Edgar Filing: MILESTONE SCIENTIFIC INC.

Large accelerated filer

Accelerated filer

Non-accelerated filer

¨ (Do not check if a smaller reporting company)

Smaller reporting company

Form 10-K

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(Mark One)

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

For the fiscal year ended December 31, 2011

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

For the transition period from to

Commission file number 001-14053

Milestone Scientific Inc.

(Exact name of registrant as specified in its charter)

Delaware

13-3545623

State or other jurisdiction of

Incorporation or organization

(I.R.S. Employer

Identification No.)

220 South Orange Avenue, Livingston, NJ 07039

(Address of principal executive offices)

Registrant’s telephone number, including area code 973-535-2717

Securities registered pursuant to Section 12(b) of the Act:

None

Securities registered pursuant to section 12(g) of the Act:

Common Stock, par value $.001 per share

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. ¨ Yes x No

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. ¨ Yes x No

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 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. x Yes ¨ No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). x Yes ¨ No

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment of this Form 10-K. ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ¨ No x

As of June 30, 2011, the last business day of the Company’s most recently completed second fiscal quarter, the aggregate market value of the common stock held by non – affiliates of the issuer was $7,045,755. This amount is based on the closing price of $0.78 per share of the Company’s common stock as of such date, as reported on the OTCQB.

As of March 13, 2012 the registrant has a total of 15,693,678 shares of Common Stock, $0.001 par value outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

None

MILESTONE SCIENTIFIC INC.

Form 10-K Annual Report

TABLE OF CONTENTS


	Page
PART I
Item 1. Description of Business		3
Item 1A. Risk Factors		10
Item 1B. Unresolved Staff Comments		13
Item 2. Description of Property		13
Item 3. Legal Proceedings		13
Item 4. Mine Safety Disclosure		13
PART II
Item 5. Market for Common Equity, Related Stockholder Matters and Small Business Issuer Pruchases of Equity Securities		14
Item 6. Selected Financial Data		14
Item 7. Management's Discussion and Analysis or Plan of Operations		14
Item 7A. Quantitative and Qualitative Disclosure about Market Risk		21
Item 8. Financial Statements		22
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure		22
Item 9A. Controls and Procedures		22
Item 9B. Other Information		22
PART III
Item 10. Directors, Executive Officers, Promoters and Control Persons and Corporate Governance; Compliance with Section 16 (a) of the Exchange Act		23
Item 11. Executive Compensation		25
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters		27
Item 13. Certain Relationships and Related Transactions, and Director Independence		30
Item 14. Principal Accounting Fees and Services		30
PART IV
Item 15. Exhibits		32

SIGNATURES		35
EXHIBITS

FORWARD-LOOKING STATEMENTS

Certain statements made in this Annual Report on Form 10-K are “forward-looking statements” (within the meaning of the Private Securities Litigation Reform Act of 1995) regarding the plans and objectives of management for future operations. Such statements involve known and unknown risks, uncertainties and other factors that may cause actual results, performance or achievements of Milestone to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. The forward-looking statements included herein are based on current expectations that involve numerous risks and uncertainties. Milestone’s plans and objectives are based, in part, on assumptions involving the continued expansion of business. Assumptions relating to the foregoing involve judgments with respect to, among other things, future economic, competitive and market conditions and future business decisions, all of which are difficult or impossible to predict accurately and many of which are beyond the control of Milestone. Although Milestone believes that its assumptions underlying the forward-looking statements are reasonable, any of the assumptions could prove inaccurate. In light of the significant uncertainties inherent in the forward-looking statements included herein, particularly in view of Milestone’s early stage operations, the inclusion of such information should not be regarded as a representation by Milestone or any other person that the objectives and plans of Milestone will be achieved. The Company undertakes no obligation to revise or update publicly any forward-looking statements for any reason.

PART I

Item 1. Description of Business

All references in this report to “Milestone,” “us,” “the Company”, or “Milestone Scientific” refer to Milestone Scientific Inc. unless the context otherwise indicates. Milestone has rights to the following trademarks: CompuDent^®, CompuMed^®, CompuFlo^®, The Wand^®, The Wand Plus^®, The SafetyWand^®, Cool Blue Wand^®, Cool Blue Tooth Whitening Instrument™, Dynamic Pressure Sensing Technology^®, STA Single Tooth Anesthesia™, (STA Instrument, instruments and handpieces), Ionic White^® (light emitting diode), and Ionic White™ (whitening toothpaste). Milestone was incorporated in the State of Delaware in 1989.

BUSINESS

Background

Milestone since its inception has engaged in pioneering proprietary, innovative, computer-controlled injection technologies and solutions for the medical and dental markets. The company has focused its energy and resources on redefining the worldwide standard of care for injection techniques by making the experience more comfortable for the patient and by reducing the anxiety and stress of administering injections for the healthcare provider.

Milestone and its technology is widely recognized by key opinion leaders, industry experts and medical and dental practitioners as the noted leader in the emerging, high growth, computer-controlled injection industry; and remains intent on expanding the use and application of its proprietary, patented technologies to achieve greater operational efficiencies, enhanced patient safety and therapeutic adherence, and improved quality of care within a broad range of medical disciplines.

In 1997, Milestone first introduced The Wand^® (CompuDent^® instrument) and the disposable Wand handpiece. CompuDent provides painless injections for all routine dental treatments, including root canals, crowns, fillings and cleanings. Milestone’s Computer-Controlled Local Anesthetic Delivery (C-CLAD) instrument handpiece does not look or feel like a syringe. And, what’s more, it works better than a syringe, resulting in a more pleasant experience for the patient and practitioner. With more than 18,000 CompuDent instruments sold within four months of its market introduction, this represented the most successful launch in the history of small equipment sales in U.S. dentistry.

Milestone subsequently expanded its product offerings with the introduction of the CompuMed^® advanced injection instrument, designed for use in a wide range of applications within the medical industry, including cosmetic surgery, hair restoration surgery, podiatry, colorectal surgery, nasal and sinus surgery, dermatology and orthopedics, among others.

Central to Milestone’s intellectual property platform and current product development strategy is its patented CompuFlo^® technology for the precise delivery of medicaments. The CompuFlo pressure/force Computer-Controlled Local Anesthetic Delivery (C-CLAD) technology is an advanced, patented and FDA-approved medical technology for the painless and accurate delivery of drugs, anesthetics and other medicaments into all tissue types, as well as for the aspiration of bodily fluids or previously injected substances. Its regulation and control of flow rate continues to provide the CompuDent and CompuMed benefits of painless injections, while its Dynamic Pressure Sensing^® capability provides visual and audible in-tissue pressure feedback, identifying tissue types to the healthcare provider. This pressure feedback extends the benefit of painlessness from anesthetics with known viscosities to a wide range of liquid drugs and other medicaments with varying viscosities and flow rates. Dynamic Pressure Sensing also allows the healthcare provider to know when certain types of tissues have been penetrated and permits the healthcare provider to inject medicaments precisely at the desired location. Thus, pressure feedback can prevent the suffusion of tissue outside the intended target area, a vitally important characteristic in the injection of chemotherapeutics and other toxic substances.

The CompuFlo technology consists of two critical elements. One element is the ability to determine exit pressure In Situ (in the injection site tissue) at the tip of the needle in real time. This minimizes tissue damage (and eliminates the pain of the injection) because the flow rate and pressure of the injection are controlled. The other critical element of the technology is an integrated injection database of algorithms that have been defined which allow for the measurement of the exit pressure. This database of algorithms contains the critical components of specific drugs, parameters of needles, tubing and syringes and all other pertinent components for the safe and efficacious delivery of medications for all procedures.

