U.S.
SECURITIES AND EXCHANGE COMMISSION
 Washington,
D.C. 20549
 
 **FORM
10-KSB/A**
 **(Mark
One)**
 
 **[X]
ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE**
 **SECURITIES
EXCHANGE ACT OF 1934**
 
 For the
fiscal year ended December 31, 2004
 Commission
file number 0-12183
 
 **BOVIE
MEDICAL CORPORATION**
  (Exact
name of small business issuer as specified in its charter)
 
 Delaware
      No.
    
    11-2644611(State
      or other jurisdiction
    
    (IRS
      Employer Identification No.)of
      incorporation or organization)
 
 **734
Walt Whitman Rd., Melville, New York 11747**
 (Address
of principal executive offices)
 
 **(631)
421-5452**
 (Issuer's
telephone number)
 
 **Securities
registered under Section 12(b) of the Exchange Act**
 Common
Stock, $.001 Par Value
 (Title of
class)
 
 **Securities
registered under Section 12(g) of the Exchange Act**
 None
 
 Indicate
by check mark whether the registrant (I) filed all reports required to be filed
by Section 13 or 15(d) of the Exchange Act of 1934 during the past 12 months (or
for such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days. Yes
[X] No[ ]
 
 Check if
there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant’s knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
any amendment to this Form 10-KSB. [ ]
 
 Issuer’s
revenues for its most recent fiscal year were $20,495,101.
 
 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 15, 2005 was approximately
$26,528,577.
 
 The
number of shares of the registrant's $.01 par value common stock
outstanding as of March 15 was 13,897,858.
 
 Company
Symbol-BVX Company SIC (Standard Industrial Code)-3841
 ****
 **Bovie
Medical Corporation**
 **2004
Form 10-KSB Annual Report**
 
 **Table
of Contents**
 
 Part I
    
    PageItem 1
    Description of BusinessItem 2
    Description of PropertyItem 3
    Legal ProceedingsItem 4.
    Submission of Matters to a Vote of Security
      HoldersPart IIItem 5.
    Markets for Common Equity and Related Stockholders
      MatterItem 6
    Management's Discussion and AnalysisItem 7
    Financial Statements (See Financial
    Section)Item 8
    Changes in and Disagreements with Accountants on Accounting
      and Financial Disclosure.Item 8A
    Controls and ProceduresItem 8B
    Other InformationPart IIIItem 9
    Directors, Executive Officers, Promoters and Control
      PersonsItem 10
    Executive CompensationItem 11
    Security Ownership of Certain Beneficial Owners and
      Management and Related Stockholders MattersItem 12.
    Certain
      Relationships and Related TransactionsItem 13
    ExhibitsItem 14
    Principal
      Accountant Fees and Services
 
 **BOVIE
MEDICAL CORPORATION**
  **Part I**
 
 **Item 1. Description of Business.**
 
 **Background**
 
 Bovie
Medical Corporation (“the Company” or “Bovie”) was incorporated in 1982, under
the laws of the State of Delaware and has its principal executive office at 734
Walt Whitman Road, Melville, New York 11747.
 
 Bovie is
actively engaged in the business of manufacturing and marketing medical products
and developing related technologies. Aaron Medical Industries, Inc. (“Aaron”), a
100% owned subsidiary based in St. Petersburg, Florida is engaged in marketing
our medical products. Over the past several years, we changed our focus to the
manufacture and marketing of generators and electrosurgical disposables,
evidenced by the development of a broad range of electrosurgical generators
designed for doctor’s offices, surgicenters and hospitals.
 
 We
manufacture and market products both under private label and the Bovie/Aaron
label to distributors worldwide. Additionally, Bovie/Aaron has original
equipment manufacturing (OEM) agreements with other medical device
manufacturers. These OEM and private label arrangements and our use of the
Bovie/Aaron label allow us to gain greater market share for the distribution of
our products.
 
 **Company
Products**
 
 **Electrosurgery
Products**
 
 We
continue to expand our line of electrosurgery products, which include,
generators, electrodes, electrosurgery pencils, and various ancillary disposable
products. These products are used in surgery for the cutting and coagulation of
tissue and constitute our largest product line. Our accessories for
electrosurgery products are substantially compatible with most major
manufacturers’ electrosurgery generator products. With the exception of OEM
products, all of our electrosurgery generators and accessories are marketed
using the internationally recognized Bovie trademark. It is estimated that 80%
of all surgical procedures performed worldwide are accomplished by
electrosurgery, including laparoscopic, as well as general surgery and surgical
procedures in gynecology, urology, plastic surgery and dermatology.
 
 **Bovie/Aaron
800 and 900 High Frequency Generators**
 
 These
products are low powered generators, designed primarily for dermatology and
plastic surgery in a physician’s office. The units are 30-watt high frequency
generators used mainly in doctors’ offices for removing small skin lesions and
growths.
 
 **Bovie/Aaron
950**
 
 Bovie has
developed the first high frequency generator with cut capacity for outpatient
surgical procedures. It was designed mainly for use in doctors’ offices and is
utilized in a variety of specialties including dermatology, gynecology, and
plastic surgery.
 
 **Bovie/Aaron
1250**
 
 We have
also developed a 120-watt multipurpose electrosurgery generator. The unit
features monopolar and bipolar functions with pad sensing. The product is being
produced in at least two private label formats in addition to the Bovie/Aaron
label.
 
 **Bovie/Aaron
2250/IDS 300**
 
 Given the
market interest in more powerful electrosurgical generators, we have developed a
200-watt multipurpose digital electrosurgery generator designed for the rapidly
expanding surgi-center market in the United States. This unit features both
monopolar and bipolar functions, has pad and tissue sensing, plus nine blended
cutting settings. This unit has the capability to do most procedures performed
today in the surgi-center or outpatient settings and was introduced in 2003. The
Bovie® IDS Series are the latest electrosurgical generators with fully digital
implementation. Bovie is using dedicated digital hardware instead of a general
purpose controller for processing data. The digital hardware allows very high
parallel data processing throughout the operation. All data is sampled and
processed digitally. While 200 watts is more than enough power to do most
procedures in the operating room, 300 watts is considered the standard and
believed to be what most hospitals and surgi-centers will require. The Bovie
IDS-300 has been designed based on a digital feedback system. The unit has a
tissue sensing capability 20 times faster than the market leader. For the first
time in electrosurgery, through digital technology, we are able to measure
tissue impedance in real time (5000 times a second). As the impedance varies,
the power is adjusted to deliver a consistent clinical effect.
 
 **Battery
Operated Cauteries**
 
 Battery
operated cauteries constitute our second largest product line. Cauteries were
originally designed for precise hemostasis (to stop bleeding) in ophthalmology.
The current use of cauteries has been substantially expanded to include
sculpting woven grafts in bypass surgery, vasectomies, evacuation of subungual
hematoma (smashed fingernail) and for arresting bleeding in many types of
surgery. Battery operated cauteries are primarily sterile one-time use products.
Bovie manufactures the broadest line of cauteries in the world, including but
not limited to, a line of replaceable battery and tip cauteries, which are
popular in overseas markets.
 
 **Battery
Operated Medical Lights**
 
 We
manufacture a variety of specialty lighting instruments for use in ophthalmology
as well as patented specialty lighting instruments for general surgery, hip
replacement surgery and for the placement of endotracheal tubes in emergency and
surgical procedures. We also manufacture and market physicians office use
penlights.
 
 **Nerve
Locator Stimulator**
 
 Bovie
manufactures a nerve locator stimulator primarily used for identifying motor
nerves in hand and facial reconstructive surgery. This instrument is a
self-contained, battery-operated unit, used for single surgical
procedures.
 
 **New
Products**
 
 **Low
Temperature Focused Plasma Technology (in development)**
 
 In
February 2000, we entered into a Joint Venture Agreement with a non-affiliated
German corporation, Jump Agentur Fur Elektrotechnik GMBH, wherein we have a 50%
interest in the equity and a 50% interest in the profits of the joint venture.
Pursuant to the agreement, Bovie initially advanced $200,000 to the partnership
to cover costs of further research toward the production of two commercial
prototypes. Bovie has made available its facilities in Florida for development,
manufacturing and marketing of the products of the joint venture and is
responsible to expend its best efforts to secure all necessary financing for the
research, development and marketing of the products estimated to be an amount up
to $1.5 millions. To date we have expended approximately $.5 million for the
development of the technology. Based upon our current cash position, cash flows
and credit facility we believe we have the financial resources to satisfy our
obligations.
 
 Pursuant
to agreement, the joint venture acquired an exclusive license to produce and
market any surgical/medical devices utilizing this technology. In fiscal 2004
and 2003, Bovie made additional advances to the joint venture in the form of
research and development of prototypes expending $39,286 and $81,914 in
development and engineering costs, respectively.
 
 This
technology utilizes a gas ionization process using only one working electrode.
The device produces a stable thin focused beam of ionized gas that can be
controlled in a wide range of temperatures and intensities, providing the
surgeon with precision, minimal invasiveness and an absence of conductive
currents during surgery.
 
 The
device has been developed and patented in both Europe and the United States.
Bovie has constructed its first two pre-production prototypes for field-testing
purposes as a prelude to eventual FDA submission and clearance for
manufacturing. The initial intended uses are in the areas of dermatology,
plastic surgery, cosmetology and gastroenterology.
 
 To date
there have been no revenues recorded by the joint venture.
 
 **GI
Device (in development)**
 
 This new
electrosurgical generator has been designed as a specialty electrosurgical niche
product for the gastroenterological market. The device’s styling adds a new
dimension to Bovie’s continued expansive array of generators. Additionally, the
product is expected to be the basis for other new electrosurgical generator
introductions.
 
 **Suture
Removal Device (in development)**
 
 In
October, 2003 we entered into an exclusive worldwide license agreement with
Emergency Medical Innovations, LLC., **** (EMI) a
non-affiliated company, to manufacture and market a disposable suture removal
device (patent pending). The device is expected to reduce time for removing
stitches in a doctor’s office, medical clinic or emergency room. The device is
designed to remove sutures with a tension free cut to be utilized in various
medical procedures on humans and animals. We are presently developing
pre-production prototypes and subject to FDA clearance for marketing, we have
now targeted the last quarter of 2005 for release and marketing to medical
professionals. We expended development funds of approximately $50,000 in 2004
and when the product begins selling we will pay a 5% royalty to
EMI.
 
 **Manufacturing,
Marketing and Distribution**
 
 Bovie
manufactures the majority of its products on its premises in St. Petersburg,
Florida. Labor-intensive sub-assemblies and labor-intensive products may be
out-sourced to our specification. Although we sell through distributors, we
market our products through national trade journal advertising, direct mail,
distributor sales representatives and trade shows, under the Bovie name, the
Bovie/Aaron name and private label. Major distributors include Allegiance (a
Cardinal Company), IMCO, McKesson Medical Surgical, Inc., NDC (Abco, Cida and
Starline), Owens & Minor, and Physician Sales & Service.
 
 We have a
major OEM customer, Arthrex, Inc., for which we manufacture products on a
private label basis, pursuant to agreement. The agreement provides, among other
things, that we will be reimbursed for our expenses in developing products
according to Arthrex’s specifications. Arthrex owns the technology and we may
not generally compete with the product developed in Arthrex markets. The
agreement further provides that Arthrex is not obliged to place any orders for
the product developed, but if it does seek to place orders, it must place them
with us. The agreement also generally provides for product warranties,
insurance, termination, and confidentiality. In fiscal 2004, Arthrex orders
represented approximately 29% of revenues for us. As such, should Arthrex
determine to reduce or cease placement of orders for the products, our business
will be adversely affected.
  **Competition**
 
 The
medical device industry is highly competitive. Many competitors in this industry
are well established, do a substantially greater amount of business, and have
greater financial resources and facilities than we do.
 
 We
believe we rank third in the field of electrosurgical generator manufacturing
and we sell our products and compete with other manufacturers in various ways.
In addition to advertising, attending trade shows and supporting our
distribution channels, we strive to enhance product quality, improve user
friendliness and expand product exposure.
 
 We also
compete by private labeling our products for major distributors under their
label. This allows us to have our product in the marketplace and thereby compete
from two different approaches, our Aaron or Bovie label, and our customers
private label. Our private label customers distribute our products under their
name through their internal sales force. Our main competitors do not private
label their products
 
 Lastly,
we only sell our product through distributors. Since we never sell direct to the
end user we are participating with our distribution partners, and never
competing with them. Many of the companies we compete with sell direct, thus
competing directly with distributors they sometimes use.
 
 Main
competitors are Conmed, Valleylab (a division of Tyco), in the electrosurgery
market and Xomed (a division of Medtronics) in the battery operated cautery
market.
 
 **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
      tractability, 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.
 
 **Manufacturing**
 
 Manufacturing
and distribution of our products may be subject to continuing regulation by the
FDA. We will also be subject to routine inspections by the FDA to determine
compliance with the following:
 
 ·
    Quality
      System Regulations.·
    Medical
      device reporting regulations, and
 
 ·
    FDA
      restrictions on promoting products for unapproved or off-label uses.
 
 In
addition to regulations enforced by the FDA, we are also subject to regulations
under the Occupational Safety and Health Act, the Environmental Protection Act
and other federal, state and local regulations.
 
 **International**
 
 To market
products in the European Union and countries other than the United States, we
must obtain regulatory approval similar to that required by the FDA. All of our
medical devices are classified as Class III devices under the European Medical
Devices directive. Therefore, we were required to obtain a “CE Mark”
certification from a “Notified Body” in one of the member countries in the
European Union. CE Mark certification is an international symbol of adherence to
quality assurance standards and compliance with the applicable European Medical
Devices Directive.
 
 Approval
by a Notified Body typically includes a detailed review of the following:
 
 ·
    Description
      of the device and its components,·
    Safety
      and performance of the device,
 
 ·
    Clinical
      evaluations with respect to the device,·
    Methods,
      facilities and quality controls used to manufacture the device, and
 
 ·
    Proposed
      labeling for the device.
 
 Manufacturing
and distribution of a device is subject to continued inspection and regulation
by the Notified Body after CE Mark certification to ensure compliance with
quality control and reporting requirements.
 
 Pre-market
notification clearance must be obtained for some Class I and most Class II
devices when the FDA does not require pre-market approval. A pre-market approval
application is required for most Class III devices. A pre-market approval
application must be supported by valid scientific evidence to demonstrate the
safety and effectiveness of the device. The pre-market approval application
typically includes:
 
 ·
    Results
      of bench and laboratory tests, animal studies, and clinical studies,·
    A
      complete description of the device and its components,
 
 ·
    A
      detailed description of the methods, facilities and controls used to
      manufacture the device, and·
    Proposed
      labeling.
 
 The
approval process can be expensive, uncertain and lengthy. A number of devices
for which FDA approval has been sought by other companies have never been
approved for marketing. To date we have not experienced non-approval of any of
our devices heretofore submitted to the FDA.
 
 We
obtained CE Mark certification to market our products in the European Union in
1999. In addition to CE Mark certification, each member country of the European
Union maintains the right to impose additional regulatory requirements.
 
 Outside
of the European Union, regulations vary significantly from country to country.
The time required to obtain approval to market products may be longer or shorter
than that required in the United States or the European Union. Certain European
countries outside of the European Union do recognize and give effect to the CE
Mark certification. We are permitted to market and sell our products in those
countries.
 
 **Patents
and Trademarks**
 
 We own a
total of twelve outstanding patents We do not believe our current patents have a
material effect on our operations. Although the useful lives of our existing
patents have substantially diminished, we can give no assurance that competitors
will not infringe on our patent rights or otherwise create similar or
non-infringing competing products that are technically patentable in their own
right.
  **Liability
Insurance**
 
 The
manufacture and sale of medical products entail significant risk of product
liability claims. Bovie currently maintains product liability insurance with
combined coverage limits of $5 million on a claim made basis. There is no
assurance that this coverage will be adequate to protect us from any liabilities
we might incur in connection with the sale or testing of our products. In
addition, we may need increased product liability coverage as products are
commercialized. This insurance is expensive and in the future may not be
available on acceptable terms, if at all.
 
 **Research
and Development**
 
 The
amount expended by us on research and development of its products during the
years 2004 and 2003, totaled $907,389 and $717,347 respectively. We have not
incurred any direct costs relating to environmental regulations or requirements.
 
 **Employees**
 
 Presently
Bovie has a total of approximately 134 employees. These consist of 5 executives,
10 administrative, 6 sales, and 113 technical support and factory employees.
 
 **Significant
Subsidiary - Aaron Medical Industries, Inc.**
 
 Aaron
Medical Industries, Inc., is a Florida Corporation with offices in St.
Petersburg, Florida. It is principally engaged in the business of marketing our
medical products.
 
 **Item
2. Properties****.**
 
 Bovie has
executive office space at 734 Walt Whitman Road, Melville, New York and its St.
Petersburg, Florida manufacturing facility located at 7100 30 th Ave N.
Bovie leases the executive offices in New York for $1,450 per month through the
year 2006. Bovie owns its main facility in Florida consisting of 28,000 square
feet of office, warehousing and manufacturing space.
 
 On August
20, 2003, Bovie signed an agreement to lease approximately 20,000 square feet of
space located at 3200 Tyrone Blvd., St. Petersburg Florida for sixty-two months
commencing on September 1, 2003 and terminating on October 31, 2008, with an
option to renew for an additional five years. This additional space provides
Bovie with a total of 48,000 square feet of manufacturing warehousing and office
space in Florida. The building leased is in close proximity to our present
manufacturing facility in St. Petersburg, Florida. The base monthly rent is
$8,750 commencing on November 1, 2003. The base rent increases by 3% for each
year of the lease. We are responsible for common area maintenance, insurance and
real estate taxes which have been established at $1,667 per month for the first
year of the term of the lease.
 
