
                      Exercise
      PricesNonvested
      at January 1, 2008
                    
                    
                    190,500
                    
                    
                    
                    2.86Granted
      in 2008
                    
                    
                    207,500
                    
                    
                    
                    7.29Vested
      in 2008
                    
                    
                    (103,643
                    )
                    
                    
                    6.04Forfeited
      in 2008
                    
                    
                    -
                    
                    
                    
                    -Nonvested
      at December 31, 2008
                    
                    
                    294,357
                    
                    
                    
                    7.57





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




The grant
date fair value of options granted during the year ended December 31, 2008 were
estimated on the grant date using a binomial lattice option-pricing model with
the following assumptions: expected volatility of 30%, expected term of 7 years,
risk-free interest rate of 2.7%, and expected dividend yield of 0%.




F-23
 Table of Contents




The grant
date fair value of options granted during the years ended December 31, 2007 and
2006 were estimated on the grant date using a 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 the options. The Company uses historical data to
estimate pre-vesting forfeiture rates.




Allocation
of stock based compensation expense for the fiscal years ended December 31,
2008, 2007 and 2006 was as follows:





2008
                
                
                2007
                
                
                2006Cost
      of sales
                
                $
                16,294
                
                
                $
                36,185
                
                
                $
                3,408Research
      and development
                
                
                115,344
                
                
                
                10,072
                
                
                
                25,125Salaries
      and related costs
                
                
                53,060
                
                
                
                25,832
                
                
                
                12,564Total
                
                $
                184,698
                
                
                $
                72,089
                
                
                $
                41,097





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. Because 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, 2008, 2007, and 2006.





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





Bovie
      Medical Corp
                                                                      
                                                                      
                                                                      Bovie
      Canada
                                                                      
                                                                      
                                                                      Bovie
      Medical Corp
                                                                      
                                                                      
                                                                      Bovie
      Canada
                                                                      
                                                                      
                                                                      Bovie
      Medical Corp
                                                                      
                                                                      
                                                                      Bovie
      Canada2008
                                                                      
                                                                      
                                                                      2008
                                                                      
                                                                      
                                                                      2007
                                                                      
                                                                      
                                                                      2007
                                                                      
                                                                      
                                                                      2006
                                                                      
                                                                      
                                                                      2006
      (1)Sales,
      net
                                                                      
                                                                      $
                                                                      27,441
                                                                      
                                                                      
                                                                      $
                                                                      656
                                                                      
                                                                      
                                                                      $
                                                                      28,432
                                                                      
                                                                      
                                                                      $
                                                                      347
                                                                      
                                                                      
                                                                      $
                                                                      26,571
                                                                      
                                                                      
                                                                      $
                                                                      105Gross
      profit
                                                                      
                                                                      
                                                                      11,781
                                                                      
                                                                      
                                                                      
                                                                      (68
                                                                      )
                                                                      
                                                                      
                                                                      11,569
                                                                      
                                                                      
                                                                      
                                                                      (253
                                                                      )
                                                                      
                                                                      
                                                                      10,607
                                                                      
                                                                      
                                                                      
                                                                      (6
                                                                      )Operating
      expenses
                                                                      
                                                                      
                                                                      9,555
                                                                      
                                                                      
                                                                      
                                                                      1,003
                                                                      
                                                                      
                                                                      
                                                                      8,716
                                                                      
                                                                      
                                                                      
                                                                      488
                                                                      
                                                                      
                                                                      
                                                                      7,925
                                                                      
                                                                      
                                                                      
                                                                      52Net
      income (loss)
                                                                      
                                                                      $
                                                                      2,767
                                                                      
                                                                      
                                                                      $
                                                                      (935
                                                                      )
                                                                      
                                                                      $
                                                                      3,141
                                                                      
                                                                      
                                                                      $
                                                                      (741
                                                                      )
                                                                      
                                                                      $
                                                                      2,741
                                                                      
                                                                      
                                                                      $
                                                                      (58
                                                                      )





(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, 2008, 2007 and 2006. 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.


F-24
 Table of Contents




First
                
                
                Second
                
                
                Third
                
                
                FourthYear
      ended December 31, 2008
                
                Quarter
                
                
                Quarter
                
                
                Quarter
                
                
                QuarterTotal
      revenue
                
                $
                6,678
                
                
                $
                6,985
                
                
                $
                7,296
                
                
                $
                7,138Gross
      profit
                
                
                2,586
                
                
                
                2,900
                
                
                
                3,233
                
                
                
                3,126Net
      income
                
                
                190
                
                
                
                1,205
                
                
                
                366
                
                
                
                71Diluted
      earnings per share (1)
                
                
                .01
                
                
                
                .08
                
                
                
                .02
                
                
                
                .00Year
      ended December 31, 2007Total
      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
                
                
                
                .02





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


F-25
 Table of Contents


EXHIBITINDEX





Exhibit 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.