The CompuFlo technology also consists of a disposable injection handpiece that provides for precise tactile control during the injection, an electromechanical (computer-controlled) fluid delivery instrument and the ability to record data from the injection event. As confirmed by numerous noted medical and dental experts within academia and the clinical practice arenas, CompuFlo has the potential to greatly increase the safety and efficacy of many drug delivery procedures that currently rely upon the over 150-year-old hypodermic syringe technology and the tactile senses and delivery expertise of the administrator.

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

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

In December 2005, Milestone submitted a pre-market notification to the US Food and Drug Administration (FDA) on its CompuFlo technology, which was subsequently cleared by the FDA in July of 2006. This initial submission was critical for Milestone’s continuing efforts to develop and commercialize this important technology. Milestone has identified a number of potential applications for CompuFlo, including single-tooth dental injections, self-administered drug delivery, osteoarthritis joint pain management and epidurals.

Given the Company’s experience and established brand awareness within the dental industry, it elected to focus its initial product development efforts on the integration of CompuFlo into its legacy computer-controlled dental injection instrument. As a result, Milestone developed the industry’s first solution for painlessly administering a single-tooth injection as the only injection necessary for achieving anesthesia, foregoing the need to administer a traditional nerve branch block. This new instrument, which also provides for use of a disposable handpiece, was trademarked the “STA Single Tooth Anesthesia Instrument™,” now more commonly known as the STA Instrument.

After receiving FDA 510(k) Pre-market Notification acceptance for the marketing and sale of the STA Instrument, Milestone introduced the instrument to market in February 2007 at the Chicago Dental Society’s 143^rd Midwinter Meeting. The patented STA Instrument incorporates the "pressure feedback" elements of Milestone's patented CompuFlo technology, thereby allowing dentists to administer injections accurately and painlessly into the periodontal ligament space, effectively anesthetizing a single tooth. This injection is of significant value in that it allows the dentist to profoundly anesthetize the tooth within one or two minutes, versus up to 15-18 minutes for a block injection to take effect. Utilizing the STA Instrument single tooth injection, the patient will suffer neither pain nor collateral anesthesia in the cheek, lips or tongue at any time. The STA Instrument is capable of performing all of the injections that can be done with a conventional dental syringe, including the palatal-anterior superior alveolar, anterior middle superior alveolar and inferior alveolar nerve block. The STA Instrument achieves these injections predictably and reliably.

Initial market response to the STA Instrument following its commercial debut in February 2007 proved to be less than robust. Moreover, at that time, the Company had granted exclusive US and Canadian distribution and marketing rights for the STA Instrument to Henry Schein, Inc., the largest distributor of healthcare products and services to office-based practitioners in the combined North American and European markets. Following several months of lackluster sales and after making critical senior management changes, Milestone initiated an in-depth market study to reassess its positioning and marketing strategies for the STA Instrument. The insight gained from this study led management to redefine and implement a new messaging platform, created to emphasize key benefits that Milestone discovered are of most value to dental professionals. This new product messaging was launched in January 2008 and has remained in constant review.

In the spring of 2009, Milestone signed an Exclusive Distribution and Marketing Agreement with China National Medicines Corporation, dba Sinopharm, which is China’s largest domestic manufacturer, distributor and marketer of pharmaceuticals and importer of medical devices and the country’s largest domestic distributor of dental anesthetic carpules to the Chinese dental industry. Prior to the end of 2009, China National Medicines issued Milestone a blanket purchase order for 12,000 STA instruments and related handpieces to be delivered over 36 months, thereby marking the Company’s initial penetration into China’s emerging dental market.

As of March 13, 2012, China National Medicine has not received the appropriate registration approval from the regulatory body in China, therefore, shipment of STA instruments and handpieces have been suspended pending the approval to sell and distribute these products in China. It is expected that the approval by the appropriate Chinese regulatory body will be received in 2012.

According to a report published by the U.S. Department of Commerce, titled “China’s Emerging Markets: Opportunities in the Dental and Dental Lab Industry,” China’s dental market lags behind other healthcare services and has largely been neglected in the past. In fact, CS Market Research reports that “of China’s 1.3 billion plus population, 50% of the adults and 70% of the children are estimated to have decayed tooth problems, and over 90% have periodontal disease.” However, with increasing affluence of the Chinese population, as well as increasing attention towards personal care, demand for dental services has been growing. Market research firm Freedonia agrees, noting that demand for dental products in China is expected to climb to 21.5 billion RMB (US$3.15 billion) by 2012, due primarily to escalating personal income levels and government programs promoting awareness of the benefits of good oral care.

Shortly before the end of the second quarter of 2009, Milestone elected to refine its international marketing strategy to gain greater access to and penetration of the international dental markets. The new sales strategy provides for increasing hands-on oversight and support of its existing international distribution network, while also attracting new distributors throughout Europe, Asia and South America.

Beginning in the second and third quarter 2010, Milestone expanded its international and domestic sales force by hiring a Director of International Sales and Director of Domestic Sales. These additions have proven to be a valuable addition to our dental market business, as we expand our distribution in both markets.

CompuFlo^® Advanced Injection Technology – Core Technology

The CompuFlo technology is patented and embedded in the STA Instrument that is being sold worldwide in the dental market. CompuFlo technology has been tried and proven in human and animal studies, as well as by dentists in most parts of the world who are using the STA Instrument in their practices.

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

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

Precisely controlling in-tissue pressure increases patient safety by reducing the risk of tissue damage and post-treatment pain related to excessive pressure that may occur during certain injections. Identification of the tissue, in which the needle tip is imbedded, is believed to be highly important in epidural injections, intra-articular injections and numerous organ, subcutaneous and intramuscular injections.

CompuFlo’s pressure sensing technology provides an objective tool that consistently and accurately identifies the epidural space by detecting the difference in pressure between the ligamentum flavum and the extraligamentary tissue. In studies utilizing the CompuFlo technology the epidural space has been correctly identified 100 % of the time. Knowing the precise location of a needle during an epidural injection procedure provides a measure of safety not presently available to doctors using conventional syringes, who identify the epidural space by relying on the subjective perception of loss of resistance to saline.

In the absence of curative procedures, arthritis patients are obliged to endure multiple painful injections for a lifetime. Often these injections are not efficacious, because the doctor using a syringe failed to locate the intra-articular space or did not inject the appropriate volume of hyaluronic acid or other medicament into that space. The CompuFlo technology has been successful in administering viscous hyaluronic acid and other medicaments into the intra-articular space in both small and large joints using its computer-controlled pressure sensing capabilities in an independent animal study.

There are a number of injectable drugs routinely self-administered in a home or office setting using spring loaded automatic injection devices by people who suffer from long term chronic conditions such as Multiple Sclerosis and Rheumatoid Arthritis. The CompuFlo technology, using pressure sensing capabilities, can serve as a painless subcutaneous injection method for these self-administered drugs. A significant reduction in pain during delivery will have a positive impact on compliance, which is a major consideration when physicians are determining which drugs to prescribe.

On December 3, 2009, Milestone announced that it signed an Agreement of Intent with China National Medicines Corporation, Ltd. and Yichang Humanwell Pharmaceutical Co. Ltd., both incorporated in the People’s Republic of China (PRC), to develop orthopedic and epidural drug delivery instruments utilizing CompuFlo. This agreement of intent was terminated, effective July 13, 2011.