 In
October 2004 a hurricane damaged the roof of approximately 1500 square feet of
office space at 7100 30 th Ave N,
St. Petersburg causing extensive water damage. The offices had been used by
several engineers which had to be moved to other space. An additional 4200
square feet of office and warehouse space was leased on a month-to-month basis
at 7191 30 th Ave N,
St. Petersburg for $2,140 per month.
 
 The
damage to our building was estimated at $296,000 which the insurance company has
paid to us. The City of St. Petersburg has issued a permit so that the
contractor retained can commence repairs.
 
 **Item 3. Legal Proceedings**
 
 We
presently have no material litigation outstanding.
  **Item 4. Submission of Matters to a Vote of Security
Holders**
 
 There
were no matters submitted to securities holders during the fourth quarter of the
year ended December 31, 2004.
 
 **PART II**
 
 **Item 5. Markets and Market Prices**
 
 Bovie’s
common stock has been traded on the American Stock Exchange since November 5,
2003. Prior to that it was traded in the over-the-counter market on the OTC
bulletin board. The table shows the reported high and low bid prices for the
common stock during each quarter of the last eight respective quarters as
reported by the OTC Bulletin Board (symbol “BOVI”) and the American Stock
Exchange (symbol “BVX”). These prices do not represent actual transactions and
do not include retail markups, markdowns or commissions.
 
 
 2004
    High
    Low1stQuarter
    $
    3.70
    $
    2.322ndQuarter
    
    3.10
    
    2.313rdQuarter
    
    3.00
    
    2.064thQuarter
    
    2.72
    
    2.252003
    
    High
    
    Low1stQuarter
    $
    1.02
    $
    .722ndQuarter
    
    1.45
    
    .853rdQuarter
    
    3.35
    
    1.354thQuarter
    
    3.75
    
    2.95
 
 On March
24, 2005, the closing bid for Bovie’s Common Stock as reported by the American
Stock Exchange was $2.42 per share. As of March 24, 2005, the total number of
shareholders of the Bovie’s Common Stock was approximately 1,500, of which
approximately 700 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.
 
 **Item 6. Management’s Discussion and Analysis of Financial Condition
and Results of Operations.**
 
 ***Executive
Level Overview***
 
 We are a
medical device company engaged in the manufacturing and marketing of
electrosurgical devices. Our medical products include a wide range of devices
including electrosurgical generators and accessories, cauteries, medical
lighting, nerve locators and other products.
 
 We divide
our operations into three reportable business segments. 
Electrosurgical products, battery operated cauteries and other products.
The electrosurgical segment sells electrosurgical products which include
generators, electrodes, electrosurgical pencils and various ancillary disposable
products. These products are used in surgery for the cutting and coagulation of
tissue. Battery operated cauteries are used for precise hemostasis (to stop
bleeding) in ophthalmology and in other fields. Our other revenues are derived
from nerve locators, disposable and reusable penlights, medical lighting,
license fees, development fees and other miscellaneous income.
  Domestic
sales accounted for 85% of total revenues in 2004. Most of the Company’s
products are marketed through medical distributors which distribute to more than
6,000 hospitals and to doctors and other health-care facilities.
 
 International
sales accounted for 15% of total revenues in 2004. The Company’s products are
sold in more than 150 countries through local dealers. Local dealer support is
coordinated by sales and marketing personnel at the St. Petersburg, Florida
facility. We have no branch offices other than the Florida facility. We sell our
products to distributors that distribute them in the following countries:
Argentina, Australia, Austria, Belgium, Brazil, Canada, Chile, Denmark, Finland,
France, Germany, Greece, India, Italy, Japan, Korea, Mexico, The Netherlands,
New Zealand, Norway, Poland, Portugal, Singapore, South Africa, Spain, Sweden,
Switzerland, Taiwan and the United Kingdom, China, the CIS (former Soviet
Union), Cyprus, Indonesia, Ireland, Korea, Latin America, Malaysia, the
Philippines, Thailand, Turkey, and Vietnam. Our business is generally not
seasonal in nature.
 
 ***Outlook
for 2005***
 
 Based
upon preliminary forecasts, we currently expect diluted net earnings per share
from operations for 2005 may be less than 2004.   In addition, net
earnings may be negatively impacted by increased costs of selling, general
payroll, professional fees, research and development and administrative. 
Sales for the year 2005 are expected to be comparable to 2004. For the first six
months of the current fiscal year, we expect similar sales to the same
period last year, despite a decline in orders from our main OEM customer.
If foreign currency exchange rates hold at current levels, we anticipate a
favorable impact on foreign sales for the full year of 2005.
 
 Even
though our main OEM customer has reduced its orders during the first three
months our sales for that period should be comparable with sales for the same
period last year.  We continue to have an excellent relationship with this
customer, evidenced by the fact we are receiving significant orders. 
OEM business is marked by variables, making it difficult to forecast future
performance, as OEM contracts create a climate of limited
visibility.  A single OEM order or new product can favorably and
materially impact our performance. During fiscal 2005 we will direct increased
effort and resources at advancing product development, and geographic expansion
of distributors while continuing to take advantage of selective
OEM opportunities as they occur.  Management believes that this course
of action will result in a greater diversification to our revenue
stream.
 
 We have
paid off all previously outstanding borrowings under our existing credit
facility. We anticipate investing in future business growth, including business
and product line acquisitions to supplement our current product offerings, new
product launches and future building expansions, including manufacturing
facility expansions.
 
 **RESTATEMENT
OF FINANCIAL STATEMENTS**
 
 We
adopted ***FASB
Interpretation No. 46R, Consolidation of Variable Interest Entities - An
Interpretation of ARB51*** that
requires the consolidation of legal structures, called *Variable
Interest Entities (VIEs).* Our joint
venture with Jump Agentur Fur Electrotechnik GMBH (“the Joint Venture”, “JAG”)
qualifies as a VIE. We had
historically accounted for the investment in JAG on the equity basis. We have
restated our balance sheets and consolidated JAG in the years ended December 31,
2004 and 2003. The most significant impact to our financial statements is to add
the intangible assets of JAG, totaling approximately $350,000 in 2004 and
$360,000 in 2003, and minority interest of $150,000 in 2004 and $160,000 in 2003
to our balance sheets. The impacts on our consolidated statements of net income
or cash flows are not material.
 
 We
amended our statement of operations for the year ended December 31, 2004 and
reclassified a $245,264 of gain from insured damages to our building from a
hurricane as other income instead of an extraordinary item. The reclassification
did not affect our taxable net income which remained at $1,511,997 nor did it
affect our earnings per share and diluted earnings per share of $.11 and $.09,
respectively.
 
 **Results
of Operations** (to be
read in conjunction with the profit and loss statement)
 
 The table
below outlines the components of the consolidated statements of earnings as a
percentage of net sales and the year-to-year percentage change in dollar
amounts:
 
 Analysis
      of 2003/2004
    
    
    Percentage
      change in dollar amounts2004
    2003
    2003/2004%
    %
    %Sales
    100.0
    100.0
    27.0Cost
      of sales
    61.1
    59.6
    30.0Gross
      profit
    38.9
    40.4
    23.0Other
      costs:R
      & D
    4.4
    4.5
    26.0Professional
      fees
    2.0
    2.4
    6.0Salaries
    9.6
    10.7
    15.0SGA
    16.4
    18.2
    15.0Development
      cost - joint venture
    .2
    .5
    -52.0Total
      other costs
    32.7
    36.3
    15.0Income
      from operations
    6.2
    4.1
    93.1Other
      income/expense
    1.2
    -.1
    -851Income
      after other income/expense
    7.4
    4.1
    139Discontinued
      operations
    --
    --
    --Net
      Income
    7.4
    4.0
    139Income
      tax expense
    -2.2
    (1.0)
    (85.0)Income
      tax benefit
    2.2
    1.0
    85.0Net
      income after taxes
    7.4
    4.0
    139
 
 The table
below sets forth domestic/international and product line sales
Information:
 
 Net
      Sales (in thousands)
    
    Percentage
      change2004
    
    2003
    
    2004/2003
    
    IncreaseDomestic/international
      salesLin
      thousands)Domestic
    
    $
    17,448
    
    $
    13,714
    
    
    27
    %
    
    3,734International
    
    
    3,047
    
    
    2,403
    
    
    27
    
    
    644Total
      net sales
    
    $
    20,495
    
    $
    16,117
    
    
    27
    
    
    4,378Product
      line sales:Electrosurgical
    
    $
    12,684
    
    $
    8,957
    
    
    42
    
    
    3,727Cauteries
    
    
    5,460
    
    
    5,004
    
    
    9
    
    
    456Other
    
    
    2,351
    
    
    2,156
    
    
    9
    
    
    195Total
      net sales
    
    $
    20,495
    
    $
    16,117
    
    
    27
    
    
    4,378
 
 
 **2004
Compared with 2003**
 
 Our net
sales increased 27% in 2004 to $20.5 million from $16.1 million in 2003($4.4
million increase). Net sales grew by 27% as a result of increased OEM sales and
an increase in number of electrosurgical generators units shipped through
standard distribution of our products including OEM. Approximately 4500 units
were shipped in 2004 as compared to 3,800 for 2003. No sales of one particular
electrosurgical product dominates the number of units sold.
 
 Arthrex
sales of generators and accessories increased by 2.4 million which accounts for
55% of our annual increase in sales. There were no price increases and generally
the volume of other products accounted for the balance of the
increase.
 
 Domestic
sales were $17.4 million for 2004, representing an increase of 27% as a result
of increased shipments of generators and accessories. International sales were
$3.0 million for 2004, representing an increase of 27% as a result of higher
shipments of generators. Excluding the impact of foreign currency, international
sales increased 27% in 2004.
 
 Cost of
sales represented 61% of sales in 2004 compared to 60% in 2003. The 1% higher
cost of sales in 2004 was mainly attributable to the increased volume of
electrosurgical accessories sold to one large customer at lowers than normal
margins.
 
 Research,
development and engineering expenses represented 4.4% and 4.5% of sales for 2004
and 2003, respectively. These expenses increased 26% in 2004 to $907,389, an
increase over 2003 spending of $190,042. The higher spending level is the result
of development spending in advance of our proposed product launches in 2005. New
products under development are the suture removal device, plasma technology,
gastrointestinal and various improvements to our line of electrosurgical
generators.
 
 Professional
fees increased from $392,796 in 2003 to $415,606 in 2004, an increase of $22,810
or 6%. Audit fees increased by $22,774 or 20% and legal fees mainly associated
with new product development increased by $31,220 or 15%.
 
 Salaries
and related costs increased by 14.8% from $1.72 million to $1.98 million. Annual
employee increases, overtime increases, medical insurance increases and the
hiring of an addition salesperson accounted for the increase in
cost.
 
 Selling,
general and administrative expenses increased by 14.5% from $2.9 million in 2003
to $3.36 million in 2004. The 14.5% increase in selling, general and
administrative expenses is partially due to an increase in commissions expense
of $138,520 directly related to increased sales of 27%, increased trade show
costs, increased general liability insurance, increased depreciation on new
software and equipment purchased, increased regulatory costs, and increased
costs associated with rent and utilities on the new building we moved into at
the end of 2003.
 
 Net
interest expense declined to $11,828 in 2004 from $31,080 in 2003, primarily as
a result of lower outstanding debt balances.
 
 The
effective income tax rate was 36.2% in 2004. There was also a tax loss carryover
benefit of 36.2%.
 
 Net
earnings, increased 139% to $1.5 million from $.7 million in 2003. Basic net
earnings per share, increased by 120% to $.11 in 2004 from $.05 in 2003. Earning
per share including extraordinary item in 2004 were $.11 per share. Diluted
earning per share was $.09as compared to $.05 for diluted earnings per share for
2003.
 
 In
October 2004 a hurricane tore a portion of the roof off the office facility at
7100 30 th Avenue
North, St. Petersburg, Florida causing extensive water damage to that portion of
the building. The cost of the building allocated to the loss was $63,749 of
which there was depreciation of $12,278 leaving a net cost of $51,471. As per
Financial Accounting Standard Board interpretation number 30 we have recognized
a gain of $245,264 from the non-monetary asset being involuntarily converted to
a monetary asset through the payment by the insurance company of $296,735. This
is reflected as other income on the consolidated statement of
income.
 
 We sell
our products through distributors both overseas and in US markets. New
distributors are contacted through responses to our advertising in international
and domestic medical journals and domestic or international trade shows.
 
 In the
fourth quarter of 1998, we made agreements 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 2004 and 2003, commissions paid were $367,299
and $228,779 respectively, an increase of 61 %. The increase is directly related
to increased sales.
 
 An
adequate supply of raw materials is available from both domestic and
international suppliers. The relationship between our suppliers and us is
generally limited to individual purchase order agreements, supplemented by
contractual arrangements with key vendors to ensure availability of certain
products. We have developed multiple sources of supply where possible.
 
 In order
to provide additional working capital, we have secured a $1.5 millions credit
facility with a local commercial bank. This facility is payable on demand. For
the year ended December 31, 2004, we had zero funds drawn down on this credit
facility.
 
 Our ten
largest customers accounted for approximately 70% of net revenues for 2004 as
compared to 66% in 2003. For both years December 31, 2004 and 2003, our ten
largest trade receivables accounted for approximately 63% of outstanding
receivables. In 2004 and 2003 one customer accounted for 29% and 22% of total
sales, respectively.
  **Product
Development**
 
 Most of
the Company’s products and product improvements have been developed internally.
Funds for this development have come from internal cash flow and the sale of
common stock upon the exercise of stock options. The Company maintains close
working relationships with physicians and medical personnel in hospitals and
universities who assist in product research and development. New and improved
products play a critical role in 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. The
Company has a centralized research and development focus, with its one
manufacturing location responsible for new product development and product
improvements. Our research, development and engineering units at the
manufacturing location maintain relationships with distribution locations and
customers in order to provide an understanding of changes in the market and
product needs. During 2004 we invested in the J Plasma Technology, the Suture
Removal Technology, the Gastrointestinal “GI” device and undertook development
of Cardio and Urological Electrosurgical devices for a contractual partner. The
suture removal device and the GI device are slated to be marketed during the
fourth quarter of 2005. The ongoing cost for this development will be paid from
operating cash flows.
 
 In the
next year we do not contemplate any material purchase or acquisition of assets
which our ordinary cash flow and or credit line would not be able to
sustain.
 
 We
believe that Bovie has the financial resources needed to meet business
requirements in the foreseeable future, including capital expenditures needed
for the expansion of our manufacturing site, working capital requirements, and
product development programs, subject to Bovie maintaining compliance with our
credit facility.
 
 **Non-Medical
Products**
 
 In 2003,
our sales of flexible lighting products, used primarily in the automotive and
locksmith industries, totaled $375,250. One customer accounted for 80% of such
sales. We discontinued our non-medical product line by selling our inventory at
cost, and licensing our customer list and manufacturing technology to our
largest customer in that field for $500,000 payable in equal installments over 5
years. We believe this sale will have no material impact on our continuing
operations or financial condition. The transaction is being accounted for as a
licensing agreement over five years and in 2003 and 2004 we received income of
$57,750 and $100,000, respectively, from the licensing.
 
 **Scientific
Advisory Board**
 
 On July
8, 2003, we announced the formation of a scientific advisory board to assist in
the advancement of new products and technologies. The advisory board includes:
Yuval Carmel, Ph. D., Peter M. Pardoll, MD and Mr. Gregory Konesky.
 
 **Backgrounds**
 
 Dr. Yuval
Carmel is a senior research scientist at the University of Maryland. Dr. Carmel
has over 20 years of research and development experience in the areas of
advanced electrosurgical equipment for medical applications, physics of plasma,
applied physics, electromagnetics and electro-physics. He has published over 90
papers in scientific journals, is a holder of three patents and five pending
patents.
 
 Dr. Peter
Pardoll is a Gastroenterologist and the president of Medical Education
Associates (MEA), a health care consulting group. Dr. Pardoll is a trustee of
the Board of the American College of Gastroenterology, past president of the
Florida Gastroenterology Society and current president of the National GI
Political Action Committee as well as a practicing physician at the Center for
Digestive Diseases in St. Petersburg, Florida.
 
 Mr.
Gregory Konesky has been Bovie’s lead scientist in new product development for
J-Plasma, advanced plasma applicator design, plasma physical research and other
electrosurgical products. Mr. Konesky has published over 13 scientific papers,
holds one patent, with another pending. He has also presented at a variety of
scientific forums over the past several years as well as being a member of over
10 scientific societies.
 
 **Reliance
on Collaborative, Manufacturing and Selling Arrangements**
 
 We are
dependent on certain contractual OEM customers for product development wherein
we are to provide the manufacturing of the product developed. However, the
customer has no legal obligation to purchase the developed products. Should the
collaborative customer fail to give us purchase orders for the product after
development, our future business and value of related assets could be negatively
affected. Furthermore, no assurance can be given that a collaborative customer
may give sufficient high priority to our products. In addition, disagreements or
disputes may arise between Bovie and its contractual customers which could
adversely affect production of our products. We also have a similar informal
collaborative arrangements with two foreign suppliers except that we request the
development of certain items and components and we purchase them from the
foreign supplier pursuant to purchase orders. Our purchase orders are never for
more than one year and are supported by customer purchase orders from our
customers.
 
 **Liquidity
and Capital Resources**
 
 Our
working capital at December 31, 2004 increased $1.7 million to $5.55 million
from $3.84 million at December 31, 2003. The increase in working capital
resulted from growth in our overall business and the use of cash earnings to
fund increases in accounts receivable. Accounts payable and other accrued
liabilities together increased to a small degree in 2004 as a result of the
growth in the business. Accounts receivable days sales outstanding were 41 days
and 45 days at December 31, 2004 and 2003 respectively. Days sales in inventory
decreased 34 days to 58 days at December 31, 2004 from 92 days at December 31,
2003. The lower days sales in inventory is due to decreased inventories
resulting from efficiencies in manufacturing practices domestically in the new
facility and overseas.
 
 We
generated cash of $2.04 million from operations in 2004 compared with $.92
million in 2003. The increase in cash from operations in 2004 compared to the
prior year is primarily due to the reduction of inventory of $.25 million and
the generation of cash of $1.13 million in 2004 from cash earnings as compared
to $.52 million in 2003.
 
 In 2004
we used $606,495 for the purchase of fixed assets. Total borrowing declined by
$35,344 which is the amount we reduced our first mortgage by. Employees and
others exercised options and purchased 397,600 shares for $294,711.
 
 We had
2.30 million in cash and cash equivalents at December 31, 2004. We also had
outstanding borrowings totaling $.38 million at that date. Current maturities of
long-term debt at December 31, 2004 were $31,668. We believe our cash on hand,
as well as anticipated cash flows from operations, will be sufficient to fund
future operating capital requirements, future manufacturing facility
construction and other capital expenditures and future acquisitions to
supplement our current product offerings. Should additional funds be required,
we have $1.5 million of additional borrowing capacity available under our
existing credit facility.
 
 The
Company’s future contractual obligations for agreements with initial terms
greater than one year, including agreements to purchase materials in the normal
course of business, are summarized as follows (in thousands):
 
 Payment
      Period2005
    2006
    2007
    2008
    2009Long-term
      debt
    32
    348
    -0-
    -0-
    -0-Operating
      leases
    146
    142
    135
    115
    -0-Unconditional
      purchase obligations
    2,691
    -0-
    -0-
    -0-
    -0-
 
 The
Company’s additional borrowing capacity, along with the expected expiration
period of the commitments, is summarized as follows (in millions):
 
 Amount
      of CommitmentTotal
    
    Expiration
      Per PeriodAmount
    
    Less
      than
    
    In
      excess ofCommitted
    
    1
      year
    
    1
      yearSecured
      revolving credit agreement and other lines of credit
    
    $
    1.5
    
    $
    1.5
    
    
    -0-
 
 As of
December 2004 the total amount is available.
 
 Our
future results of operations and the other forward-looking statements contained
herein, particularly the statements regarding growth in the medical products
industry, capital spending, research and development, and marketing and general
and administrative expenses, involve a number of risks and uncertainties. In
addition to the factors discussed above, there are other factors that could
cause actual results to differ materially, such as business conditions and the
general economies; competitive factors including rival manufacturers’
availability of components at reasonable prices; risk of nonpayment of accounts
receivable; risks associated with foreign operations; and litigation involving
intellectual property and consumer issues.
 
 We
believe that we have the product mix, facilities, personnel, competitive edge,
operating cash flows and financial resources for business success in the
immediate (1 year) future and distant future (after 1 year), but future
revenues, costs, margins, product mix and profits are all subject to the
influence of a number of factors, as discussed above.
 
 **Critical
Accounting Estimates**
 
 We have
adopted various accounting policies to prepare the consolidated financial
statements in accordance with accounting principles generally accepted (GAAP) in
the United States of America (U.S.). Our most significant accounting policies
are disclosed in Note 1 to the consolidated financial statements.
 
 The
preparation of the consolidated financial statements, in conformity with U.S.
GAAP, requires us to make estimates and assumptions that affect the amounts
reported in the consolidated financial statements and accompanying notes. Our
estimates and assumptions, including those related to bad debts, inventories,
intangible assets, property, plant and equipment, minority investment, legal
proceedings, research and development, warranty obligations, product liability,
pension obligations, sales returns and discounts, and income taxes are updated
as appropriate, which in most cases is at least quarterly. We base our estimates
on historical experience, actuarial valuations, or various assumptions that are
believed to be reasonable under the circumstances and the results form the basis
for making judgments about the reported values of assets, liabilities, revenues
and expenses. Actual results may materially differ from these
estimates.
  Estimates
are considered to be critical if they meet both of the following criteria: (1)
the estimate requires assumptions about material matters that are uncertain at
the time the accounting estimates are made, and (2) other materially different
estimates could have been reasonably made or material changes in the estimates
are reasonably likely to occur from period to period. Our critical accounting
estimates include the following:
 
 Allowance
for doubtful accounts
 
 We
maintain an allowance for doubtful accounts for estimated losses in the
collection of accounts receivable. We make estimates regarding the future
ability of our customers to make required payments based on historical credit
experience and expected future trends. If actual customer financial conditions
are less favorable than projected by management, additional accounts receivable
write-offs may be necessary, which could unfavorably affect future operating
results.
 
 Inventory
Reserves
 
 We
maintain reserves for excess and obsolete inventory resulting from the potential
inability to sell our products at prices in excess of current carrying costs.
The markets in which we operate are highly competitive, with new products and
surgical procedures introduced on an ongoing basis. Such marketplace changes may
cause our products to become obsolete. We make estimates regarding the future
recoverability of the costs of these products and record a provision for excess
and obsolete inventories based on historical experience, and expected future
trends. If actual product life cycles, product demand or acceptance of new
product introductions are less favorable than projected by management,
additional inventory write-downs may be required, which could unfavorably affect
future operating results.
 
 Income
Taxes
 
 We
operate in multiple tax jurisdictions both inside and outside the United States.
Accordingly, management must determine the appropriate allocation of income to
each of these jurisdictions. Tax audits associated with the allocation of this
income and other complex issues may require an extended period of time to
resolve and may result in income tax adjustments if changes to the income
allocation are required between jurisdictions with different tax rates. Because
tax adjustments in certain jurisdictions can be significant, we record accruals
representing our best estimate of the probable resolution of these matters. To
the extent additional information becomes available, such accruals are adjusted
to reflect the revised estimated probable outcome.
 
 Other
Matters
 
 We
distribute our products throughout the world. As a result, our financial results
could be significantly affected by factors such as changes in foreign currency
exchange rates or weak economic conditions in foreign markets. Our operating
results are primarily exposed to changes in exchange rates among the United
States dollar and European currencies, in particular the euro and the British
pound. When the United States dollar weakens against foreign currencies, the
dollar value of sales denominated in foreign currencies increases. When the
United States dollar strengthens, the opposite situation occurs. We manufacture
our products in the United States, China and Bulgaria and incur the costs to
manufacture in US dollars. This worldwide deployment of factories serves to
partially mitigate the impact of the high costs of manufacturing in the US.
  In
December 2004, the Financial Accounting Standards Board (FASB) issued a revision
to Statement No. 123, *Share-Based
Payment* *.* This
revision supersedes Accounting Principles Board (APB) Opinion N o. 25, *Accounting
for Stock Issued to Employees* , and its
related implementation guidance. This revision requires companies to recognize
the cost of stock options based on the grant-date fair value pursuant to their
employee stock option plans over the period during which the recipient is
required to provide services in exchange for the options, typically the vesting
period. Pursuant to the requirements of the Statement, the Company plans to
adopt the provisions of the standard during the third quarter of 2005. (See Note
1. Significant Accounting Policies)
 
 **Item 7. Financial Statements.**
 
 The
restated consolidated balance sheets as of December 31, 2004 and, 2003 and the
restated related consolidated statements of operations, stockholders equity,
cash flows and notes to consolidated financial statements for each of the years
in the two-year period ended December 31, 2004, together with the report of
Bloom & Co., LLP dated March 25, 2005, except for Notes 1, 2, 6 and 14 as to
which are as of July 8, 2005 appearing in Item 7 of this Form 10-KSB/A are shown
as report of independent registered public accounting firm and as pages F1-F29.
 
 
 (See
Attached)
 
 **Item 8. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure**
 
 There are
no disagreements with, or changes in, accountants.
 
 **Item 8A. Disclosure Controls And
Procedures**
 
 (a)
Evaluation of disclosure controls and procedures
 
 An
evaluation of the effectiveness of the design and operation of the Company’s
disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e)
and 15d-15(e) as of December 31, 2004 was carried out under the supervision and
with the participation of the Company’s management, including the President and
Chief Executive Officer and the Chief Financial Officer (“the Certifying
Officers”). Based on that evaluation, the Certifying Officers concluded that the
Company’s disclosure controls and procedures are effective to bring to the
attention of the Company’s management the relevant information necessary to
permit an assessment of the need to disclose material developments and risks
pertaining to the Company’s business in its periodic filings with the Securities
and Exchange Commission.
 
 Disclosure
controls and procedures are designed to ensure that information required to be
disclosed in our reports filed or submitted under the Securities Exchange Act is
recorded, processed, summarized and reported within the time periods specified
in the SEC’s rules and forms. Disclosure controls and procedures include,
without limitation, controls and procedures designed to ensure that information
required to be disclosed in our reports filed or submitted under the Securities
Exchange Act is accumulated and communicated to management, including our
President and Chief Financial Officer, as appropriate, to allow timely decisions
and timely reporting regarding required disclosure.
 
 (b)
Changes in internal controls
 
 There was
no change to the Company’s internal control over financial reporting during the
quarter ended December 31, 2004 that materially affected, or is reasonably
likely to materially affect, the Company’s internal control over financial
reporting.
 
 **Item 8B. Other Information**
 
 There was
no information to be disclosed on Form 8K that was not
reported.
  **Part III**
 
 **Item 9. Directors, Executive Officers, Promoters and Control
Persons**
 
 Bovie’s
Executive Officers and directors are as follows:
 
 Name
    Position
    Director
      SinceAndrew
      Makrides
    Chairman
      of the Board, President, CEO
    December
      1982J.
      Robert Saron
    President
      of Aaron Medical Industries,Inc. and Director
    August
      1994George
      Kromer
    Director
    October
      1995Alfred
      V. Greco
    Director
    April
      1998Brian
      Madden
    Director
    September
      2003Moshe
      Citronowicz
    Executive
      Vice President and Chief Operating Officer
    --Charles
      Peabody
    Chief
      Financial Officer and Secretary
    --Michael
      Norman
    Director
    September
      2004Randy
      Rossi
    Director
    September
      2004
 
 Directors
serve for one-year terms and are elected at the annual shareholders
meeting.
 
 Andrew
Makrides, Esq. Age 63, Chairman of the Board and President, member of the Board
of Directors, received a Bachelor of Arts degree in Psychology from Hofstra
University and a Juris Doctor Degree from Brooklyn Law School. He is a member of
the Bar of the State of New York and practiced law from 1968 until joining Bovie
Medical Corporation as Executive Vice President and director, in 1982. Mr.
Makrides became President of the Company in 1985 and the CEO in December 1998
and has served as such to date. Mr. Makrides employment contract extends to
December 31, 2009.
 
 J. Robert
Saron, age 52, Director, holds a Bachelor degree in Social and Behavioral
Science from the University of South Florida. From 1988 to present Mr. Saron has
served as a director of Aaron Medical Industries, Inc. (formerly Suncoast
Medical Manufacturing, Inc.). Mr. Saron served as CEO and chairman of the Board
of the Company from 1994 to December 1998. Mr. Saron is presently the President
of Aaron Medical Industries, Inc., which serves as the Company’s marketing
subsidiary, and he is also a member of the Board of Directors of the Company.
Mr. Saron serves on two industry boards, the Health Industry Distributors
Association Education Foundation and the Health Care Manufacturing Marketing
Council. Mr. Sarons employment contract extends to December 31,
2009.
 
 Alfred V.
Greco, Esq. Age 69, Director, is the principal of Alfred V. Greco, PLLC, a
partner of Sierchio Greco and Greco LLP, has been counsel to us since our
inception. Mr. Greco is a member of the Bar of the State of New York and has
been engaged in the practice of law for the past 35 years in the City of New
York. The main focus of Mr. Greco’s experience for the past 30 years has been in
the area of corporate and securities law during which he has represented a large
number of public companies, securities brokerage firms, executives and
registered representatives and has developed a broad range of experience in
administrative, regulatory and legal aspects of public companies, their
organization and operation. Mr. Greco graduated from Fordham University School
of Law with a Doctor of Law degree in June of 1960. He was admitted to the New
York State Bar in March, 1961.
 
 George W.
Kromer, Jr., age 64, became a director on October 1, 1995. Bovie Medical
Corporation has also retained Mr. Kromer on a month-to-month basis as a
consultant in addition to his capacity as a director. He has been writing for
business publications since 1980. In 1976, he received a Master’s Degree in
health administration from Long Island University. He was engaged as a Senior
Hospital Care Investigator for the City of New York Health & Hospital
Corporation from 1966 to 1986. He also holds a Bachelor of Science Degree from
Long Island University’s Brooklyn Campus and an Associate in Applied Science
Degree from New York City Community College, Brooklyn, New York.
 
 Moshe
Citronowicz, age 52, is a graduate of the University of Be’er Sheva, Be’er
Sheva, Israel, with a Bachelor of Science Degree in electrical engineering. He
has also received certificates from Worcester Polytech, Lowell University and
the American Management Association for completion of seminars in MRP, master
scheduling, purchasing SPC, JIT, accounting and plant management. Since coming
to the United States in 1978, Mr. Citronowicz has worked in a variety of
manufacturing and high tech industries. In October 1993, Mr. Citronowicz joined
the Company as Vice President of Operations. He is responsible for all areas of
manufacturing, purchasing, product redesign, as well as new product design. In
September 1997, Mr. Citronowicz was appointed by the Board of Directors to the
position Executive Vice President and Chief Operating Officer. Mr. Citronowicz’s
employment contract extends to December 31, 2009.
 
 Charles
Peabody, CPA, age 53, graduated from Babson College with a BSBA in accounting.
He is a Certified Public Accountant in the States of Florida and Vermont. During
the past twenty years, Mr. Peabody has had positions ranging from vice
president, finance and administration of an $11 million telecommunication
equipment manufacturer to the chief financial officer of an $18 million
commercial refrigeration glass door company. Mr. Peabody is a member of the
American and Florida Institutes of Certified Public Accountants. Mr. Peabody’s
employment contract is renewed annually.
 
 Brian
Madden, age 50, graduated from Iona College in 1976 with a Bachelor of Business
Administration degree. Mr. Madden is married with two children and is currently
the President of Liberty Title Agency. He has been a member of the boards of
various professional and civic organizations such as: Long Island Housing
Partnership, chairman of NYS Land Title Assoc-Agents Committee, Elwood School
Board, Good Samaritan Hospital Board of Governors, Long Island Children’s Museum
and various others. Mr. Madden presently sits on our audit
committee.
 
 Randy
Rossi, age 45, has over 14 years of experience in medical manufacturing. Most
recently, he was President of the Patient Care Division, Kendall/TYCO which
specialized in Wound Care, Urology and Incontinent Care with revenues in excess
of $500M.
 
 Michael
Norman, CPA age 48, manages a CPA firm specializing in business financial
planning as well as governmental and financial auditing. Mr. Norman is a member
of the Nassau County Board of Assessors, Treasurer of the Don Monti Memorial
Research Foundation and a Glen Cove City Councilman, all located on Long Island,
New York. He also serves as the expert member of Bovie’s audit
committee.
 
 We have a
3-member audit committee consisting of three independent members of the Board of
Directors, George Kromer Chairman, Brian Madden and Michael Norman CPA. One of
the independent members, Michael Norman serves as a financial expert for the
Committee.
 
 On March
30, 2004 Bovie adopted an executive employee ethics code.
 
 A copy of
the code of ethics which expressly relates to the CEO (Andrew Makrides) and
Chief Financial Officer (Charles Peabody) will be provided without charge to any
person upon request to Bovie Medical Corporation, 734 Walt Whitman Road,
Melville, NY 11747, Attn: Andrew Makrides.
  **Item 10. Remuneration**
 
 The
following table sets forth the compensation paid to the executive officers of
the registrant for the three years ended December 31, 2004:
 
 Summary
      Compensation TableLong
      Term CompensationAnnual
      Compensation
    Awards
    
    Payouts(a)
    (b)
    I
    (d)
    (e)
    (f)
    (g)
    (h)
    (i)Name
      and Principal Position
    Year
    Salary($)
    Bonus($)
    Other
      Annual Compensation-($)*
    Restricted
      Stock Award(s) ($)
    Securities
      Underlying Options/ SARs(#)
    LTIP
      Payouts ($)
    All
      Other Compensation ($)Andrew
      Makrides
      President,
      CEO,
      Chairman
      of
      the
      Board
    2004
    $167,320
    3,189
    9,921
    --
    25,000
    --
    --2003
    $158,406
    2,967
    9,942
    --
    110,000
    --2002
    $141,835
    2,760
    9,581
    --
    --
    --
    --J.
      Robert Saron
      President
      of Aaron
      Medical
      and
      Director
    2004
    $233,036
    4515
    16,533
    --
    25,000
    --
    --2003
    $219,786
    4,200
    15,568
    --
    110,000
    --
    --2002
    $200,545
    3,907
    15,533
    --
    --
    --
    --Moshe
      Citronowicz
      Executive
      Vice
      President-
      Chief
      Operating
      Officer
    2004
    $170,766
    3,318
    15,848
    --
    25,000
    --
    --2003
    $158,637
    3,086
    14,345
    --
    110,000
    --
    --2002
    $147,370
    2,871
    15,688
    --
    --
    --
    --Charles
    2004
    $81,825
    1,579
    7,893
    --
    25,000
    --
    --Peabody
    2003
    $77,221
    1,532
    6,216
    --
    60,000
    --
    --Chief
    2002
    $76,227
    1,532
    6,051
    -
    --
    --
    --FinancialOfficer
 (*) Other
compensation consists of medical insurance and auto.
 