In July 2011, we entered into a definitive joint venture agreement with Beijing 3H (Heart-Help-Health) Scientific Technology Co., Ltd. (Beijing 3H) for the development, commercialization, manufacture and marketing of epidural and intra-articular injection instruments. Milestone Scientific has a 50% interest in the joint venture and Beijing 3H, whose shareholders are a number of individuals, including a large shareholder in Milestone who is also the principal of a supplier to Milestone, Bejing 3H also has a 50% interest in joint venture.

The joint venture provided for Milestone’s contribution of an exclusive worldwide royalty-free license to use its patents. Beijing 3H will contribute $1.5 million to the joint venture to design and develop two commercial instruments using Milestone’s CompuFlo^® technology and disposables. Milestone will have distribution responsibility in the U.S., Canada and the rest of the world, while Beijing 3H will distribute products exclusively in the People’s Republic of China, Macao, Hong Kong and other regions of Asia.

Product Platform

Milestone has developed and brought to market a highly differentiated portfolio of industry innovations. Thus far, the Company’s proprietary solutions have succeeded in elevating the standard of care in the professional dental arena. The product portfolio includes:

STA Single Tooth Anesthesia Instrument™ (STA Instrument)

The STA Single Tooth Anesthesia Instrument™ (STA Instrument) is a patented, computer-controlled local anesthesia delivery instrument that incorporates the “pressure feedback” elements of Milestone’s patented CompuFlo technology, thereby allowing dentists to administer injections accurately into the periodontal ligament space, effectively anesthetizing a single tooth. While the periodontal ligament injection has been available for some time, there has been no effective technology that allows dentists to easily perform the procedure painlessly, safely and predictably until now. With this unique procedure dentists can easily and predictably anesthetize a single tooth root in one minute and a multiple root tooth in two minutes, as compared to a general blocking injection and waiting up to 18 minutes (or longer if the blocking injection needs to be re-administered) before proceeding to perform a procedure on the target tooth. A device which allows dentists to effectively anesthetize a single tooth will greatly enhance the productivity of dental practices and, when combined with the painless injection capabilities already present in the CompuDent instrument, such a device provides a compelling value in the marketplace. The STA Instrument will generate recurring revenues from per-patient disposable handpieces.

Since its market introduction in the spring of 2007, the STA Instrument has received rave reviews and awards from the dental industry. In July 2007, noted industry publication Dentistry Today featured the STA Instrument as one of the “Top 100 Products in 2007,” helping to promote much broader recognition of the instrument and validating STA’s value proposition for dentists and patients, alike. In early 2008, Medical Device & Diagnostic Industry magazine distinguished the STA Instrument as a 2008 Medical Design Excellence Award winner in the “Dental Instruments, Equipment and Supplies” product category. Of the 33 products to receive this coveted award, the STA was one of only two winning products that serve dental practitioners. In December 2008, Milestone continued to win broad acclaim for the STA Instrument by winning a “Townie Choice Award”. The “Townie Choice” awards were originally started by Dr. Howard Darran and Farran Media, publisher of Dentaltown Magazine, to assist dentists in making product purchasing decisions, and are considered the “people’s choice” of the products and services available to the dental industry today. That same month, the STA Instrument was also named as a Dental Products Report “Top 100 2008 Product of Distinction.” Additionally, the STA Instrument was named one of Dentistry Today’s “Top 100 Products” for the third consecutive year in 2010.

CompuDent^®

CompuDent (also known as the Wand Plus^® internationally) is Milestone’s proprietary, patented Computer-Controlled Local Anesthetic Delivery (C-CLAD) instrument and predecessor of the STA Instrument. CompuDent delivers anesthesia at a precise and consistent rate below a patient’s pain threshold. Over the years, CompuDent has been widely heralded as a revolutionary device, considered one of the major advances in dentistry in the 20^th Century. The instrument has been favorably evaluated in more than 50 peer reviewed or independent clinical research reports. CompuDent, including its ergonomically designed single-use handpieces (The Wand^®), provides numerous, well documented benefits:

•

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

•

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

•

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

•

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

•

the use of a single patient use, disposable handpieces minimizes the risk of cross contamination; and

•

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

Despite CompuDent’s many benefits, including the administration of less painful and more comfortable injections, dentists in the United States have been slow to give up the use of traditional syringes. Dentists have all been trained to use syringes in dental school and often have become accustomed to and are comfortable with their use during many years of clinical practice, in spite of the obvious reluctance and/or fear of the patient in relation to injections administered by hypodermic syringe. There are approximately 40 million dental phobics, those people afraid to visit a dentist, in the United States. Therefore, Milestone believes there is a disconnect in the way dentists perceive their patients’ attitudes toward injection by hypodermic syringe. The CompuDent is used today by thousands of dentists around the world, many of whom have long since abandoned the over 150-year old syringe.

CompuMed^®

CompuMed is a patented computer-controlled injection instrument geared to the needs of the medical market and providing benefits similar to CompuDent. CompuMed allows many medical procedures, now requiring intravenous sedation, to be performed with only local anesthesia due to dramatic pain reduction. Also, dosages of local anesthetic can often be significantly reduced, thus reducing side effects, accelerating recovery times, lowering costs and eliminating potential complications. CompuMed has accumulated clinical evidence demonstrating benefits from use in colorectal surgery; podiatry; dermatology, including surgery for the removal of basal cell carcinomas and other oncological dermatologic procedures; nasal and sinus surgery, including rhinoplasty; hair transplantation and cosmetic surgery, among others.

The Wand^®

The Wand handpiece is used in conjunction with the STA, CompuDent and CompuMed instruments. It is an ergonomically designed and patented handpieces that enables all traditional and newer injections, such as AMSA, P-ASA and Modified-PDL, to be more comfortable and easier to deliver. Moreover, the pen-like grasp of The Wand allows bi-directional rotation during injection, which prevents needle deflection that occurs with a traditional syringe. A straighter path results in a more accurate injection, meaning fewer missed mandibular blocks, and more rapid onset of anesthesia. Missed blocks are reported in the literature to occur 30% of the time. This raises both patient anxiety and difficulties for the dentists in managing their business. While awaiting profound anesthesia, the dentist is losing time and money.

The SafetyWand^®

The SafetyWand is the first, patented safety-engineered injection device that conforms to regulatory standards while also meeting the clinical needs of dental and medical practitioners. Following the adoption of the Federal Needlestick Safety and Prevention Act, Milestone developed, and in September 2003 the FDA approved marketing of, Milestone’s SafetyWand disposable handpiece, a patented injection device that incorporates safety engineered sharp protection features to aid in the prevention of needlesticks. The SafetyWand is the first patented injection device to be fully compliant with OSHA regulations under the federal Needlestick Safety Act while meeting the clinical needs of dentists.

The SafetyWand represents the culmination of two years’ effort to develop a safer injection device for dentists, physicians and hygienists. While safety injection devices have been mandated since 2000 under federal law, OSHA had been unable to enforce this law against dentists because of the inadequacy of existing devices to meet both the requirements of the law and the clinical needs of dentists. The SafetyWand meets these requirements and provides dental practitioners with a safer retractable needle device, with single hand activation, which is reusable multiple times during a single patient visit; yet small and sleek enough not to obscure the dentist’s sometimes limited field of view. While SafetyWand is now available commercially and OSHA has not begun, in a meaningful way, to enforce existing regulations requiring the use of these devices. OSHA is empowered to levy substantial fines for failure to use safety engineered devices.