 No
options were granted or issued to any executive officer or director during
fiscal year ending December 31, 2002. In 2003 and 2004, a total of 585,000 and
225,000 options were granted to executive officers and directors,
respectively.
 
 Option
Grants Table:
 
 The
following table sets forth, with respect to grants of stock options made during
2004 to each of the Named Executive Officers: (I) the name of the executive
officer (column (a)); (ii) the number of securities underlying options granted
(column (b)); (iii) the percent the grant represents of the total options
granted to all employees during 2004; (iv) the per share exercise price of the
options granted (column (d)); (v) the expiration date of the options (column
(e)); and (vi) the potential realizable value of each grant, assuming the market
price of the Common Stock appreciates in value from the date of grant to the end
of the option term at a rate of (A) 5% per annum (column (f)) and (B) 10% per
annum (column (g)).
 
 Option
Grants in 2004:
 
 Individual
      Grants
    Potential
      Realizable
      Value
      at Assumed Annual Rates of Stock Price Appreciation for Option
      TermName
      (a)
    Number
      of Securities
      Underlying
      Options Granted
      (b)
    %
      of Total Options
      Granted
      to Employees in 2004
      I
    Exercise
      or Base Price per Share
      (d)
    Expiration
      Date
      (e)
    5%($)
      (f)
    10%($)
      (g)Charles
      Peabody(CFO)
    25,000
    6.76%
    2.13
    09/23/14
    $
      33,383
    $
      87,684Moshe
      Citronowicz(COO)
    25,000
    6.76%
    2.13
    09/23/14
    $
      33,383
    $
      87,684J.
      Robert Saron(2)
    25,000
    6.76%
    2.13
    09/23/14
    $
      33,383
    $
      87,684Andrew
      Makrides(CEO)
    25,000
    6.76%
    2.13
    09/23/14
    $
      33,383
    $
      87,684
 
 Total
options granted were 370,000 which represents 100% of the options granted in
2004.
 
 J.
    Such
      options were granted at 100% of fair market value on the date of grant and
      become immediately exercisable as to the shares covered thereby.
 
 (2)
President of Aaron Medical.
  Equity
Compensation Plan Information:
 
 Plan
      category
    Number
      of Securities
      to
      be issued upon
      exercise
      of
      outstanding
      options,
    Weighted-average
      exercise
      price of
      outstanding
      options,
      warrants
      and rights
    Number
      of securities
      remaining
      available
      for
      future issuance
      under
      equity
      compensation
      plansEquity
      compensation Plans approved by Security holders3,951,200
    $1.12
    27,700Total
    3,951,200
    1.12
    27,700
 
 The
following table summarizes: 1. The options granted in the last fiscal year 2004
and 2. The aggregated option exercises in the last fiscal year and the fiscal
year-end option values.
 
 Aggregate
Option/SAR Exercises in the Fiscal Year Ended December 31, 2004 and December 31,
2004 Option/SAR Values
 (a)
    (b)
    I
    (d)
    (e)Name
    Shares
      Acquired on Exercise (#)
    Value
      Realized ($)
    Number
      of Securities Underlying Unexercised Options/SARs at December 31, 2004
      (#)
    Value
      of Unexercised In-the Money Options/SARs at December 31,
      2004($)Exercisable
    Unexercisable
    Exercisable
    UnexercisableAndrew
      Makrides
    -
    -
    510,000
    -
    $
      849,150
    -Alfred
      Greco
    -
    -
    360,000
    -
    615,650
    -George
      Kromer
    -
    -
    415,000
    -
    690,475
    -Moshe
      Citronowicz
    -
    -
    465,000
    -
    803,725
    -Rob
      Saron
    -
    -
    530,000
    -
    901,200
    -Brian
      Madden
    -
    -
    50,000
    -
    10,250
    -Michael
      Norman
    -
    -
    25,000
    -
    10,250
    -Charles
      Peabody
    -
    -
    110,000
    -
    119,400
    -Randy
      Rossi
    -
    -
    25,000
    -
    10,250
    -Total
    -
    -
    2,490,000
    -
    $
      4,010,350
    -
 
 
 J.
    Assumes
      $2.54 per share fair market value on December 31, 2004 which was the
      closing price on December 31, 2004, the last day of trading on NASDAQ in
      2004.
 
 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 2004, the Board of Directors granted 25,000
options to each Executive Officer and Director totaling 225,000 shares.
 
 Outside
Directors are compensated in their capacities as Board members through option
grants. Our Board of Directors presently consists of J. Robert Saron, Andrew
Makrides, Chairman CEO, and President, George W. Kromer, Jr., Alfred Greco and
Brian Madden. For the past years, pursuant to a written agreement, Mr. Kromer
has been retained by Bovie Medical Corporation as a business and public
relations consultant on a month-to-month basis at an average monthly fee of
$1,700. Mr. Greco is the managing director of Alfred V. Greco PLLC, a partner of
Sierchio, Greco and Greco counsel to Bovie, to which Bovie paid legal fees of
$63,650 during 2004.
 
 There
have been no changes in the pricing of any options previously or currently
awarded.
 
 In
January 3, 2004, we extended employment contracts with certain of its officers
for two years. The following schedule shows all contracts and terms with
officers of Bovie.
 
 Bovie
      Medical CorporationDecember
      31, 2004Contract
    Expiration
    Current
    AutoDate
    Date(1)
    Base
      Pay
    AllowanceAndrew
      Makrides
    01/01/98
    12/31/2009(1)
    $155,246
    $
      6,067J.
      Robert Saron
    01/01/98
    12/31/2009(1)
    214,638
    6,067Moshe
      Citronowicz
    01/01/98
    12/31/2009(1)
    161,521
    6,067Charles
      Peabody
    08/18/03
    08/18/2004(2)
    77,479
    --
 
 J.
    Includes
      total extensions for six years- Salaries increase annually pursuant to a
      contract formula. In the event of a change in control, each officers’
      contract contains an option for each respective officer to resign and
      receive 3 years salary.
 
 (2)  If not
cancelled 30 days prior to year-end, the contract automatically renews for one
year periods.
 
 
 **Item 11. Section 16(a) Beneficial Ownership Reporting
Compliance**
 
 The
following table sets forth certain information as of December 31, 2004, with
respect to the beneficial ownership of the Company’s common stock by all persons
known by the Company to be the beneficial owners of more than 5% of its
outstanding shares, by directors who own common stock and/or options to levy
common stock and by all officers and directors as a group.
 Number
      of SharesNature
      of
    Percentage
      ofName
      and Address
    Title
    Owned
      (i)
    Ownership
    Ownership(i)The
      Frost National Bank
    Common
    1,000,000(xi)
    Beneficial
    5.6%FBO
      RenaissanceUS
      Growth InvestmentTrust
      PLC.Trust
      no. W00740100The
      Frost National Bank
    Common
    1,000,000(xi)
    Beneficial
    5.6%FBO,
      BFS US SpecialOpportunities
      Trust PLC.Trust
      no. W00118000
  Directors
      and OfficersAndrew
      Makrides
      734
      Walt Whitman Road
      Melville,
      NY 11746
    Common
    825,800(ii)
    Beneficial
    5.7%George
      Kromer
      P.O.
      Box 188
      Farmingville,
      NY 11738
    Common
    415,000(iii)
    Beneficial
    2.9%
  Alfred
      V. Greco
      666
      Fifth Avenue
      New
      York, NY 10103
    Common
    381,500(iv)
    Beneficial
    2.7%J.
      Robert Saron
      7100
      30thAvenue North
      St.
      Petersburg, FL 33710
    Common
    962,976(v)
    Beneficial
    6.7%Moshe
      Citronowicz
      7100
      30thAvenue North
      St.
      Petersburg, FL 33710
    Common
    639,591
      (vi)
    Beneficial
    4.5%Brian
      Madden
      300
      Garden City Plaza
      Garden
      City, NY 11530
    Common
    75,000
      (vii)
    Beneficial
    .5%Charles
      Peabody
    Common
    110,000(x)
    Beneficial
    .8%7100
      30thAveN.
      St. Petersburg, FLMike
      Norman
    Common
    25,000(ix)
    Beneficial
    .2%410
      Jericho Tpke,Jericho,
      NYRandy
      Rossi
    Common
    25,000(ix)
    Beneficial
    .2%19
      Bubbling Brook Rd.,Walpole,
      MassOfficers
      and Directors as a group(9)
    
    3,449,867(viii)
    
    20%
 (i) Based
on 13,862,128 outstanding shares of Common Stock and 3,951,200 outstanding
options to acquire a like number of shares of Common Stock as of December 31,
2004, of which officers and directors owned a total of 2,490,000 options and
969,867 shares at December 31, 2004. 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 510,000 shares reserved and underlying ten year options owned by Mr.
Makrides to purchase shares of Common Stock of the Company. Exercise prices for
his options range from $.50 for 155,000 shares to $3.25 for 25,000 shares.
 
 (iii)
Includes 415,000 shares reserved pursuant to ten year options owned by Mr.
Kromer to purchase shares of the Company. Exercise prices for his options range
from $.50 for 100,000 shares to $3.25 for 25,000 shares.
 
 (iv)
Includes 360,000 shares reserved pursuant to 10 year options exercisable at
prices varying between $.50 per share for 100,000 shares up to $3.25 per share
for 25,000 shares. Mr. Greco’s wife presently owns 21,500 shares.
 
 (v)
Includes 530,000 shares reserved pursuant to 10 year options owned by Mr. Saron,
exercisable at prices ranging from $.50 per share for 155,000 shares, and $3.25
per share for 25,000 shares.
 
 (vi)
Includes 465,000 shares reserved pursuant to 10 year options owned by Mr.
Citronowicz exercisable at prices ranging from $.50 for 155,000 shares to $3.25
for 25,000.
 
 (vii)
Includes 50,000 shares reserved pursuant to 10 year options owned by Mr. Madden
exercisable at prices ranging from $3.25 for 25,000 to $2.13 for 25,000 options
to purchase Common Stock.
 
 (viii)
Includes 2,490,000 shares reserved for outstanding options owned by all
Executive Officers and directors as a group. The last date options can be
exercised is September 22, 2014.
 
 (ix)
During 2004 two new directors were appointed, Mr. Michael Norman, CPA and Mr.
Randy Rossi. Each received 25,000 10 year options to purchase shares at $2.13
per share on September 23, 2004.
 
 (x)
Includes 110,000 shares reserved pursuant to 10 year options owned by Mr.
Peabody exercisable at prices ranging from $.70 for 35,000 shares to $3.25 for
25,000 shares to purchase common stock.
 
 (xi)
Russell Cleveland is the principal individual with voting and dispositive
control of these trusts and is also the principal in charge of securities of a
third trust, The Frost National Bank FBO Renaissance Capital Growth Income Fund
III, Inc. Trust No. W00740000, owning 300,000 shares. The aggregate ownership of
the three trusts equal 2.3 million shares over which Mr. Cleveland has complete
voting and dispositive control which equals 12.9% of our outstanding shares
fully diluted.
 
 Except
for Mr. Norman and Mr. Rossi the above executive officers and directors received
grants of options in 2004 for which they inadvertently neglected to timely file
appropriate Form 4 reflecting the option grants. Mr. Norman and Mr. Rossi
neglected to timely file their Form 3 for the options received by them in
2004.
 
 **Item 12. Certain Relationships and Related
Transactions**
 
 In 2004,
the Executive Officers and directors were awarded a total of 225,000 options to
purchase our Common Stock at an exercise price of $2.13 per share expiring on
September 22, 2014 under our 2003 Executive and Employee Stock Option Plan. See
Remuneration
 
 A
director, Alfred V. Greco Esq. is the principal of Alfred Greco PLLC, a partner
of Sierchio, Greco and Greco the Company’s counsel. Alfred V. Greco PLLC
received $63,650 and $73,646 in legal fees for the years 2004 and 2003,
respectively. See “Security Ownership of Certain Beneficial Owners and
Management.”
 
 A
director, George Kromer also serves as a consultant to us with consulting
compensation of $20,751 and $16,615 for 2004 and 2003, respectively.
 
 Two
relatives of the chief operating officer of the Company are employed by the
Company. Yechiel Tsitrinovich, an engineering consultant received compensation
for 2004 and 2003 of $86,764 and $46,978 respectively. The other relative, Arik
Zoran, is an employee of the Company in charge of the engineering department. He
had a two year contract providing for a salary of $90,000 per year plus living
expenses and benefits which has been extended. For 2003 and 2004 he was paid
$144,434 and $144,314 which includes living expenses and benefits. The Company
is attempting at this time to secure a permanent work visa for Mr. Zoran.
 
 **Item 13A.  Exhibit Index**
 
 Exhibit
      3.1
    Articles
      of Incorporation*Exhibit
      3.2
    By-Laws*Exhibit
      4.1
    Copy
      of Stock Certificate *Exhibit
      10.1
    Joint
      Venture Agreement dated February 25, 2000
      Between
      Bovie Medical Corporation and Jump Agentur fur
      Elektrotechnik
      GmBH**Exhibit
      10.2
    Agreement
      between Bovie Medical Corporation and Arthrex Inc. dated
      June
      2002, filed with Form S-3 on November 23, 2004, which is incorporated here
      in by reference. This agreement is the subject of an application for
      confidential treatment.**Exhibit
      10.3
    Distribution
      and Service Center Agreement  between Bovie and
      SymbolMedical
      Limited dated December 31, 2004**Exhibit
      10.4
    Employment
      Agreement- Andrew MakridesExhibit
      10.5
    Employment
      Agreement-J. Robert SaronExhibit
      10.6
    Employment
      Agreement-Moshe CitronowiczExhibit 10.7
    Employment Agreement-Charles
  PeabodyExhibit 21.1
    Consent of Bloom & Co., LLPExhibit 31.1
    Certification pursuant to Section 302 of Sarbanes-Oxley
      Act of 2002.Exhibit 31.2
    Certification pursuant to Section 302 of Sarbanes-Oxley
      Act of 2002.Exhibit 32.1
    Certification pursuant to Section 906 of Sarbanes-Oxley
      Act of 2002.Exhibit 32.2
    Certification pursuant to Section 906 of Sarbanes-Oxley
      Act of 2002._____________________*
      Incorporated by reference to Exhibits 3.1,3.2 and 4.1 to Form 10KSB/A for
      December 31, 2003 filedWith
      the SEC on February 16, 2005.
 
 **Item
13B.****8K’s
Filed in the Fourth Quarter**
 
 **Two
Form 8-K were filed in the fourth quarter of 2004.**
 
 (a)
    Filed
      on October 4, 2004 item 5 - other events reporting appointment of two new
      directors.
 ****
 (b) Filed
on December 30, 2004 item 1.01 regarding a distribution agreement for the Far
East.
 
 **Item
14. Principal Accountant Fees And Services**
 
 The
following table sets forth the aggregate fees billed to us for fiscal years
ended December 31, 2004 and 2003 by Bloom & Co., LLP, our
auditors:
 
 2004
    
    2003Audit
      Fees (1)
    
    $
    133,442
    
    $
    110,669Non-Audit
      Fees:Audit
      Related Fees(2)
    
    
    --
    
    
    --Tax
      Fees(3)
    
    
    5,000
    
    
    5,000All
      other Fees(4)
    
    
    --
    
    
    --Total
      Fees paid to Auditor
    
    $
    138,442
    
    $
    115,669
  J.
    Audit
      fees consist of fees billed for professional services rendered for the
      audit of Bovie’s annual financial statements and review of the interim
      consolidated financial statements and review of the interim consolidated
      financial statements included in quarterly reports and services that are
      normally provided by Bloom & Co., LLP in connection with statutory and
      regulatory filings or engagements.
 
 (2)
Audit-Related fees consist of fees billed for assurance and related services
that are reasonably related to the performance of the audit or review of Bovie’s
consolidated financial statements and are not reported under “Audit
Fees”.
 
 (3) Tax
fees consist of fees billed for professional services rendered for tax
compliance, tax advice and tax planning (domestic and international). These
services include assistance regarding federal, state and international tax
compliance, acquisitions and international tax planning.
 
 (4) All
other fees consist of fees for products and services other than the services
reported above. In the past the Board of Directors had considered the role of
Bloom & Co., LLP in providing certain tax services to Bovie and had
concluded that such services were compatible with Bloom & Co., LLP’s
independence as our auditors. In addition, since the effective date of the SEC
rules stating that an auditor is not independent of an audit client if the
services it provides to the client are not appropriately approved (which was
previously done by the Board of Directors). Now the Audit Committee will
pre-approve all audit and permissible non-audit services provided by the
independent auditors.
 
 **Audit
Committee**
 
 The Audit
Committee has adopted a policy for the pre-approval of services provided by the
independent auditors, pursuant to which it may pre-approve any service
consistent with applicable law, rules and regulations. Under the policy, the
Audit Committee may also delegate authority to pre-approve certain specified
audit or permissible non-audit services to one or more of its members, including
the Chairman. A member to whom pre-approval authority has been delegated must
report its pre-approval decisions, if any, to the Audit Committee at its next
meeting, and any such pre-approvals must specify clearly in writing the services
and fees approved. Unless the Audit Committee determines otherwise, the term for
any service pre-approved by a member to whom pre-approval authority has been
delegated is twelve months.
 
 Prior to
September 29, 2003 the audit committee consisted of the board of directors. On
September 29, 2003 the board of directors appointed Brian Madden, George Kromer
(both independent directors) and Andrew Makrides as audit committee members. Mr.
Madden was considered audit committee financial expert until Mr. Michael Norman
CPA was made a board member on September 23, 2004. The audit committee is
presently made up of three members, George Kromer (Chairman), Michael Norman,
CPA (Financial Expert) and Brian Madden.
  **SIGNATURES**
 
 Pursuant
to the requirements of the Section 13 or 15(d) of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized, in the Melville, New York on July
11, 2005.
 
 Bovie
      Medical CorporationBy:
      /s/ Andrew MakridesAndrew
      MakridesPresidentChairman
      of the Board
  **PART
II**
 
 **ITEM
7. FINANCIAL STATEMENTS**
 
 **BOVIE
MEDICAL CORPORATION INDEX**
 **TO
FINANCIAL STATEMENTS**
 
 Page
 ContentsIndependent Auditors' ReportRestated
      Consolidated Balance Sheet at December 31, 2004 and 2003
    F-1Restated
      Consolidated Statements of Operations for the years ended December 31,
      2004 and 2003
    F-3Consolidated
      Statements of Shareholders' Equity for the years ended December 31, 2004
      and 2003
    F-5Consolidated
      Statements of Cash Flows for the years ended December 31, 2004 and
      2003
    F-6Restated
      Notes to Consolidated Financial Statements
    F-9Consent of Certified Public
    Accountant
 
 BLOOM
      & CO., LLP 50 CLINTON STREET. HEMPSTEAD. NEW YORK 11550:
    TEL:
      516 - 486-5900CERTIFIED
      PUBLIC ACCOUNTANTS
    FAX:
      516 - 486-5476STEVEN
      BLOOM, CPA
      FREDERICK
      PAUKER, CPA
      SIROUSSE
      TABRIZTCHI, Ph.D. CPA
    MEMBER
      OF AMERICAN INSTITUTE OF
      CERTIFIED
      PUBLIC ACCOUNTANTS
 
 
 
 **REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING
FIRM**
 
 To the
Board of Directors
 and
Shareholders of
 Bovie
Medical Corporation
 
 We have
audited the accompanying consolidated balance sheets of Bovie Medical
Corporation as of December 31, 2004 and 2003, and the related consolidated
statements of operations, stockholders’ equity, and cash flows for the years
then ended. These financial statements are the responsibility of the Company’s
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
 
 We
conducted our audits in accordance with standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
 
 In our
opinion, the financial statements referred to above present fairly, in all
material respects, the consolidated financial position of Bovie Medical
Corporation as of December 31, 2004 and 2003, and the consolidated results of
its operations and its cash flows for the years then ended in conformity with
accounting principles generally accepted in the United States of America.
 
 As more
fully discussed in Note 1 to the consolidated financial statements, the Company
has restated its investment in a joint venture in its consolidated balance
sheets for the years ended December 31, 2004 and 2003 and the gain from
involuntary conversion of fixed assets in the statement of income for the year
ended December 31, 2004.
 
 /s/Bloom
and Company LLP
 Hempstead,
New York
 March 25,
2005 (except for the Notes 1, 2, 6 and 14, as to which the date is July 11,
2005)
 
 **BOVIE
MEDICAL CORPORATION**
 **CONSOLIDATED BALANCE SHEET**
 **DECEMBER
31, 2004 AND 2003**
 
 **ASSETS**
 
 2004
    
    2003Current
      assets:Cash
    
    $
    2,294,746
    
    $
    306,137Trade
      accounts receivable, net
    
    
    1,954,287
    
    
    1,708,181Inventories
    
    
    2,001,637
    
    
    2,451,149Prepaid
      expenses
    
    
    328,765
    
    
    390,025Deferred
      tax asset
    
    
    386,200
    
    
    386,200Total
      current assets
    
    
    6,965,635
    
    
    5,241,692Property
      and equipment, net
    
    
    2,116,324
    
    
    1,900,015Other
      assets:Repair
      parts
    
    
    124,363
    
    
    228,226Brand
      name/Trademark
    
    
    1,509,662
    
    
    1,509,662Purchased
      technology (net)
    
    
    88,572
    
    
    144,967License
      rights, restated
    
    
    350,000
    
    
    360,000Deposits
    
    
    14,445
    
    
    9,4702,087,042
    
    
    2,252,325Total
      Assets
    
    $
    11,169,001
    
    $
    9,394,032The
      accompanying notes are an integral part of the financial
      statements.
 
  **BOVIE
MEDICAL CORPORATION**
 **CONSOLIDATED
BALANCE SHEET**
 **DECEMBER
31, 2004 AND 2003**
 **(Continued)**
 
 **LIABILITIES
AND STOCKHOLDERS' EQUITY**
 
 **LIABILITIES**
 
 Current
      liabilities:
    
    2004
    
    2003Accounts
      payable
    
    $
    620,151
    
    $
    679,792Accrued
      expenses and other liabilities
    
    
    568,482
    
    
    473,630Customers
      deposits
    
    
    36,000
    
    
    112,000Deferred
      Revenue
    
    
    157,844
    
    
    103,445Current
      maturities of long term debt
    
    
    31,668
    
    
    35,343Total
      current liabilities
    
    
    1,414,145
    
    
    1,404,210Mortgage
      Payable-Non current
    
    
    348,325
    
    
    379,995Minority
      interest, restated
    
    
    150,000
    
    
    160,000Stockholders'
      equity:Preferred
      stock 10,000,000 shares
      authorized,
      none outstandingCommon
      stock par value $.001;
      40,000,000
      shares authorized,
      13,862,128
      and 13,464,528
      issued
      and outstanding
      on
      December 31, 2004 and
      December
      31, 2003 respectively,
    
    
    13,881
    
    
    13,482Additional
      paid in capital
    
    
    20,391,407
    
    
    20,097,095Accumulated
      deficit
    
    
    (11,148,757
    )
    
    (12,660,750
    )Total
      stockholders' equity
    
    
    9,256,531
    
    
    7,449,827Total
      liabilities and stockholders' equity
    
    $
    11,169,001
    
    $
    9,394,032The
      accompanying notes are an integral part of the financial
      statements.
 
 **BOVIE
MEDICAL CORPORATION**
 **CONSOLIDATED STATEMENT OF OPERATIONS**
 **FOR
THE YEARS ENDED DECEMBER 31, 2004 AND 2003**
 2004
    
    2003Sales
    
    $
    20,495,101
    
    $
    16,117,722Cost
      of sales
    
    
    12,514,063
    
    
    9,604,183Gross
      Profit
    
    
    7,981,038
    
    
    6,513,539Other
      costs:Research
      and development
    
    
    907,389
    
    
    717,347Professional
      services
    
    
    415,606
    
    
    392,796Salaries
      and related costs
    
    
    1,977,053
    
    
    1,721,545Selling,
      general and administration
    
    
    3,363,148
    
    
    2,936,479Development
      costs - joint venture
    
    
    39,286
    
    
    81,914Total
      other costs
    
    
    6,702,482
    
    
    5,850,081Income
      from operations
    
    
    1,278,556
    
    
    663,458Other
      income and (expense):Gain from involuntary conversion of fixed assets
    
    
    245,264Interest income
    
    
    3,263
    
    
    2,980Interest expense
    
    
    (
      15,090
    )
    
    (34,060
    )233,437
    
    
    (31,080
    )Net
      income before income tax
    
    
    1,511,993
    
    
    632,378Income
      tax expense
    
    
    (541,000
    )
    
    (228,000
    )Income
      tax benefit
    
    
    541,000
    
    
    228,000Net
      income from continuing operations
    
    $
    1,511,993
    
    $
    632,378Discontinued
      Operations:Gain
      from operations of discontinued component(loss
      on disposal -0-)
    
    
    --
    
    
    48,939Income
      tax expense
    
    
    
    
    
    (18,000
    )Income
      tax benefit
    
    
    --
    
    
    18,000Gain
      from discontinued operations
    
    
    --
    
    
    48,939Net
      income
    
    $
    1,511,993
    
    $
    681,317The
      accompanying notes are an integral part of the financial
      statements.
 
 **BOVIE
MEDICAL CORPORATION**
 **CONSOLIDATED
STATEMENT OF OPERATIONS**
 **FOR
THE YEARS ENDED DECEMBER 31, 2004 AND 2003**
 **(CONTINUED)**
 
 2004
    
    2003Basic
      earnings per common share
    
    $
    .11
    
    $
    .05Diluted
      earnings per common share
    
    
    .09
    
    
    .05Earnings
      from discontinued operations
    
    
    --
    
    
    --Weighted
      average numberof
      common shares outstanding
    
    
    13,755,552
    
    
    13,188,353Incremental
      items:Stock
      options
    
    
    2,422,329
    
    
    1,647,097Diluted
      weighted averagecommon
      shares outstanding
    
    
    16,177,881
    
    
    14,835,450*Basic
      Earnings per share were $.004 and diluted earnings per share were $.003
      from discontinued operations.The
      accompanying notes are an integral part of the financial
      statements.
  **BOVIE
MEDICAL CORPORATION**
 **CONSOLIDATED STATEMENT OF SHAREHOLDERS
EQUITY**
 **FOR
THE YEARS ENDED DECEMBER 31, 2004 AND 2003**
 Options
    Preferred
    Common
    Paid-Outstanding
    Shares
    Value
    Shares
    Value
    in
      Capital
    Deficit
    TotalJanuary
      1, 2003
    2,909,000
    --
    --
    13,256,103
    $13,274
    $19,820,044
    $(13,342,067)
    $6,491,251Subscription
      Receivable
    
    
    
    
    
    6,131
    
    6,131Cancel
      shares onRecission
      offer
    --
    --
    --
    (142,575)
    (143)
    18,931
    --
    18,788Exercise
      options for cash
    (350,000)
    
    
    350,000
    350
    250,650
    --
    251,000Options
      cancelled or forfeited
    (361,200)
    --
    --
    --
    --
    --
    --
    --Options
      granted
    1,791,000
    --
    --
    --
    --
    --
    --
    --Shares
      issued for promotion
    --
    --
    --
    1,000
    1
    1,339
    --
    1,340Income
      for period
    --
    --
    --
    --
    --
    --
    681,317
    681,317December
      31, 2003
    3,988,800
    --
    --
    13,464,528
    $13,482
    $20,097,095
    $(12,660,750)
    $7,449,827Options
      granted
    370,000
    --
    --
    --
    --
    --
    --
    --Options
      exercised
    (397,600)
    --
    --
    397,600
    399
    294,312
    --
    294,711Options
      forfeited
    (
      10,000)
    --
    --
    --
    --
    --Income
      for period
    --
    --
    --
    --
    --
    --
    1,511,993
    1,511,993December
      31, 2004
    3,951,200
    --
    --
    13,862,128
    $13,881
    $20,391,407
    $(11,148,757)
    $9,256,531
 
  **BOVIE
MEDICAL CORPORATION**
 **CONSOLIDATED STATEMENT OF CASH FLOWS**
 **FOR
THE YEARS ENDED DECEMBER 31, 2004 AND 2003**
 
 2004
    
    2003Cash
      flows from operating activities:Net
      income
    
    $
    1,511,993
    
    $
    681,317Adjustments
      to reconcilenet
      income to net cash providedby
      operating activities:Depreciation
      and amortization
    
    
    395,119
    
    
    314,682Cancel
      recission liability
    
    
    
    
    
    18,788Promotion
      cost paid with shares
    
    
    
    
    
    1,340Write
      down of inventories and parts
    
    
    303,872
    
    
    352,295Write
      down development cost
    
    
    
    
    
    112,471Involuntary
      conversion of fixed assets
    
    
    (
      245,264
    )
    
    --Change
      in assets and liabilities:Trade
      receivables
    
    
    (322,106
    )
    
    (357,694
    )Prepaid
      expenses
    
    
    61,260
    
    
    (225,761
    )Inventories
      and parts
    
    
    249,503
    
    
    (392,419
    )Other
      receivables
    
    
    --
    
    
    45,044Accounts
      payable
    
    
    (59,641
    )
    
    201,124Accrued
      expenses
    
    
    149,251
    
    
    164,126Total
      adjustments
    
    
    531,994
    
    
    233,996Net
      cash provided by operations
    
    $
    2,043,987
    
    $
    915,313The
      accompanying notes are an integral part of the financial
      statements.
  **BOVIE
MEDICAL CORPORATION**
 **CONSOLIDATED
STATEMENT OF CASH FLOWS**
 **FOR
THE YEARS ENDED DECEMBER 31, 2004 AND 2003**
 **(Continued)**
 
 2004
    
    2003Net
      cash provided by operating activities
    
    $
    2,043,987
    
    $
    915,313Cash
      flows from investing activities:(Increase)
      in fixed assets
    
    
    (606,505
    )
    
    (565,915
    )Decrease(Increase)in
      security deposits
    
    
    (
      4,975
    )
    
    --Purchase
      of technology
    
    
    --
    
    
    (
      88,926
    )Involuntary
      conversion of fixed assets
    
    
    296,735
    
    
    --Net
      cash provided by (used in) investing activities
    
    
    (314,745
    )
    
    (654,841
    )Cash
      flows from financing activities;Loans
      from shareholders
    
    
    
    
    
    (
      37,215
    )Sale
      of common stock
    
    
    290,425
    
    
    251,000Reduction
      in subscription receivable
    
    
    4,286
    
    
    6,131Reduction
      in mortgage
    
    
    (35,344
    )
    
    (
      31,668
    )Bonds
      payable
    
    
    --
    
    
    (
      20,000
    )Short
      term notes
    
    
    --
    
    
    (501,792
    )Net
      cash (used in) financing activities
    
    
    259,367
    
    
    (333,544
    )Net
      increase(decrease) in cash
    
    
    1,988,609
    
    
    (
      73,072
    )Cash
      at beginning of year
    
    
    306,137
    
    
    379,209Cash
      at end of year
    
    $
    2,294,746
    
    $
    306,137Cash
      paid during the twelve months ended December 31:2004
    
    
    2003Interest
    
    $
    11,625
    
    $
    34,060Income
      Taxes
    
    
    --
    
    
    --The
      accompanying notes are an integral part of these financial
      statements.
  **BOVIE
MEDICAL CORPORATION AND SUBSIDIARY**
 **CONSOLIDATED
STATEMENT OF CASH FLOWS**
 **INCREASE
(DECREASE) IN CASH AND CASH EQUIVALENTS**
 **FOR
THE YEAR ENDED DECEMBER 31, 2004 AND 2003**
 
 **SUPPLEMENTAL
SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:**
 
 **FOR
THE TWELVE MONTHS ENDED DECEMBER 31, 2004 AND 2003:**
 
 During
2003 we gave as a promotion, 1,000 shares of common stock valued at $1,340 to a
vendor.
 
 In
October 2004 a hurricane tore a portion of the roof off the office facility at
7100 30 th Avenue
North, St. Petersburg, Florida causing extensive water damage to that portion of
the building. The cost of the building allocated to the loss was $63,749 of
which there was depreciation of $12,278 leaving a net cost of $51,471. As per
Financial Accounting Standard Board interpretation number 30 we have recognized
a gain of 245,264 from the non-monetary asset being involuntarily converted to a
monetary asset through the payment by the insurance company of
$296,735.
   **BOVIE
MEDICAL CORPORATION**
 **NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**
 
 **NOTE
1. SIGNIFICANT ACCOUNTING POLICIES**
 
 **Use
of Estimates in the Preparation of Financial Statements**
 
 The
preparation of consolidated financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
 
 **Consolidated
Financial Statements**
 
 The
accompanying consolidated financial statements include the accounts of Bovie
Medical Corporation and its wholly owned subsidiary Aaron Medical Industries,
Inc. Intercompany transaction accounts have been eliminated in
consolidation.
 
 The
equity method of accounting is used when the Company has a 20% to 50% interest
in other companies. Under the equity method, original investments are recorded
at cost and adjusted by the company's share of undistributed earnings or losses
of these companies.
 
 **Cash
and cash equivalents**
 
 Holdings
of highly liquid investments with maturities of three months or less, when
purchased, are considered to be cash equivalents. The carrying amount reported
in the balance sheet for cash and cash equivalents approximates its fair values.
The amount of federally insured cash deposits was $100,000 as of December 31,
2004.
 
 **Fair
Values of Financial Instruments**
 The
carrying amount of trade accounts receivable, accounts payable, prepaid and
accrued expenses, bonds and notes payable, and amounts due to shareholders, as
presented in the balance sheet, approximates fair value.
 
 **Accounts
Receivable**
 
 Accounts
for which no payments have been received for three consecutive months are
considered delinquent and a reserve is setup for them. Customary collection
efforts are initiated and an allowance for uncollectible accounts is set up and
the related expense is charged to operations. We give negotiated sales volume
discounts which amounted to $382,433 and $323,071 for 2004 and 2003,
respectively. Sales, as shown on the profit and loss statement of net of all
discounts.
 