Medical Instrument for Joint Venture

In July 2011, we entered into a definitive joint venture agreement with Beijing 3H (Heart-Help-Health) Scientific Technology Co., Ltd. (Beijing 3H) for the development, commercialization, manufacture and marketing of epidural and intra-articular injection instruments. Milestone Scientific has a 50% interest in the joint venture and Beijing 3H together with a number of individuals, including a large shareholder in Milestone who is also the principal of a supplier to Milestone, Bejing 3J also has a 50% interest in joint venture.

Competition

Milestone’s proprietary, patented Computer-Controlled Local Anesthesia Delivery (C-CLAD) instruments compete with disposable and reusable syringes that generally sell at lower prices and that use established and well-understood methodologies in both the dental and medical marketplaces.

Milestone’s instruments compete on the basis of their performance characteristics and the benefits provided to both the practitioner and the patient. Clinical studies have shown that the instruments reduce fear, pain and anxiety for many patients, and Milestone believes that they can reduce practitioner stress levels, as well. The Company’s newest product introduction, the STA Instrument, can be used for all dental injections that can be performed with a traditional dental syringe. Moreover, the STA Instrument can also be used for new and modified dental injection techniques that cannot be performed with traditional syringes. These new techniques allow for faster procedures shortening chair-time, minimizing the numbing of the lips and facial muscles, enhancing practice productivity, reducing stress and virtually eliminating pain and anxiety for both the patient and the dentist.

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

Patents and Intellectual Property

Milestone holds the following U.S. utility and design patents:

		September 30,		September 30,
	U.S. PATENT NUMBER		DATE OF ISSUE
Computer Controlled Drug Delivery Systems
Dental Anesthetic and Delivery Injection Unit		6,022,337		2/8/2000
Design for a Dental Anesthetic Delivery System Holder		D422,361		4/4/2000
Design for a Dental Anesthetic Delivery System Housing		D423,665		4/25/2000
Design for a Dental Anesthetic Delivery System Handle		D427,314		6/27/2000
Cartridge Holder for Injection Device		6,132,414		10/17/2000
Dental Anesthetic Delivery Injection Unit		6,152,734		11/28/2000
Microprocessor-controlled Fluid Dispensing Apparatus		6,159,161		12/12/2000
Pressure/Force Computer Controlled Drug Delivery System		6,200,289		3/13/2001
Dental Anesthetic and Delivery Injection Unit with Automated Rate Control		6,652,482		11/25/2003
Pressure/Force Computer Controlled Drug Delivery System with Exit Pressure		6,786,885		9/14/2004
Pressure/Force Computer Controlled Drug Delivery System with Automated Charging		6,887,216		5/3/2005
Drug Delivery System with Profiles		6,945,954		9/20/2005
Cartridge Holder for Anesthetic and Delivery Injection Device		D558,340		12/25/2007
Design for Drive Unit for Anesthetic		D566,265		4/8/2008
Design for Drive Unit for Anesthetic		D579,540		10/28/2008
Drug Infusion Device with Tissue Identification Using Pressure Sensing		7,449,008		11/11/2008
Computer Controlled Drug Delivery Systems with Pressure Sensing		7,618,409		11/17/2009
Hand Piece for Fluid Administration		7,625,354		12/1/2009
Self-Administration Injection System		7,740,612		6/22/2010
Computer controlled drug delivery system with dynamic pressure sensing		7,896,833		3/1/2011
Engineered Sharps Injury Protection Devices
Handpiece for Injection Device with a Retractable and Rotating Needle		6,428,517		8/6/2002
Safety IV Catheter Device		6,726,658		4/27/2004
Safety IV Catheter Infusion Device		6,905,482		6/14/2005
Handpiece for Injection Device with a Retractable and Rotating Needle		6,966,899		11/22/2005

During the 2011 and 2010 fiscal years, Milestone expensed $140,053 and $270,494, respectively, on research and development activities. The higher costs incurred in 2010 were primarily associated with the continued development of the Single Tooth Anesthetic (STA) delivery instrument and continuing efforts on developing medical products utilizing the CompuFlo technology.

Milestone relies on a combination of patent, copyright, trade secret, and trademark laws and employee and third party nondisclosure agreements to protect intellectual property rights. Despite the precautions taken by Milestone to protect the products, unauthorized parties may attempt to reverse engineer, copy, or obtain and use products and information that Milestone regarded as proprietary, or may design products serving similar purposes that do not infringe on Milestone’s patents. The Company’s failure to protect its proprietary information and the expenses of doing so could have a material adverse effect on the operating results and financial condition.

In the event that the products infringe upon patent or proprietary rights of others, Milestone may be required to modify processes or to obtain a license. There can be no assurance that Milestone would be able to do so in a timely manner, upon acceptable terms and conditions, or at all. The failure to do so would have a material adverse effect on the Company.

Government Regulation

The FDA cleared the CompuDent instrument and its disposable handpieces for marketing in the U.S. for dental applications in July 1996; the CompuMed instrument for marketing in the U.S. for medical applications in May 2001; and, the Safety Wand for marketing in the U.S. for dental applications in September 2003. For us to commercialize the other products in the U.S., Milestone will have to submit additional 510(k) applications with the FDA. Milestone received FDA 510 (k) approval for the STA Instrument in August 2006.

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

If a manufacturer or distributor can establish that a proposed device is “substantially equivalent” to a legally marketed Class I or Class II medical device or to a Class III medical device for which the FDA has not required pre-market approval, the manufacturer or distributor may seek FDA marketing clearance for the device by filing a 510(k) Pre-market Notification. The 510(k) Pre-market Notification and the claim of substantial equivalence may have to be supported by various types of data and materials, including test results indicating that the device is as safe and effective for its intended use as a legally marketed predicate device. Following submission of the 510(k) Pre-market Notification, the manufacturer or distributor may not place the device into commercial distribution until an order is issued by the FDA. By regulation, the FDA has no specific time limit by which it must respond to a 510(k) Pre-market Notification. At this time, the FDA typically responds to the submission of a 510(k) Pre-market Notification within 180 days. The FDA response may declare that the device is substantially equivalent to another legally marketed device and allow the proposed device to be marketed in the U.S. However, the FDA may determine that the proposed device is not substantially equivalent or may require further information, such as additional test data, before the FDA is able to make a determination regarding substantial equivalence. Such determination or request for additional information could delay market introduction of products and could have a material adverse effect on us. If a device that has obtained 510(k) Pre-market Notification clearance is changed or modified in design, components, method of manufacture, or intended use, such that the safety or effectiveness of the device could be significantly affected, separate 510(k) Pre-market Notification clearance must be obtained before the modified device can be marketed in the U.S. If a manufacturer or distributor cannot establish that a proposed device is substantially equivalent to a legally marketed device, the manufacturer or distributor will have to seek pre-market approval of the proposed device, a more difficult procedure requiring extensive data, including pre-clinical and human clinical trial data, as well as extensive literature to prove the safety and efficacy of the device.

Though the STA Instrument, CompuDent, the Safety Wand and CompuMed have received FDA marketing clearance, there can be no assurance that any of the other products under development will obtain the required regulatory clearance in a timely manner, or at all. If regulatory clearance of a product is granted, such clearance may entail limitations on the indicated uses for which the

product may be marketed. In addition, modifications may be made to the products to incorporate and enhance their functionality and performance based upon new data and design review. There can be no assurance that the FDA will not request additional information relating to product improvements; that any such improvements would not require further regulatory review, thereby delaying the testing, approval and commercialization of product improvements; or, that ultimately any such improvements will receive FDA clearance.