 **Inventories
and Repair Parts**
 
 Inventories
are stated at the lower of cost or market. Cost is determined principally on the
average actual cost method. Finished goods and work-in-process inventories
include material, labor, and overhead costs. Factory overhead costs are
allocated to inventory manufactured in-house based upon cost of materials. Bovie
monitors usage reports to determine if the carrying value of any items should be
adjusted due to lack of demand for the item. Bovie adjusts down the inventory
for estimated obsolescence (inventory judged to be unused in the manufacturing
process for 2 years and is eventually discarded) or unmarketable inventory equal
to the difference between the cost of inventory and the estimated market value
based upon assumptions about future demand and market conditions. If actual
market conditions are less favorable than those projected by management,
additional inventory write-down may be required.
  **BOVIE
MEDICAL CORPORATION**
 **NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS**
 
 **NOTE
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)**
 
 **Inventories
and Repair Parts (Continued)**
 
 Inventory
at December 31, 2004 and 2003 was as follows:
 
 2004
    
    2003Raw
      materials (net of reserves)
    
    $
    705,188
    
    $
    1,332,742Work
      in process
    
    
    742,289
    
    
    616,837Finished
      goods
    
    
    554,160
    
    
    501,570Total
    
    $
    2,001,637
    
    $
    2,451,149
 
 Reserves
for obsolescence of raw materials were $817,808 and $784,992 at December 31,
2004 and 2003, respectively. There were no reserves for finished goods or work
in progress.
 
 Obsolete
raw material inventory charged to operations was $303,872 and $352,295 for 2004
and 2003, respectively.
 
 Repair
Parts. We acquired the inventory of repair parts in conjunction with the
purchase of the Bovie line of generators and Bovie trade name, on May 8, 1998.
Bovie has maintained the inventory to service the previously sold generators.
The useful life of repair parts is estimated to be five to seven years and the
Company has set up an allowance for excess and obsolete parts.
 
 As of
December 31, 2004 and 2003 the inventory of parts were as follows:
 
 2004
    
    2003Raw
      materials
    
    $
    317,615
    
    $
    317,614Allowance
      for excess or obsolete parts
    
    
    (193,252
    )
    
    (89,388
    )Total
    
    $
    124,363
    
    $
    228,226
 
 **Notes
Payable**
 
 We
account for all note liabilities that are due and payable in one year as short
term notes for example: Our line of credit with a commercial bank and our
insurance premium financing arrangement which had zero balances at December 31,
2004.
 
 **Property,
plant and equipment**
 
 These
assets are recorded at cost less depreciation and amortization. Depreciation and
amortization are accounted for on the straight-line method based on estimated
useful lives. The amortization of leasehold improvements is based on the shorter
of the lease term or the life of the improvement. Betterments and large
renewals, which extend the life of the asset, are capitalized whereas
maintenance and repairs and small renewals are expenses, as incurred. The
estimated useful lives are: machinery and equipment, 7-15 years; buildings, 30
years; and leasehold improvements, 10-20 years.
 
 **BOVIE
MEDICAL CORPORATION**
 **NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS**
 
 **NOTE
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)**
 
 **Goodwill
and Other Intangible Assets**
 
 These
assets consist of licenses, purchased technology and brand name. The licenses
and purchased technology (other intangibles) are being amortized by the
straight-line method over a 5-20 year period. The brand name
(goodwill) qualifies as an indefinite-lived intangible asset and is not
subject to amortization.
 
 Goodwill/brand
name/trademark represents the excess of purchase price over fair value of
identifiable net assets of acquired businesses.  Other intangible assets
primarily represent allocations of purchase price to identifiable intangible
assets of acquired businesses.  Goodwill/brand name/trademark and other
intangible assets had been amortized over periods ranging from 5 to 40 years
through December 31, 2001.
 
 In June
2001, the Financial Accounting Standards Board issued statement of Financial
Accounting Standards No. 142 "Goodwill and other Intangible Assets" ("SFAS
142").  We adopted SFAS 142 effective January 1, 2002.  As a result of
the adoption of this standard, amortization of goodwill and certain intangibles
has been discontiinued.  .
 
 **Impairment
of Long-Lived Assets**
 
 We review
long-lived assets consisting of intangible assets subject to and not subject to
amortization and property, plant and equipment subject to depreciation. 
Our brand name is tested for impairment annually, or more frequently if the
events or changes in circumstances indicate that the asset may have been
impaired. In the event of impairment of any intangible asset, the excess of the
carrying amount over the fair value is recognized as impairment loss. The
impairment losses are not restored in future. We assess the recovery ability of
goodwill and other intangible assets based on independent appraisal and or
undiscounted cash flows that measures the impairment, if any.
 
 **Revenue
recognition**
 
 Revenue
is recognized when title has been transferred to the customer, which is
generally at the time of shipment. The following policies apply to our major
categories of revenue transactions:
 
 Sales to
customers are evidenced by firm purchase orders. Title and the risks and rewards
of ownership are transferred to the customer when product is shipped. Payment by
the customer is due under fixed payment terms.
 
 Product
returns are only accepted at our discretion and in accordance with our “Returned
Goods Policy”. Historically, the level of product returns has not been
significant. We accrue for sales returns, rebates and allowances based upon an
analysis of historical customer returns and credits, rebates, discounts and
current market conditions.
 
 Our terms
of sale to customers generally do not include any obligations to perform future
services. Limited warranties are generally provided for sales and provisions for
warranty are provided at the time of product sale based upon an analysis of
historical data.
 
 Amounts
billed to customers related to shipping and handling have been included in net
sales. Shipping and handling costs included in cost of sales expense were
$305,391, and $249,919 for 2004 and 2003, respectively.
 
 We have
no consignment inventory.
 
 **BOVIE
MEDICAL CORPORATION**
 **NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS**
 
 **NOTE
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)**
 
 We sell
to a diversified base of customers around the world and, therefore, believe
there is no material concentration of credit risk.
 
 We assess
the risk of loss on accounts receivable and adjust the allowance for doubtful
accounts based on this risk assessment. Historically, losses on accounts
receivable have not been material. Management believes that the allowance for
doubtful accounts of $112,392 at December 31, 2004 is adequate to provide for
probable losses resulting from accounts receivable.
 
 **Advertising
Costs**
 
 All
advertising costs are expensed, as incurred. The amounts of advertising costs
were $452,121 and $529,711 for 2004 and 2003, respectively.
 
 **Net
Earnings Per Common share**
 
 Basic
earnings per share ("EPS") is computed based on the weighted average number of
common shares outstanding for the period. Diluted EPS gives effect to all
dilutive potential shares outstanding (i.e., options and warrants) during the
period. (See Significant Accounting Policies - Stock Based
Compensation)
 ****
 **Research
and Development Costs**
 
 Research
and development expenses are charged to operations. Only the development costs
that are purchased from another enterprise and have alternative future use are
capitalized and are amortized over the estimated useful life of the asset,
generally five years.
 
 **Research
and Development Costs for Others**
 
 For
research and development activities that are partially or completely funded by
other parties and the obligation is incurred solely to perform contractual
services all expenses are charged to cost of sales and all revenues are shown as
sales.
 
 We will
only develop electrosurgical products for others that use our product as the
base for their instrument. Our development agreements provide that the customer
must pay the costs for the development as it progresses and further provide that
any future purchases of the developed product must be purchased from us. We
assume no contractual risk and operate as the customer’s original equipment
manufacturer. Our agreements call for no minimum order, but the customer may not
manufacture or purchase this product from any other manufacturer.
 
 **Income
Taxes**
 
 Bovie and
its wholly owned subsidiary file a consolidated federal income tax return.
Income taxes are accounted for under the asset and liability method. Deferred
tax assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases and operating
loss and tax credit carryforwards. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a change in tax
rates is recognized in income in the period that includes the enactment date.
  **BOVIE
MEDICAL CORPORATION**
 **NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS**
 
 **NOTE
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)**
 
 **Non-monetary
Transactions**
 
 The
accounting for non-monetary assets is based on the fair values of the assets
involved. Cost of a non-monetary asset acquired in exchange for another
non-monetary asset is recorded at the fair value of the asset surrendered to
obtain it. The difference in the costs of the assets exchanged is recognized as
a gain or loss. The fair value of the asset received is used to measure the cost
if it is more clearly evident than the fair value of the asset surrendered.
 
 **Stock-Based
Compensation**
 
 The
Company had adopted SFAS 123 and has adopted the amendments to SFAS 123
disclosure provisions required under SFAS 148. Bovie will continue to account
for stock-based compensation utilizing the intrinsic value method pursuant to
Accounting Principles Board Opinion No. 25 (APB 25), Accounting for Stock Issued
to Employees. Under this policy:
 
 1.
Compensation costs are recognized as an expense over the period of employment
attributable to any employee stock options. 2. Stocks issued in accordance with
a plan for past or future services of an employee are allocated between the
expired costs and future costs. Future costs are
 charged
to the periods in which the services are performed.
 
 In
December 2002, the FASB issued Statement No. 148, Accounting for Stock-Based
compensation - Transition and Disclosure - an amendment of FASB Statement No.
123. Statement No. 148 amends Statement No. 123, Accounting for Stock-Based
Compensation, to provide alternative methods of transition for a voluntary
change to the fair-value based method of accounting for stock-based employee
compensation. In addition, Statement No. 148 amends the disclosure requirements
of Statement No. 123 to require disclosure in interim financial statements
regarding the method of accounting for stock-based employee compensation and the
effect of the method used on reported results. Bovie does not intend to adopt a
fair-value based method of accounting for stock-based employee compensation
until a final standard is issued by the FASB that addresses concerns related to
the applicability of current option pricing models to non-exchange traded
employee stock option plans. SFAS 148 also amends the disclosure requirements of
SFAS 123 to require prominent disclosures in both annual and interim financial
statements about the method of accounting for stock-based employee compensation
and the effect of the method used on reported results. SFAS 148 is effective for
financial statements for annual periods ending after December 15, 2002 and
interim periods beginning after December 31, 2002.
 
 Bovie adopted
the amendments to SFAS 123 disclosure provisions required under SFAS 148 and
continued to use intrinsic value method under APB 25 to account for stock-based
compensation. As such, the adoption of this statement did not have a
significant impact on Bovie’s financial position, results of operations or cash
flows.
 
  **BOVIE
MEDICAL CORPORATION**
 **NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS**
 
 **NOTE
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)**
 
 At
December 31, 2004, we had key employee and director stock option plans, which
are described more fully in Note
8 . 
The Company follows Accounting Principles Board (APB) Opinion No. 25, *Accounting
for Stock Issued to Employees* , in
accounting for its stock option plans.  Under Opinion No. 25, no
compensation expense is recognized because the exercise price of the Company's
stock options equals the market price of the underlying stock on the measurement
date (date of grant).  Had compensation expense for the Company's
stock-based compensation plans been determined based on the fair value at the
grant dates for awards under those plans consistent with the method of FASB
Statement No. 123, *Accounting
for Stock-Based Compensation* , the
Company's net earnings and net earnings per share would have been as follows:
(in thousands)
 
 2004
    
    2003Net
      earnings:As
      reported
    
    $
    1,512
    
    $
    681Deduct:
      Compensation expense --fair
      value method
    
    
    (522
    )
    
    (999
    )Pro
      forma
    
    $
    990
    
    $
    (318
    )
 
 Basic
      net earnings per share:As
      reported
    
    $
    .11
    
    $
    .05Pro
      forma
    
    $
    .07
    
    $
    (
      .03
    )Diluted
      net earnings per share:As
      reported
    
    $
    .09
    
    $
    .05Pro
      forma
    
    $
    .06
    
    $
    (.02
    )
 
 The
weighted-average fair value per share of options granted during 2004 and 2003,
estimated on the date of grant using the Black-Scholes option-pricing model, was
$1.41 and $1.00, respectively.  The fair value of options granted was
estimated on the date of grant using the following assumptions:
 
 2004
    2003Risk-free
      interest rate
    4.18%
    6.34%Expected
      dividend yield
    0.00%
    0.00%Expected
      stock price volatility
    43%
    50.0%Expected
      option life
    10
      years
    10
      years
 
 
 **BOVIE
MEDICAL CORPORATION**
 **NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS**
 
 **NOTE
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)**
 
 **New
Accounting Pronouncements**
 
 In
December 2004, the FASB issued SFAS No.123 (revised 2004), "Share-Based Payment"
("SFAS 123R"), which replaces SFAS No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123") and supercedes APB Opinion No. 25, "Accounting for
Stock Issued to Employees. "SFAS 123R requires that all share-based payments to
employees, including grants of employee stock options, be recognized in the
financial statements based on their fair values, beginning with the first
interim or annual period after June 15, 2005, with early adoption encouraged.
The pro forma disclosures previously permitted under SFAS 123, no longer will be
an alternative to financial statement recognition. We are required to adopt SFAS
123R in the third quarter of 2005. Under SFAS 123R, we must determine the
appropriate fair value model to be used in valuing share-based payments, the
amortization method for compensation cost and the transition method to be used
at the date of adoption. Upon adoption, we may choose from two transition
methods: the modified-prospective transition approach or the
modified-retroactive transition approach. Under the modified-prospective
transition approach we would be required to recognize compensation cost for
awards that were granted prior to, but not vested as of the date of adoption.
Prior periods remain unchanged and pro forma disclosures previously required by
SFAS No. 123 continue to be required. Under the modified-retrospective
transition method, we would be required to restate prior periods by recognizing
compensation cost in the amounts previously reported in the pro forma disclosure
under SFAS No. 123. Under this method, we would be permitted to apply this
presentation to all periods presented or to the start of the fiscal year in
which SFAS No. 123R is adopted. We would also be required to follow the same
guidelines as in the modified-prospective transition method for awards granted
subsequent to adoption and those that were granted and not yet vested. We are
currently evaluating the requirements of SFAS 123R and its impact on our
consolidated results of operations and earnings per share. We have not yet
determined the method of adoption or the effect of adopting SFAS 123R, and it
has not been determined whether the adoption will result in amounts similar to
the current pro forma disclosures under SFAS 123.
 
 In
December 2004, the FASB issued Staff Position ("FSP") No.109-2, "Accounting and
Disclosure Guidance for the Foreign Earnings Repatriation Provision within the
American Jobs Creation Act of 2004" ("FSP 109-2"). This position provides
guidance under FASB Statement No.109 ("SFAS 109"), "Accounting for Income
Taxes", with respect to recording the potential impact of the repatriation
provisions of the American Jobs Creation Act of 2004 (the "Jobs Act") on
enterprises' income tax expense and deferred tax liability. The Jobs Act was
enacted on October 22, 2004. FSP 109-2 states that an enterprise is allowed time
beyond the financial reporting period of enactment to evaluate the effect of the
Jobs Act on its plan for reinvestment or repatriation of foreign earnings for
purposes of applying SFAS 109.   The Company does not have accumulated
income earned abroad and The Act and the FSP No. 109-2 do not have any
effect on the Company's financial statements.
 
 In
December 2004, the FASB issued SFAS No. 153, "Exchanges of Nonmonetary Assets -
An Amendment of APB Opinion No. 29, Accounting for Nonmonetary Transactions"
("SFAS 153"). SFAS 153 eliminates the exception from fair value measurement for
nonmonetary exchanges of similar productive assets in paragraph 21(b) of APB
Opinion No. 29, "Accounting for Nonmonetary Transactions," and replaces it with
an exception for exchanges that do not have commercial substance. SFAS 153
specifies that a nonmonetary exchange have commercial substance if the future
cash flows of the entity are expected to change significantly as a result of the
exchange. SFAS 153 is effective for fiscal periods beginning after June 15,
2005. We have considered SFAS 153 and have determined that this pronouncement is
not applicable to our current operations.
 
 **BOVIE
MEDICAL CORPORATION**
 **NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS**
 
 **NOTE
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)**
 
 In
November 2004, the FASB issued SFAS No. 151, "Inventory Costs - An Amendment of
ARB Opinion No. 43, Chapter 4" ("SFAS 151"). SFAS 151 amends the guidance in ARB
No. 43, Chapter 4, "Inventory Pricing," to clarify the accounting for abnormal
amounts of idle facility expense, freight, handling costs, and wasted material
(spoilage). Among other provisions, the new rule requires that items such as
idle facility expense, excessive spoilage, double freight, and rehandling costs
be recognized as current period charges regardless of whether they meet the
criterion of "so abnormal" as stated in ARB No. 43. Additionally, SFAS 151
requires that the allocation of fixed production overheads to the costs of
conversion be based on the normal capacity of the production facilities. SFAS
151 is effective for fiscal years beginning after June 15, 2005. We have
considered SFAS 151 and have determined that this pronouncement will not
materially impact our consolidated results of operations.
 
 In
November 2004, the FASB issued SFAS No. 152, "Accounting for Real Estate
Time-Sharing Transactions - An amendment of SFAS No. 66 and 67". This statement
amends SFAS No. 66, "Accounting for Sales of Real Estate, to reference the
financial accounting and reporting guidance for real estate time-sharing
transactions which is provided in AICPA Statement of Position ("SOP") 04-2,
"Accounting for Real Estate Time-Sharing Transactions." This statement also
amends SFAS No. 67, "Accounting for Costs and Initial Rental Operations of Real
Estate Projects," to state the guidance for (a) incidental costs and (b) costs
incurred to sell real estate projects does not apply to real estate time-sharing
transactions. The accounting for those costs is subject to guidance in SOP 04-2.
SFAS 152 is effective for fiscal years beginning after June 15, 2005. We have
considered SFAS 152 and have determined that this pronouncement is not
applicable to our current operations.
 
 ***FASB
Interpretation No. 46R, Consolidation of Variable Interest Entities - An
Interpretation of ARB51*** The FASB
finalized FIN 46R in December 2003. FIN 46R expands the scope of ARB51 and
various EITFs and can require consolidation of legal structures, called *Variable
Interest Entities (VIEs)* .
Companies with investments in *Special
Purpose Entities (SPEs)* were
required to implement FIN 46R in 2003; however, companies with VIEs are
permitted to implement in the first quarter of 2004. While we do not have SPEs,
we do have a VIE that we have determined will qualify for consolidation. This
include joint
venture with Jump Agentur Fur Electrotechnik GMBH (“the Joint Venture”,
“JAG”). We have
consolidated this VIEs in the years ended December 31, 2004 and 2003. The most
significant impact to our financial statements is to add the intangible assets
of JAG, totaling approximately $350,000 in 2004 and $360,000 in 2003, and
minority interest of $150,000 in 2004 and $160,000 in 2003 to our balance
sheets. The impacts on our consolidated statements of net income or cash flows
are not material.
 
 In
December 2003, the FASB issued a revision to Statement No. 132, Employers'
Disclosures about Pensions and Other Postretirement Benefits. This revision
requires additional disclosures by the Company regarding its plan assets,
investment strategies, plan obligations and cash flows. We have considered
revised statement 132 and have determined that at this time this pronouncement
is not applicable to our current operations.
 
 Reclassifications:
Certain prior year amounts have been reclassified to conform with the
presentation used in 2004.
 
 **RESTATEMENT
OF FINANCIAL STATEMENTS**
 
 We
adopted ***FASB
Interpretation No. 46R, Consolidation of Variable Interest Entities - An
Interpretation of ARB51*** that
requires the consolidation of legal structures, called *Variable
Interest Entities (VIEs).* Our joint
venture with Jump Agentur Fur Electrotechnik GMBH (“the Joint Venture”, “JAG”)
qualifies as a VIE. We had
historically accounted for the investment in JAG on the equity basis. We have
restated our balance sheets and consolidated JAG in the years ended December 31,
2004 and 2003. The most significant impact to our financial statements is to add
the intangible assets of JAG, totaling approximately $350,000 in 2004 and
$360,000 in 2003, and minority interest of $150,000 in 2004 and $160,000 in 2003
to our balance sheets. The impacts on our consolidated statements of net income
or cash flows are not material.
 
 We
amended our statement of operations for the year ended December 31, 2004 and
reclassified a $245,264 of gain from insured damages to our building from a
hurricane as other income instead of an extraordinary item. The reclassification
did not effect our taxable net income which remained at $1,511,997 nor did it
effect our earnings per share and diluted earnings per share of $.11 and $.09,
respectively.
 
 **NOTE
2. DESCRIPTION OF BUSINESS**
 
 **Background**
 
 Bovie
Medical Corporation (“Bovie”) was incorporated as An-Con Genetics, Inc. in 1982,
under the laws of the State of Delaware and has its principal executive office
at 734 Walt Whitman Road, Melville, New York 11747.
 
 Bovie is
actively engaged in the business of manufacturing and marketing medical products
and developing related technologies. Aaron Medical Industries, Inc. ("Aaron"), a
100% owned subsidiary based in St. Petersburg, Florida is engaged in marketing
our medical products. Previously Bovies largest product line was
battery-operated cauteries, we have shifted our focus to the manufacture and
marketing of generators and electrosurgical disposables. This new focus on high
frequency generators is evident in the development of the Aaron 800 and Aaron
900 high frequency desiccators, the Aaron 950- the first high frequency
desiccator with cut capability, the Aaron 1250 and the Aaron 2250. The Aaron
1250 and Aaron 2250 are designed for today’s rapidly expanding surgi-center
market.
 
  **BOVIE
MEDICAL CORPORATION**
 **NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS**
 
 **NOTE
2. DESCRIPTION OF BUSINESS**
 
 Additionally,
our new 200-watt electrosurgical unit and our new 300-watt electrosurgical unit
are being marketed under the Bovie name.
 
 Bovie
also manufactures a variety of specialty lighting instruments for use in
ophthalmology, general surgery, hip replacement surgery, and for the placement
of endotracheal tubes.
 
 Bovie
manufactures and markets its products both under private label and the
Bovie/Aaron label to distributors worldwide. Additionally, Bovie/Aaron has
original equipment manufacturing (OEM) agreements with other medical device
manufacturers. These OEM arrangements combined with private label and the
Bovie/Aaron label allows us to gain greater market share for the distribution of
its products.
 
 **Joint
Venture Agreement**
 
 In
February 2000, Bovie entered into a Joint Venture Agreement with a German
corporation, Jump Agentur Fur Elektrotechnik GMBH. Pursuant to the agreement,
Bovie advanced $200,000 to the partnership to cover costs of further research
toward the production of two commercial prototypes for our contribution we
received a 50% equity interest and 50% interest in the profits. Bovie has made
available its facilities in Florida for development, manufacturing and marketing
of the products of the joint venture and is responsible to expend its best
efforts to secure all necessary financing for the research, development and
marketing of the products estimated to be an amount up to $1,500,000, as per
contract.
 
 Pursuant
to agreement, the joint venture acquired an exclusive license to produce and
market any surgical/medical devices utilizing this technology. In fiscal, 2004
and 2003, Bovie made additional advances to the joint venture in the form of
research and development of prototypes expending $39,286 and $81,914 in
development costs and engineering costs, respectively.  Bovie has charged
these costs to operations as equity in net loss of unconsolidated affiliate. To
date the joint venture has no revenues and is not considered by us to be a
significant subsidiary.
 
 The
device has been developed and patented in both Europe and the United States.
Bovie has constructed two pre-production prototypes for field-testing purposes
as a prelude to eventual submission to the FDA for clearance to manufacture. The
initial intended uses are in the areas of dermatology and plastic surgery. Other
contemplated surgical uses for the technology are cardiovascular, thoracic,
gynecological, trauma and other surgeries.
 
 FASB
finalized Interpretation No. 46R, Consolidation of Variable Interest Entities-An
Interpretation of ARB51 (FIN 46R) in December 2003, making the new guidance
applicable to us in the first quarter of 2004. FIN 46R expands the scope of
ARB51 and can require consolidation of “variable interest entities (VIEs)” Once
an entity is determined to be VIE, the party with the controlling financial
interest, the primary beneficiary , is required to consolidate it.
 
 We have
an investment in a joint venture with Jump Agentur Fur Electrotechnik GMBH (“the
Joint Venture”, “JAG”) of which we are the primary beneficiary. We had
previously recorded our interest in the Joint Venture on the equity basis. Under
FIN 46R, as the primary beneficiary we have consolidated the Joint Venture and
restated our balance sheet as of December 31, 2004.
 
 The
impact of consolidating JAG on our balance sheets was replacement of our
$200,000 previously recorded investment in the Joint Venture by license rights
of $350,000 in 2004and $360,000 in 2003 and a minority interest of $150,000 in
2004 and $160,000 in 2003, for JAG . Consolidating the Joint Venture did not
materially affect our statements of operations or cash flows, for the years
ended December 31, 2004, and 2003.
 
 **NOTE
3. TRADE ACCOUNTS RECEIVABLE**
 
 As of
December 31, 2004 and 2003 the trade accounts receivable were as follows:
 
 2004
    
    2003Trade
      accounts receivable
    
    $
    2,131,445
    
    $
    1,917,694Less:allowance
      for doubtful accts
    
    
    (
      112,392
    )
    
    (
      116,952
    )Allowance
      for discounts
    
    
    (
      64,766
    )
    
    (
      92,561
    )Trade
      accounts receivable, net
    
    $
    1,954,287
    
    $
    1,708,181
 
 Bad debt
expense charged to operations was $5,477 in 2004 and $55,614 in
2003.
 
 At
December 31, 2004 trade accounts receivable were pledged as collateral in
connection with bank loans.
 
 **BOVIE
MEDICAL CORPORATION**
 **NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS**
 
 **NOTE
4. PROPERTY, PLANT AND EQUIPMENT**
 
 As of
December 31, 2004 and 2003 property, plant and equipment consisted of the
following:
 
 2004
    
    2003Equipment
    
    $
    992,542
    
    $
    714,222Building
    
    
    573,736
    
    
    637,485Furniture
      and Fixtures
    
    
    969,948
    
    
    903,711Leasehold
      Improvements
    
    
    626,804
    
    
    531,694Molds
    
    
    516,689
    
    
    398,5893,679,719
    
    
    3,185,701Less:accumulated
      depreciation
    
    
    (1,563,395
    )
    
    (1,285,686
    )Net
      property, plant, and equipment
    
    $
    2,116,324
    
    $
    1,900,015
 
 Depreciation
expense for the years ended December 31, 2004 and 2003 were $338,724 and
$226,762, respectively.
 
 
 **Property
and Rental Agreements**
 
 The
following is a schedule of future minimum rental payments as of December 31,
2004 and for the next five years.
 
 
 2005
    
    $
    145,9742006
    
    
    141,9522007
    
    
    135,3082008
    
    
    115,1502009
    
    
    -0-$
    538,384
 
 
 Total
consolidated rent expense for the Company was $152,442 in 2004 and $95,647 in
2003.
 
 **NOTE
5. DUE TO SHAREHOLDERS**
 
 In
relation to the registered recission offer of 1996 to Aaron's former
shareholders we had recorded a liability of $18,787 and accrued interest of
$18,787, for 46,800 shares presumed unconverted.  A review of our
shareholder records in 2003 disclosed that all Aaron's shares had been
converted.  We eliminated the liability to Aaron shareholders and credited
our shareholders' equity account.
  **BOVIE
MEDICAL CORPORATION**
 **NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS**
 
 **NOTE
6. INTANGIBLE ASSETS**
 
 At
December 31, 2004 and 2003 intangible assets consisted of the following:
 
 
 2004
    
    2003Indefinite
      life assets:Brand
      name/Trademark (life indefinite)
    
    $
    1,509,662
    
    $
    1,509,662Other
      intangibles:License
      rights (20yr life)
    
    
    350,000
    
    
    360,000Purchased
      technology (5 yr life)
    
    $
    278,763
    
    $
    278,763Less:
      Accumulated amortization
    
    
    (190,191
    )
    
    (133,796
    )Net
      carrying amount
    
    $
    88,572
    
    $
    144,967
 
 Trademark
and brandname were recognized in connection with the 1998 acquisition of
Bovie Medical Corporation.  We continue to market products, release new
products and product extensions and maintain and promote these trademarks and
brandnames in the marketplace through legal registration and such methods as
advertising, medical education and trade shows.  It is our belief that
these trademarks and brandnames will generate cash flow for an indefinite period
of time.  Therefore, in accordance with SFAS 142, our trademarks and
tradenames intangible assets are not amortized.
 
 The cost
of licenses, trademarks, patent rights, technologies and copyrights acquired are
being amortized on the straight-line method over five to twenty years.
Amortization expense charged to operations in 2004 and 2003 was $56,395 and
$95,618, respectively. Fully amortized intangibles that were deleted during 2003
amounted to $94,877 and had a book value of -0-.
 
 
 **NOTE
7. LONG-TERM DEBT AND LINE OF CREDIT**
 
 The
long-term debt of the Company at December 31, 2004 and 2003 includes a mortgage
and notes payable.
 
 2004
    
    2003Mortgage
      payable
    
    $
    379,994
    
    $
    411,664Term
      loan
    
    
    --
    
    
    3,675Line
      of credit- bank
    
    
    --
    
    
    --$
    379,994
    
    $
    415,339
 
 **Mortgage
Payable**
 
 In 2001,
Bovie paid off its existing mortgage on its premises at 7100 30 th Avenue
North, St. Petersburg, Florida, and replaced it with a new first mortgage of
$475,000, from its commercial lender. The interest Bovie pays on the mortgage is
variable at the banks base rate which is 4.75%, presently. Bovie makes principal
payments of $2,639 per month plus interest. The mortgage has a balloon payment
of $320,562 due in November of 2006.
 
  **BOVIE
MEDICAL CORPORATION**
 **NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS**
 
 **NOTE
7. LONG-TERM DEBT AND LINE OF CREDIT (Continued)**
 
 **Mortgage
Payable(Continued)**
 
 The
scheduled principal payments for the next five years are as follows:
 
 Year
    
    Amount2005
    
    $
    31,6682006
    
    
    348,325$
    379,993
 
 
 **Line
of Credit - Commercial Bank**
 
 Advances
under the new line of credit secured in May of 2001 are limited to the lesser of
$1,500,000 or 80% of net accounts receivable from non-affiliated parties.
Availability was $1,500,000 on December 31, 2004. The annual interest rate on
the loan is variable and is based on the bank's base rate. The line has no
expiration date and is due on demand by the bank. The bank has a security
interest in inventory, accounts receivable and equipment of the Company (the
collateral). The balance due the bank on the credit line at December 31, 2004
was zero.
 
 **NOTE
8. OPTIONS**
 
 **Stock-Based
Compensation**
 
 The
Company has an employee incentive compensation plan (the “Plan”) pursuant to
which the Company’s board of directors may grant stock options to officers and
key employees. Pursuant to an amendment approved by the Company’s shareholders
during 2003, stock options to purchase up to an additional 1,200,000 shares of
common stock may be granted under the Plan. Stock options are granted with an
exercise price equal to the stock’s fair market value at the date of grant. All
stock options have a ten year term and vest and become exercisable immediately
on the date of the grant. During 2004, a total of 370,000 options were granted
at prices between $2.13 and $2.95 of the 1,200,000 authorized and there were a
total of 27,700 additional shares available for grant under the various
plans.
 
 Stock-option
activity during the periods indicated was as follows:
 2004
    2003Weighted
    
    Weightedaverage
    
    averageNumber
      of
    exercise
    Number
      of
    exerciseShares
    price
    Shares
    priceBalance
      January 1,
    3,988,800
    1.00
    2,909,000
    .703Exercised
    (397,000)
    .74
    (350,000)
    .71Cancelled
      & forfeited
    (
      10,000)
    .50
    (361,200)
    .86Granted
    370,000
    2.32
    1,791,000
    1.40Balance
      December 31,
    3,951,200
    1.15
    3,988,800
    1.00
 
 **BOVIE
MEDICAL CORPORATION**
 **NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS**
 
 **NOTE
8. OPTIONS (CONTINUED)**
 
 **Stock-Based
Compensation**
 
 Stock
options consisted of the following at December 31, 2004:
 
 Number
      of Options
      Currently
      Exercisable
    Weighted
      Average
      Remaining
      Estimated Life
    Exercise
      Price470,000
    8.5
    $
      3.2595,000
    8.5
    1.30143,000
    3.0
    1.12550,000
    3.0
    1.151,311,000
    3.5
    .75500,000
    8.0
    .701,062,200
    6.5
    .5035,000
    9.5
    2.95225,000
    9.5
    2.1360,000
    9.5
    2.413,951,200
    5.7
    $1.13(a)
 
 (a) The
amount of $1.13 represents the weighted average exercise price of the
outstanding options.
 
 At
December 31, 2004 and 2003, the number of options exercisable was 3,951,200 and
3,988,800, respectively, and the weighted-average exercise prices of those
options were $1.13 and $1.00, respectively.
 
 During
the year 2004 Bovie cancelled 10,000 options issued prior to December 31, 2002
at an exercise price of .50 per share (the “cancelled options”). The cancelled
options were not replaced. In addition, we issued 370,000 options during the
year at exercise prices from $2.14 to $2.75, with average exercise price of
$2.32.  The options issued in 2004 did not affect the fiscal year 2004
statement of operations as the market value for Bovie’s common stock was the
same as the exercise price on the day granted. Had the compensation cost for
Bovie’s three stock option issuances been determined based on the fair value at
the grant date for awards in 2004 consistent with the provisions of SFAS No.123,
the Company's net earnings and earnings per share would have been reduced to the
pro forma amounts indicated in Note 1 under Significant Accounting Policies.
   **BOVIE
MEDICAL CORPORATION**
 **NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS**
 
 **NOTE
9. TAXES AND NET OPERATING LOSS CARRYFORWARDS**
 
 As of
December 31, 2004, the components of deferred tax assets were as follows:
 Deferred
tax assets:
 2004
    
    2003Accounts
      receivable(allowances)
    
    $
    177,158
    
    $
    53,300Inventories(reserves)
    
    
    1,011,060
    
    
    874,380Net
      operating loss carry forwards
    
    
    2,392,000
    
    
    2,922,000Patent
      rights, primarily due toamortization
    
    
    (118,439
    )
    
    (73,633
    )Total
      gross deferred tax assets
    
    
    3,461,779
    
    
    3,776,047Less:
      Valuation allowance
    
    
    (3,075,579
    )
    
    (3,389,847
    )Net
      deferred tax assets - current
    
    $
    386,200
    
    $
    386,200
 
 Bovie had
net operating losses (NOLs) of approximately $6,872,000 at December 31, 2004.
These NOLs and corresponding estimated tax assets, computed at a 34% tax rate,
expire as follows:
 
 Year
      loss
    Expiration
    Loss
    EstimatedIncurred
    Date
    Amount
    Tax
      Asset1990
    2010
    $38,000
    $13,0001991
    2011
    246,000
    86,0001992
    2012
    1,004,000
    352,0001993
    2013
    465,000
    163,0001994
    2014
    1,197,000
    419,0001995
    2015
    637,000
    223,0001998
    2018
    548,000
    192,0001999
    2019
    2,184,000
    764,0002002
    2022
    515,000
    180,000Total
    
    $
      6,834,000
    $
      2,392,000
 
 Under the
provisions of SFAS 109, NOLs represent temporary differences that enter into the
calculation of deferred tax assets. Realization of deferred tax assets
associated with the NOL is dependent upon generating sufficient taxable income
prior to their expiration.
 