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

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

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

In June 2007, Milestone received a CE mark for the marketing of the STA Instrument in Europe. In June 2003 Milestone received a CE mark for marketing of the Safety Wand and The Wand Handpieces with Needle in Europe. In July 2003, Milestone obtained regulatory approval to sell CompuDent and its handpieces in Australia and New Zealand.

Product Liability

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

Employees

On December 31, 2011, Milestone had a total of 16 employees, consisting of two executive officers, a director of International and Professional Relations, a director of engineering, a domestic sales manager, an international sales manager, five sales representatives (field and internal), two customer service representatives, a staff accountant, a bookkeeper and an administrative manager. Milestone also has a full time consultant who serves as a Director of Clinical Affairs.

Item 1A. CERTAIN RISK FACTORS THAT MAY AFFECT GROWTH AND PROFITABILITY

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

Milestone has no history of profitable operations. Continuing losses could exhaust capital resources and force us to discontinue operations.

For the years ended December 31, 2011 and 2010, revenues were approximately $8.4 million and $9.7 million, respectively. In addition, Milestone has had losses for each year since the commencement of operations, including net losses of approximately $1,482,000 and $615,000 for 2011 and 2010, respectively. At December 31, 2011, Milestone had an accumulated deficit of approximately $60.9 million. At December 31, 2011, the Company had cash and cash equivalents $96,324 and a negative working capital of $1,310,935. The working capital decrease is due to the Company’s ramp up of purchasing of parts in anticipation of significant sales to our distributor in China. Such sales have been delayed. The significant working capital decrease of $1,304,250 in 2011 as compared to 2010 is due to the delay in obtaining regulatory approval to sell our instruments and handpieces in China.

Obtaining such regulatory approval was not a condition of the purchase order and sale with the distributor in China. As a result of this delay, the advance to the contract manufacturer has been allocated between current and long term. Additionally, the accounts payable due to suppliers has recognized as short term in 2011 and has been allocated between long term and short term in 2010. And finally, the accounts receivable for the China distributor has been allocated between current and long term, with a reserve of $516,000 provided against the accounts receivable. The Company is actively pursuing the generation of positive cash flows from operating activities through increases in revenues based upon management’s assessment of present contracts and current negotiations and reductions in operating expenses.

As of December 31, 2011, the Company believes that it does not have sufficient cash reserves to meet all of its anticipated obligations for the next twelve months. If the Company requires a need for a higher level of marketing and sales effort, or if the Company is unable to generate positive cash flows from its operating activities, it will need to raise additional capital. There is no assurance that the Company will be able to achieve positive operating cash flows or that additional capital can be raised on the terms and conditions satisfactory to the Company, if at all. If additional capital is required and it cannot be raised, then the Company would be forced to curtail its development activities, reduce marketing expenses for existing dental products or adopt other cost savings measures, any of which might negatively affect the Company’s operating results.

The Company’s recurring losses raise substantial doubt about its ability to continue as a going concern.

Milestone cannot become successful unless it gains greater market acceptance for its products and technology.

As with any new technology, there is substantial risk that the marketplace will not accept the potential benefits of this technology or be unwilling to pay for any cost differential with the existing technologies. Market acceptance of CompuDent, STA Instrument, the SafetyWand, CompuMed and CompuFlo depends, in large part, upon the ability to educate potential customers of the product’s distinctive characteristics and benefits and will require substantial marketing efforts and expense. More than 35,000 instruments of the STA Instrument and its predecessors have been sold worldwide since 1998. Since being introduced to market in February 2007, more than 8,000 instruments of the STA Instrument have been sold. Milestone cannot assure that its current or proposed products will be accepted by practitioners or that any of the current or proposed products will be able to compete effectively against current and alternative products.

The Company’s limited distribution channels must be expanded in order to become successful.

Future revenues depend on the Company’s ability to market and distribute its computer-controlled injection products successfully. In the U.S., Milestone hired in July 2010 a Domestic Sales Director to spur our growth trend in the USA and Canada. The US and Canadian market rely on several independent dental distributors, and a team of clinical product specialists comprised of independent dental hygienists who help to educate, train and sell our products to dental practitioners and group dental practices in key U.S. markets. Abroad, Milestone lacked appropriate distribution in many markets. In April 2010, the Company hired an International Sales Director to improve sales effort outside the USA. To be successful, the Company will need to engage additional distributors, provide for their proper training and ensure adequate customer support. In the spring of 2009, the Company signed an Exclusive Distribution and Marketing Agreement with China National Medicines Corporation, dba Sinopharm, which is China’s largest domestic manufacturer, distributor and marketer of pharmaceuticals and importer of medical devices and the country’s largest domestic distributor of dental anesthetic carpules to the Chinese dental industry. Prior to the end of 2009, China National Medicines issued Milestone a blanket purchase order for 12,000 STA units and related handpieces to be delivered over 36 months, thereby marking the Company’s initial penetration into China’s emerging dental market. Milestone cannot assure that it will be able to hire and retain an adequate sales force or engage suitable distributors, or that the sales force or distributors will be able to successfully market and sell the products.

Milestone depends on three principal manufacturers. If the Company cannot maintain its existing relationships or develop new ones, it may have to cease operations.

Milestone has informal arrangements with the manufacturer of the STA Instrument, CompuDent and CompuMed instruments and with one of the principal manufacturers of the handpieces, for those items, respectively. Pursuant to the informal arrangements, they manufacture these products under specific purchase orders without minimum purchase commitment. However, in November 2009, the Company issued a purchase order to Tricor Corporation to manufacture 12,000 STA Instruments, over the next three years. In 2010,

1,000 STA Instrument were purchased and shipped against this purchase order. Milestone has a manufacturing agreement with one of the principal manufacturers of its handpieces pursuant to which they manufacture products under specific purchase orders but without minimum purchase commitments. Milestone has been supplied by the manufacturer of the STA Instrument, CompuDent and CompuMed since the commencement of production in 1998, one of the manufacturers of its handpieces since 2002 and the other manufacturer of handpieces since 2003. However, termination of the manufacturing relationship with any of these manufacturers could significantly and adversely affect the ability to produce and sell the products. Though Milestone has established an alternate source of supply for the handpieces in China and other alternate sources of supply exist, Milestone would need to recover its existing tools or have new tools produced to establish relationships with new suppliers. Establishing new manufacturing relationships could involve significant expense and delay. Any curtailment or interruptions of the supply, whether or not as a result or termination of the relationship, would have an adverse affect.

Milestone may be subject to product liability claims that are not fully covered by insurance and that could put the Company under financial strain.

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

Milestone relies on the continuing services of the Chief Executive Officer and Director of Clinical Affairs.

Milestone depends on the personal efforts and abilities of the Chief Executive Officer and the Director of Clinical Affairs. Milestone maintains a key man life insurance policy in the amount of $1,000,000 on the life of the Chief Executive Officer. However, the loss of his services or Director of Clinical Affairs, on whom Milestone maintains no insurance, could have a materially adverse effect on the business.

The market price of Milestone’s common stock has been volatile and may continue to fluctuate significantly because of various factors, some of which are beyond the Company’s control.