 Management
believes that there is a risk that certain of these NOLs may expire unused and,
accordingly, has established a valuation allowance against them. Although
realization is not assured for the remaining deferred tax assets, based on the
historical trend in sales and profitability, sales backlog, and budgeted sales
of Bovie’s wholly owned and consolidated subsidiary, Aaron Medical Industries,
Inc., management believes it is likely that they may not be totally realized
through future taxable earnings. In addition, the net deferred tax assets could
be reduced in the near term if management's estimates of taxable income during
the carryforward period are significantly reduced.
 
 **BOVIE
MEDICAL CORPORATION**
 **NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS**
 
 **NOTE
9. TAXES AND NET OPERATING LOSS CARRYFORWARDS(Continued)**
 
 The
valuation allowance of $3,075,579 as of December 31, 2004 decreased by $314,268
from December 31, 2003. The change in valuation allowance was a consequence of
decreasing tax assets of $530,000 and reserving for additional allowances for
accounts receivable and inventory loss of $260,538, and patent amortization of
$(44,806). The Company believes it is possible that the benefit of these
additional assets may not be realized in the future. A reconciliation of the
Federal statutory tax rate to Bovie’s effective tax rate is as follows:
 
 Tax
      at statutory rate
    34.0%State
      income taxes, net of U.S. federal benefit
    2.4%Tax
      benefit of loss carry forward
    (36.2%)Effective
      tax rate
    -0-%
 
 **NOTE
10. RETIREMENT PLANS**
 
 Bovie
and/or its subsidiary provides a tax-qualified profit-sharing retirement plan
under section 401k of the Internal Revenue Code the ("Qualified Plans") for the
benefit of eligible employees with an accumulation of funds for retirement on a
tax-deferred basis and provides for annual discretionary contribution to
individual trust funds.
 
 All
employees are eligible to participate if they have one year of service in Bovie.
The employees may make voluntary contributions to the plan of up to 15% of their
annual compensation. Bovie’s contributions to the plan are discretionary but may
not exceed 50% of the first 4% of an employees annual compensation if he
contributes 4% or more to the plan. Vesting is graded and depends on the years
of service. After six years of service, the employees are 100% vested.
 
 Bovie has
made a contribution during 2004 and 2003 of $61,177 and $48,967 respectively,
for the benefit of its employees. The Company also maintains a group health and
dental insurance plan. The employees are eligible to participate in the plan
after three months of full-time service.
 
 **NOTE
11. RELATED PARTY TRANSACTIONS**
 
 **Professional
Services and Employment Agreements**
 
 A
director, Alfred V. Greco Esq. is the principal of Serchi Greco &
 Greco LLP, Bovie’s counsel. The legal fees paid to Serchi Greco &
 Greco LLP were $63,650 and $73,646 for the years 2004 and 2003,
respectively.  Alfred V. Greco, PLLC, of which Mr. Greco is a principal,
was counsel during 2003.
 
 A
director, George W. Kromer, Jr. also serves as a consultant to us. The
consulting fees to Mr. Kromer were $20,751 and $16,615 for 2004 and 2003,
respectively.
 
 Two
employees of the Engineering Department of Bovie are related to the chief
operating officer. Yechiel Tsitrinovich served as an engineering consultant and
was paid fees of $86,764 and $46,978, for 2004 and 2003 respectively. Bovie
entered into a two-year contract with Mr. Arik Zoran for him to assume
supervision of the engineering department, for a salary of $90,000 per year plus
living expenses and benefits. During 2004 Mr. Zorans salary was $144,314. Bovie
agreed to secure a permanent work visa for Mr. Zoran.
 
  **BOVIE
MEDICAL CORPORATION**
 **NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS**
 
 **NOTE
11. RELATED PARTY TRANSACTIONS**
 
 **Employment
Agreement**
 
 Bovie has
employment agreements with five key employees. These agreements are for terms
extending to December 31, 2009.
 
 **Employee
Benefit Plans**
 
 In 1996,
1998, 2001 and 2003, Bovie established stock option plans under which officers,
key employees and non-employee directors may be granted options to purchase
shares of Bovie's authorized, but unissued, Common Stock. Under its existing
Employee Stock Option Plans, the Company has Options outstanding as of December
31, 2004 for employees to purchase 3,891,200 shares of common stock at exercise
prices ranging from $.50 to $3.25.
 
 **NOTE
12. COMMITMENTS AND CONTINGENCIES**
 
 **Legal
Proceedings**
 
 We have
no material legal proceeding pending against us at this time. During 2004 and
2003 legal fees associated with the deductible on our insurance policy were
$21,317 and $ -0-, respectively.
 
 **Product
Liability**
 
 Bovie
currently has product liability insurance which it believes to be adequate for
its business. The Company's existing policy expires December 31, 2005. During
2004 our legal fee deductible was $10,000 per case up to $50,000. In 2005 that
legal fee deductible went from $10,000 to $50,000 per case and the maximum out
of pocket went from $50,000 to $250,000. In 2005 we will set up a reserve for
the cost of legal fees on a monthly bases equal to an estimate based on past
product liability cases and legal costs.
 
 **Bank
Line of Credit and Term Loan**
 
 The
financial covenants of the bank are:
 
 Maximum
Liability to Net Worth Ratio: On a consolidated basis, Bovie shall maintain a
Maximum Liability to Tangible Net Worth Ratio of 1.00: 1.00 defined as liability
(total liabilities, including any subordinated debt) divided by Adjusted
Tangible Net Worth.
 
 Minimum
Adjusted Tangible Net Worth: Bovie shall maintain Minimum Tangible Adjusted Net
Worth of $5,000,000 at all times, defined as total net worth minus intangibles
and related party receivables.
 
 Minimum
Fixed Charge Coverage: Bovie shall maintain a Minimum Fixed Charge Coverage of
2:00:1:00 measured at Bovie’s fiscal year end, defined as (After tax income +
depreciation + amortization + lease expense + interest expense) divided by
(lease expense + interest expense + current maturities of long term debt). We
believe we are in compliance with all the bank’s covenants.
 
 **Joint
Venture - J Plasma Technology**
 
 The
agreement provides that we shall be responsible to expend our best efforts to
obtain additional capital if required up to a total estimated amount of $1.5
million. As of December 31, 2004 we have expended approximate $500,000 for
product development and are additionally obligated to expend our best efforts to
finance up to one million more.
 
 
 **BOVIE
MEDICAL CORPORATION**
 **NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS**
 
 **NOTE
12. COMMITMENTS AND CONTINGENCIES(Continued)**
 
 **Deferred
Revenue**
 
 During
the past two years we have sold generators and guaranteed to replace hand pieces
for 5 years. A portion of the sale associated with the future delivery of the
additional hand pieces are considered deferred revenue.
 
 **NOTE
13. EARNINGS PER SHARE**
 
 In 2004
and 2003, basic earnings per share were $.11 and $.05 per share, respectively.
The diluted weighted average common shares outstanding at December 31, 2004 and
2003 were 16,177,881 and 14,835,450, **** respectively. ****
 
 Diluted
basic earnings per share for 2004 and 2003 were $.08 and $.04, respectively. In
2003 basic and diluted earnings per share associated with discontinued
operations were both nil. In 2004 basic earnings and diluted per share after an
extraordinary item were $.11 and $.09 per share, respectively.
 
 **NOTE
14. INDUSTRY SEGMENT REPORTING**
 
 **Disclosures
about Reportable Segments - Types of products and
services.**
 
 Bovie had
two reportable segments: medical and non-medical products. In 2004, because we
had sold our non-medical products division in 2003 and the electrosurgical
division has continued to grow we now show three segments. Electrosurgical
generator and accessories, battery operated cauteries and other products. The
electrosurgical segment sells electrosurgical products which includes
generators, electrodes, electrosurgical pencils and various ancillary disposable
products. These products are used in surgery for the cutting and coagulation of
tissue. Battery operated cauteries are used for precise hemostasis (to stop
bleeding) in ophthalmology and in other fields. Our other revenues are derived
from nerve locators, disposable and reusable penlights, medical lighting,
license fees, development fees and other miscellaneous income.
 
 **Sale
of Product Line**
 
 In 2003,
our sales of flexible lighting products, used primarily in the automotive and
locksmith industries, totaled $375,250. One customer accounted for 80% of such
sales. We discontinued this non-medical product line by selling our inventory at
cost, customer list and manufacturing technology to that largest customer. The
customer will also pay us a license fee of $500,000 payable in equal
installments over 5 years. We believe this discontinuance will have no material
impact on our continuing operations or financial condition. We are picking up
the license fee as income over 5 years. At the end of 5 years all aspect of the
assets of the license agreement become the property of the
licensee.
 
 **Measurement
of segment profit or loss and segment assets**
 
 The
accounting policies of the segments are the same as those described in the
summary of significant accounting policies. Bovie evaluates performance based on
profit or loss from operations before income taxes not including non-recurring
gains and losses. There were no intersegment sales and transfers in 2004 and
2003.
 
 Bovie now
operates in three reportable segments, electrosurgical products, cauteries and
other products. We sold our non-medical products division in the beginning of
2003.
 
  **BOVIE
MEDICAL CORPORATION**
 **NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS**
 
 **NOTE
14. INDUSTRY SEGMENT REPORTING(CONTINUED)**
 
 Bovie’s
principal markets are the United States, Europe, Asia and Latin America, with
the U.S. and Europe being the largest markets based on revenues. Bovie's major
products include cauteries, electrosurgery generators, nerve locators,
disposable penlights and electrodes. Electrosurgical products, cauteries,
accounted for 62% and 55%, 27% and 31% of our sales for 2004 and 2003,
respectively.
 
 In 2004
and 2003, one significant customer accounted for 29% and 22% of total sales,
respectively.
 
 Bovie’s
ten largest customers accounted for approximately 70% of net revenues for 2004
and 66% of revenue in 2003.
 
 At
December 31, 2004 and 2003, receivables from Bovie’s 10 largest customers
accounted for approximately 66% and 62% of outstanding accounts receivable,
respectively.
 
 Summary
information by segment area for years ended December 31, 2004 and 2003 were as
follows:
 
 (in
      thousands)Cauteries
    Electrosurgical
    Other
    TotalYear
      ended December 31, 2004Net
      sales
    5,460
    12,684
    2,351
    20,495Interest
      income
    1
    2
    --
    3Interest
      expense
    4
    9
    1
    14Depreciation
      & amortization
    158
    186
    51
    395Income
      taxes
    194
    216
    46
    456Income
      tax benefit
    (194)
    (216)
    (46)
    (456)Segment
      net earnings(basic)
    538
    602
    127
    1,267Total
      assets
    2,975
    6,832
    1,212
    11,019(1)Capital
      expenditures
    164
    375
    67
    606Other
      Income
    
    
    245
    245Year
      ended December 31, 2003Net
      sales
    5004
    8,957
    2,156
    16,117Interest
      income
    1
    2
    --
    3Interest
      expense
    10
    19
    5
    34Depreciation
      & Amortization
    138
    151
    26
    315Income
      taxes
    100
    109
    19
    228Income
      tax benefit
    (100)
    (109)
    (19)
    (228)Segment
      net earnings(basic)
    277
    296
    60
    633Total
      Assets
    2,863
    5,171
    1,200
    9,234(1)Capital
      expenditures
    203
    367
    85
    655Gain
      on sale of segment
    
    
    48
    48
 
  **BOVIE
MEDICAL CORPORATION**
 **NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS**
 
 **NOTE
14. INDUSTRY SEGMENT REPORTING(CONTINUED)**
 
 Information
by geographic area is as follows (in thousands):
 
 
 Net
      Sales
    
    Long
      Lived AssetsYear
      ended December 31, 2004United
      States
    
    $17,448
    
    $2,167Europe
    
    1,348Asia
    
    597South
      America
    
    586Other
    
    
    516
    
    
    -Total
    
    $
    20,495
    
    $
    2,167Year
      ended December 31, 2003United
      States
    
    $
    13,714
    
    $
    1,900Europe
    
    
    1,238
    
    
    --Asia
    
    
    357South
      America
    
    
    279
    
    
    --Other
    
    
    529
    
    
    --Total
    
    $
    16,117
    
    $
    1,900
 
 (1)
Included is a 200,000 investment in the equity of an unconsolidated affiliate at
December 31, 2004 and December 31, 2003.
 
 (2) Loss
in the net income of an investee accounted for by the equity method was $39,286
and $81,914 for 2004 and 2003, respectively.
 
 (3) Sales
for non-medical products for 2003 were $375,000.
 
 Assets
and liabilities outside the U.S.A. (in thousands)
 
 2004
    
    2003Total
      assets
    
    $
    411
    
    $
    187Total
      liabilities
    
    
    -0-
    
    
    -0-Net
      property, plant and equipment
    
    
    29
    
    
    -0-
 
 Bovie had
no assets (other than certain trade receivables,equipment
receivables ,
equipment , molds
and inventory) outside the United States, in the years ended December 31, 2004
and 2003.
 
 
 **BOVIE
MEDICAL CORPORATION**
 **NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS**
 
 **NOTE
14. INDUSTRY SEGMENT REPORTING(CONTINUED)**
 
 
 During
2004 and 2003, a portion of Bovie’s consolidated net sales and consolidated gain
from operations was derived from foreign operations. Foreign operations are
subject to certain risks inherent in conducting business abroad, including price
and exchange controls, limitations on foreign participation in local
enterprises, possible nationalization or expropriation, potential default on the
payment of government obligations with attendant impact on private enterprise,
political instability and health care regulations and other restrictive
governmental actions. Changes in the relative value of currencies take place
from time to time and could adversely affect Bovie’s results of operations and
financial condition. The future effects of these fluctuations on the operations
of Bovie and its subsidiaries are not predictable.
 
 **NOTE
15. RESEARCH AND DEVELOPMENT PERFORMED FOR OTHERS**
 
 Bovie has
entered into several manufacturing and development agreements to produce
electrosurgical products for medical equipment companies. The agreements are
considered Original Equipment Manufacturing (OEM) contracts that call for: (1)
Bovie to develop specific use devices and components (2) the customer is not
committed to a certain dollar amount of purchases and (3) Bovie charges what it
believes will be its costs for the development of the product. If the customer
rejects or terminates the contract then it forfeits the development payments we
have incurred. The customer must fulfill its agreement if Bovie delivers its
working prototypes timely. Bovie has an arrangement with a customer whereby the
customer will receive a credit for it's reimbursement of research and
development cost of $36,000 at December 31, 2004. We do not recognize the
arrangement as income because we believe that the liability shown will be
eventually offset when the customer takes a credit against its purchases from
us.
 
 The
following is research and development revenue and costs related to specific
contracts, for 2004 and 2003:
 
 Contracted
Development Payments Received:
 2004
    
    2003Amounts:Revenue
      from development in progress
    
    $
    230,120
    
    $
    304,461Revenues
      included in Gross Sales
    
    $
    230,120
    
    $
    304,461Cost
      of Research and Development contractsincluded
      in gross profit
    
    $
    230,120
    
    $
    304,461
 
 **NOTE
16. RESEARCH AND DEVELOPMENT COSTS CAPITALIZED**
 
 During
the years 2004 and 2003 we had capitalized development costs, performed by third
parties for our line of electrosurgical generators of $-0- and $88,926,
respectively.
  **EXHIBIT
INDEX**
 
 Exhibit 3.1
    Articles of Incorporation*Exhibit 3.2
    By-Laws*Exhibit 4.1
    Copy of Stock Certificate *Exhibit 10.1
    Joint Venture Agreement dated February 25, 2000
      Between Bovie Medical Corporation and Jump Agentur fur
      Elektrotechnik GmBH**Exhibit 10.2
    Agreement between Bovie Medical Corporation and Arthrex Inc.
      dated June 2002, filed with Form S-3 on November 23, 2004, which is
      incorporated here in by reference. This agreement is the subject of an
      application for confidential treatment. **Exhibit 10.3
    Distribution and Service Center Agreement between Bovie and
      Symbol Medical Limited dated December 31, 2004**Exhibit 10.4
    Employment Agreement- Andrew
      MakridesExhibit 10.5
    Employment Agreement-J. Robert SaronExhibit 10.6
    Employment Agreement-Moshe
      CitronowiczExhibit 10.7
    Employment Agreement-Charles
      PeabodyExhibit 21.1
    Consent of Bloom & C0.,
      LLPExhibit 31.1
    Certification pursuant to Section 302
      of Sarbanes Oxley Act of 2002.Exhibit 31.2
    Certification pursuant to Section 302
      of Sarbanes Oxley Act of 2002.Exhibit 32.1
    Certification pursuant to
      Section 906 of Sarbanes Oxley Act of 2002.Exhibit 32.2
    Certification pursuant to
      Section 906 of Sarbanes Oxley Act of 2002._____________________* Incorporated by reference to Exhibits 3.1,3.2 and 4.1 to
      Form 10KSB/A for December 31, 2003 filedWith the SEC on February 16, 2005.**Incorporated by reference to
      Exhibit 10.1 and 10.2 to Form 10KSB for December 31, 2004 filed with the
      SEC on March 31, 2005.* Previously
filed