Milestone’s stock price has been extremely volatile, fluctuating over the last two years between closing prices of $.25 and $1.85. The market price of common shares could continue to fluctuate significantly in response to a variety of factors, some of which may be beyond the Company’s control.

Milestone is controlled by a limited number of shareholders.

Milestone’s principal shareholders, Leonard Osser and K. Tucker Andersen, beneficially own 32.6% of the issued and outstanding shares of common stock. As a result, they have the ability to exercise substantial control over the Company’s affairs and corporate actions requiring shareholder approval, including electing directors, selling all or substantially all of the assets, merging with another entity or amending its certificate of incorporation. This de facto control could delay, deter or prevent a change in control and could adversely affect the price that investors might be willing to pay in the future for the Company’s securities.

Future sales or the potential for sale of a substantial number of shares of Milestone’s common stock could cause the trading price of common stock and warrants to decline and could impair the Company’s ability to raise capital through subsequent equity offerings.

Sales of a substantial number of shares of Milestone’s common stock in the public markets, or the perception that these sales may occur, could cause the market price of the stock to decline and could materially impair its ability to raise capital through the sale of additional equity securities. At December 31, 2011, Milestone had outstanding options and warrants to purchase 1,599,281 shares of common stock at prices ranging from $0.32 to $2.69 per share with a weighted average exercise price of $1.13. Holders of these warrants and options are given the opportunity to profit from a rise in the market price of the common stock and are likely to exercise their securities at a time when the Company would be able to obtain additional equity capital on more favorable terms. Thus, the terms upon which the Company will be able to obtain additional equity capital may be adversely affected, since the holders of outstanding options and warrants can be expected to exercise them at a time when Milestone would, in all likelihood, be able to obtain any needed capital on terms more favorable than the exercise terms provided by such outstanding securities. The market price of the common shares has been volatile and may continue to fluctuate significantly because of various factors, some of which are beyond the Company’s control.

Implementation of procedures to comply with the Sarbanes-Oxley Act and SEC rules concerning internal controls may be so costly that compliance could have an adverse effect on the Company.

The Management of the Company has assessed the effectiveness of internal control over financial reporting as of December 31, 2011. In making this assessment, management used the criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company complied with Sarbanes-Oxley requirements to include in the annual report a management report on the effectiveness of the internal control over financial reporting. In 2005, Milestone hired an outside consultant to assist with the development and implementation of the necessary internal controls and reporting procedures. In 2011 and 2010, the Company utilized the outside consultant on a quarterly basis to review compliance with the internal controls over financial reporting. This expense amounted to $13,533 and $15,200 in 2011 and 2010, respectively and the cost is expected to continue in 2012.

Item 1B. Unresolved Staff Comments

None

Item 2. Description of Property

The headquarters for the Company is located at 220 South Orange Avenue, Livingston, New Jersey which consists of approximately 6,300 square feet of office space. The Company leases its headquarters at a monthly cost of $6,942, which it believes to be competitive and the lease term expires on June 30, 2014. The leased office space is in good condition. Additionally, since November 2010 Milestone leased a corporate apartment in Maplewood, New Jersey on a month-to-month basis which it terminated in December 2011. A third party distribution and logistics center in Pennsylvania handles shipping and order fulfillment on a month-to-month basis.

Milestone does not own or intend to invest in any real property. Milestone currently has no policy with respect to investments or interests in real estate, real estate mortgages or securities of, or interests in, persons primarily engaged in real estate activities.

Item 3. Legal Proceedings

At the present time, the Company is not involved in any significant litigation.

Item 4. Mine Safety Disclosure

PART II

Item 5. Market for Common Equity and Related Stockholder Matters and Small Business Issuer Purchases of Equity Securities

Market Information

Milestone’s Common Stock trades on the OTC Bulletin Board (“OTCBB”) and, beginning in February 2011, on the OTC Market on the OTCQB market tier under the symbol “MLSS”. The quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission, and may not necessarily represent actual transactions.

Common Stock

The following table sets forth the high and low sales prices of the Common Stock

		September 30,		September 30,
	HIGH		LOW
2011
First Quarter	$	1.05	$	0.62
Second Quarter *	$	0.80	$	0.41
Third Quarter	$	0.78	$	0.30
Fourth Quarter	$	0.70	$	0.25
2010
First Quarter	$	1.85	$	1.45
Second Quarter	$	1.70	$	1.12
Third Quarter	$	1.25	$	0.95
Fourth Quarter	$	1.12	$	0.80

*	On February 19, 2011, Milestone’s Common Stock began trading on the OTCQB.

Holders

According to the records of the transfer agent, there were approximately 91 and 71 shareholders of record of the common stock as of December 31, 2011 and 2010, respectively. However, the Company believes that there are approximately 2,000 beneficial owners of the Company’s common stock at December 31, 2011 and 2010, respectively.

Dividends

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

For information regarding securities authorized under the equity compensation plan, see Item 12.

Sales of Unregistered Securities

See NOTE J – STOCKHOLDERS’ EQUITY, to the financial statements for the issuance of unregistered securities.

ITEM 6. Selected Financial Data

Milestone is a “smaller reporting company” as defined by Regulations S-K and as such, is not providing the information contained in this item pursuant to Regulation S-K.

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

The following discussions of the financial condition and results of operations should be read in conjunction with the financial statements and the notes to those statements included elsewhere in this annual report. Certain statements in this discussion and elsewhere in this report constitute forward-looking statements, within the meaning of section 21E of the Exchange Act, that involve risks and uncertainties. The actual results may differ materially from those anticipated in these forward-looking statements. See “Certain Risk Factors” on page 11 of this Form 10-K.

OVERVIEW

Milestone remains focused on advancing efforts to achieve our two primary objectives; those being:

•

Optimizing our tactical approach to product sales and marketing in order to materially increase penetration of the global dental and medical markets with our proprietary, patented Computer-Controlled Local Anesthesia Delivery (C-CLAD) solution, the STA Single Tooth Anesthesia Instrument (STA Instrument); and

•

Identifying and pursing strategic collaborations with third parties to jointly develop new products utilizing our patented CompuFlo pressure force technology for novel new medical applications.

STA Instrument Awards — Industry Recognition

Since its market introduction in the spring of 2007, the STA Instrument has received favorable reviews and awards from the dental industry. In July 2007, noted industry publication Dentistry Today featured the STA Instrument as one of the “Top 100 Products in 2007,” helping to promote much broader recognition of the instrument and validating the STA Instrument’s value proposition for dentists and patients alike. In April 2008, Medical Device & Diagnostic Industry magazine distinguished the STA Instrument as a 2008 Medical Design Excellence Award winner in the “Dental Instruments, Equipment and Supplies” product category. Of the 33 products to receive this coveted award, the STA Instrument was one of only two winning products that serve dental practitioners.

In July 2010, the STA Instrument was recognized as one of “Dentistry Today’s”, Top 100 Products, for the third consecutive year. This honor is significant because it is unprecedented in Milestone’s history and serves to support our objective of establishing our instrument as the new global standard of care for painless dental injections.

STA Instrument Growth

Since its market introduction in early 2007, the STA Instrument and a prior computerized controlled local anesthesia delivery product, have been used to deliver over 48 million of safe, effective and comfortable injections. The instrument has also been favorably evaluated in numerous peer-reviewed, published clinical studies and associated articles. Moreover, there appears to be a growing consensus among users that the STA Instrument is proving to be a valuable and beneficial instrument that is positively impacting the practice of dentistry worldwide. The utility and value of the STA Instrument is perhaps best summarized by Dr. Joe Blaes, who wrote in the December 2008 edition of Dental Economics, “I tried the STA Instrument and my patients absolutely love it. This is a no brainer — go get one ASAP!”

Global Distribution Network

North America Market

The STA Instrument and related hand pieces are marketed to the dental industry in the United States and Canada by many of the nation’s leading dental supply companies, including Henry Schein, Inc., Patterson Dental Supply, Atlanta Dental, Benco Dental, Burkhart Dental, Darby Dental Supply, Dental Health Products, Goetze Dental, Iowa Dental, Nashville Dental and Newark Dental. In Canada, our independent distributors include Dental 2000, Mediclub, and Specialty Dental.

In the third quarter of 2010, the Company added a Domestic Sales Director to refocus our attention on the USA and Canadian markets. The mission of the Domestic Sales Director is to grow our business through marketing our STA Instrument to Dental Group Practices, as well as individual dental practitioners. Through direct marketing to the Dental Group Practices and utilizing a group of independent hygienists, the instrument and handpiece sales should increase substantially in the future. The Company signed on its first Group Dental Practice in January 2011, Towncare Dental.

International Market

On the global front, we also have granted exclusive marketing and distribution rights for the STA Instrument to select dental suppliers in various international regions in Asia, Africa, South America and Europe. They include Istrodent in South Africa and Unident in the Scandinavian countries of Denmark, Sweden, Norway and Iceland.

In April 2009, we signed an Exclusive Distribution and Marketing Agreement with China National Medicines Corporation, d/b/a Sinopharm, which is China’s largest domestic manufacturer, distributor and marketer of pharmaceuticals and importer of medical devices and the country’s largest domestic distributor of dental anesthetic carpules to the Chinese dental industry. Prior to the end of 2009, China National Medicines issued Milestone a blanket purchase order for 12,000 STA instruments to be delivered over 36 months, thereby marking the Company’s initial penetration into China’s emerging dental market.

Shortly before the end of the second quarter 2009, we announced that we were refining our international marketing strategy to gain greater access to and penetration of the international dental markets for the STA Instrument, CompuDent and related disposable hand pieces. The new sales strategy provides for increasing hands-on oversight and support of our existing international distribution network, while also attracting new distributors throughout Europe, Asia and South America. To assist in this endeavor, Milestone added in the spring of 2010 an International Sales Director to focus on growth of our products outside the USA and Canada. The new addition to the company’s staff has proven to be a positive improvement to our sales and marketing effort outside the USA and Canada.

In July 2011, we entered into a definitive joint venture agreement with Beijing 3H (Heart-Help-Health) Scientific Technology Co., Ltd. (Beijing 3H) for the development, commercialization, manufacture and marketing of epidural and intra-articular injection medical instruments. Milestone Scientific has a 50% interest in the joint venture and Beijing 3H, whose shareholders are a number of individuals, including a large shareholder in Milestone who is also the principal of a supplier to Milestone, Bejing 3H also has a 50% interest in joint venture.

The joint venture provided for Milestone’s contribution of an exclusive worldwide royalty-free license to use its patents. Beijing 3H will contribute $1.5 million to the joint venture to design and develop two commercial instrument and related disposables using Milestone’s CompuFlo^® technology and disposables. Milestone will have distribution responsibility in the U.S. and Canada while Beijing 3H will distribute products exclusively in the People’s Republic of China, Macao, Hong Kong and other regions of Asia. As of December 31, 2011, Bejing 3H has contributed $670,000 to the Joint Venture and the development project has been initiated.

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

		September 30,	September 30,			September 30,	September 30,
	Years Ended December 31,
	2011				2010
DOMESTIC
Instruments	$	1,321,967	28.4	%	$	1,236,517	27.3	%
Handpieces		3,272,113	70.2	%		3,216,000	71.0	%
Other		64,247	1.4	%		76,903	1.7	%

Total Domestic	$	4,658,327	100.0	%	$	4,529,420	100.0	%


INTERNATIONAL
Instruments	$	1,501,702	40	%	$	2,453,939	47.0	%
Handpieces		2,185,083	59	%		2,746,965	52.6	%
Other		32,982	1	%		19,644	0.4	%

Total International	$	3,719,767	100.0	%	$	5,220,548	100.0	%


DOMESTIC/INTERNATIONAL ANALYSIS
Domestic	$	4,658,327	55.6	%	$	4,529,420	46.5	%
International		3,719,767	44.4	%		5,220,548	53.5	%

Total Product Sales	$	8,378,094	100.0	%	$	9,749,968	100.0	%

The Company earned gross profits of 64% and 64% in the years ended December 31, 2011 and 2010, respectively. However, the revenues and related gross profits have not been sufficient to support overhead, new product introduction and research and development expenses. Although the Company anticipates expending funds for research and development in 2012, these amounts will vary based on the operating results for each quarter. The Company has incurred operating losses and negative cash flows from operating activities since its inception, except for 2009. The Company, at December 31, 2011, believes that it does not have sufficient cash reserves to meet all of its anticipated obligations for the next twelve months. The Company is actively pursuing the generation of positive cash flows from operating activities through increase in revenue, assessment of current contracts and current negotiations. There is no assurance that the Company will be able to achieve positive operating cash flows or that additional capital raised on terms and conditions satisfactory to the Company, if at all. If additional capital is required and it cannot be raised, then the Company would be forced to curtail its development activities, reduce marketing for existing dental products or adopt other cost saving measures, any of which might negatively affect the Company’s operating results.

In 2012, the Company plans to further support increased sales and marketing activity through trade show appearances, utilization of independent hygienists’ making sales calls and training individual practitioners and group practices domestically, refined and directed advertising to dental professionals, and support and broaden our global distribution network.

In January 2011, the Company signed an agreement with its first group dental practice Towncare Dental Partnership for deployment of our STA Instrument. The STA Instrument will replace the syringe in this practice. This practice has agreed to expand development of the STA instrument into its remaining offices in 2012 beginning with eight offices in Broward County.

Current Product Platform

See Item 1. Description of Business

Technology Rights

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

Summary of Critical Accounting Policies and Significant Judgments and Estimates

Milestone’s discussion and analysis of the financial condition and results of operations are based upon its financial statements, which have been prepared in accordance with accounting principles, generally accepted in the U.S. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, the Company evaluates its estimates, including those related to accounts receivable, inventories, stock-based compensation and contingencies. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from those estimates under different assumptions or conditions.

While significant accounting policies are more fully described in Note B to the financial statements included elsewhere in this report, the Company believes that the following accounting policies and significant judgments and estimates are most critical in understanding and evaluating the reported financial results.

Accounts Receivable

The realization of Accounts Receivable current and long-term will have a significant impact on the Company. The criteria used by management to evaluate the adequacy of the allowance for doubtful accounts included, among others, credit worthiness of the customer, current trends, prior payment performance, the age of the receivables and the Company’s overall historical experience.

Inventories

Inventory costing, obsolescence and physical control are significant to the on-going operation of the business. Inventories principally consist of finished goods and component parts stated at the lower of cost (first-in, first-out method) or market. Inventory quantities on hand are reviewed on a quarterly basis and a provision for excess and obsolete inventory is recorded if required based on past and expected future sales.

Investment in Medical Joint Venture

The Company has entered into a Medical Joint Venture with a third party for the development and commercialization of two medical products. The Company owns fifty percent of the joint venture and has recorded its investment on the equity basis of accounting. The Company’s proportionate share of expenses incurred by the Joint Venture is charged to the Statement of Operations and adjusted against the Investment in Medical Joint Venture.

Impairment of Long-Lived Assets

The long lived assets of the Company, principally patents and trademarks are the base features of the business. Milestone reviews long-lived assets for impairment whenever circumstances and situations change such that there is an indication that the carrying amounts may not be recoverable. The carrying value of the asset is evaluated in relation to the operating performance and future undiscounted cash flows of the underlying assets.

Accounts Payable

Current and long term accounts payable represents amounts due to suppliers of the Company. Long term accounts payable is based on an informal payment agreement with the supplier to assist in the purchasing of instruments and handpieces, beyond one year from the balance sheet date.

Revenue Recognition

Revenue from product sales is recognized net of discounts and allowances to domestic distributors on the date of shipment for essentially all shipments, since the shipment terms are FOB warehouse. The Company will recognize revenue on date of arrival of the goods at the customer’s location where shipments are FOB destination. Shipments to international distributors are FOB the warehouse and revenue is therefore recognized on shipment. In both cases the price to the buyer is fixed and the collectability is reasonably assured. Further, the Company has no obligation on these sales for any post installation, set-up or maintenance, these being the responsibility of the buyer. Milestone’s only obligation after sale is the normal commercial warranty against manufacturing defects if the alleged defective unit is returned within the warranty period.

Results of Operations

The following table sets forth for the consolidated results of operations for the year ended December 31, 2011 compared to 2010 as a percentage of revenues. The trends suggested by this table may not be indicative of future operating results:

		September 30,		September 30,			September 30,		September 30,
	Years Ended
	December 31, 2011					December 31, 2010

Total revenue	$	8,378,094		100	%	$	9,749,968		100	%
Cost of products sold		3,016,642		36	%		3,531,452		36	%

Gross Profit		5,361,452		64	%		6,218,516		64	%


Selling, general and administrative expenses		6,445,001		77	%		6,648,859		68	%
Research and development expenses		140,053		2	%		270,494		3	%

Operating expenses		6,585,054		79	%		6,919,353		71	%

Loss from operations		(1,223,602	)	-15	%		(700,837	)	-7	%
Total other (expense) income		(258,498	)	-3	%		86,329		1	%

Net loss	$	(1,482,100	)	-18	%	$	(614,508	)	-6	%

Year ended December 31, 2011 compared to year ended December 31, 2010

Total revenues for the twelve months ended December 31, 2011 and 2010 were $8,378,094 and $9,749,968, respectively. The total decrease in product sales of $1,371,874, or 14%, is a direct result of our shipment of STA Instruments and handpieces to a Chinese distributor in June 2010. Excluding the shipment in 2010 to the Chinese distributor, comparatively, the total sales volume increased by $468,802 in 2011 over 2010. The increase in sales volume of domestic instruments by $85,450, or 7% in 2011 over 2010, was directly related to management’s implementation of a new sales and training strategy focused on concentrated geographical sales efforts and support (deploying independent hygienists) for all customers. In the domestic market, the STA handpiece sales increased by $208,024 or 35% as compared to 2010. CompuDent handpiece sales decreased by $151,911 or 6%. The CompuDent handpiece sales decrease in the domestic market is not specifically attributable to any marketing or sales deemphasizing of the product category. Rather it may be attributable to our customers migrating to our STA instrument. On the international scene, instrument sales decreased in 2011 over 2010 by $952,237, or 39%, primarily due to a significant reduction in sales to our Chinese distributor. STA instrument sales in 2010, to China, represented $1,290,000 of the international sales. This revenue did not occur in 2011, as the Chinese distributor is still in the process of registering the STA instruments with the regulatory authorities in China. Comparatively, on an international basis, 2011 revenues increased against 2010 revenues for STA instrument sales excluding China STA instruments sales in 2010, ($1,290,000) by $396,700. The decrease in handpiece sales internationally was $561,882 or 20% due to a decrease in sales of STA handpieces of $485,103 ($557,568 for handpiece sales to China in 2010) and a decrease in sales of CompuDent handpieces $76,779.

Cost of products sold for the years ended December 31, 2011 and 2010 were $3,016,642 and $3,531,452, respectively. The $514,810 decrease in product cost is due to a decrease in revenue volume.

For the year ended December 31, 2011, Milestone’s gross profit percentage remained the same as compared to the prior year ended December 31, 2010, however, gross profit dollars decreased as a result of reduced revenues. Milestone generated a gross profit of $5,361,452, or 64% in 2011 as compared to a gross profit of $6,218,516, or 64% in 2010. The total dollar decrease in gross profit was $857,064 in 2011 over 2010.

Selling, general and administrative expenses for the years ended December 31, 2011 and 2010 were $6,445,001 and $6,648,859, respectively. The $203,858, or 3.1%, net decrease was focused on several expense categories. In 2011, Sales expense increased by $87,451. This increase is primarily due to increased travel and tradeshow attendance. Marketing expense decreased by $138,925. This decrease was primarily in the areas of printing cost of $33,931, media placement $23,247, marketing key opinion leaders of $69,939; marketing consulting of $31,682 and brochure and production design of $50,720 and offset by promotions at trade shows (national and regional) of $72,390. Payroll expenses increased by $776,615, due to a full year compensation cost for two marketing directors (total $138,242), a reversal of a 2009 Achievement Bonus for the Chief Executive Officer of approximately $300,000 and a reversal in stock based compensation of approximately $198,000 in 2010. This bonus ($300,000) was awarded in 2011 to the Chief Executive Officer upon completion of the Medical Joint Venture Agreement. Legal and patent expenses increased by $36,849 in the aggregate due to reduced general litigation expenses and offset by increased customary patent annuity payments throughout the world. Other General

and administrative expenses decreased by $965,848 due to decrease in payment of an international commission of $203,391, decreased royalties of $53,003 as a result of a decreased sales volume, an international travel expense increase of $4,720, directly related to our current and future sales growth, decrease in the success fees for domestic and international business of $44,670 offset by an increase in business consulting of $22,102. Bad debt expense decreased by $726,678, in 2011 compared to 2010. This decrease is the result of a $636,000 charge in 2010 related to a Chinese distributor accounts receivable. This charge did not occur in 2011 and, in fact, a portion of the reserve was reduced based on collection of a portion of the accounts receivable. In addition, the Company realized expense increases in the areas of professional accounting and audit fees of $31,095 and reduced insurance costs of $15,523.

Research and development expenses for the years ended December 31, 2011 and 2010 were $140,053 and $270,494, respectively. The decrease of $130,441 is due principally to application of $104,968 from the Medical Joint Venture for reimbursement of expenses previously incurred by the Company.

The loss from operations for the years ended December 31, 2011 and 2010 was $1,223,602 and $700,837, respectively. The $522,765, or increase in loss from operations, is mainly attributable to our decreased revenue in 2011.

For the year ended December 31, 2011 we had total other expense of $258,498 compared to total other income of $86,329 for the same prior year period, a decrease of $344,827. The decrease is attributable to the decrease of $183,673 of other income we had in 2010 from the sale of tax credits under the New Jersey Technology Business Tax Certificate Program; respective increases of $36,703 and $2,500 in interest expense related to the line of credit and long term note (see Note I to the financial statements included elsewhere in this annual report) and amortization of debt discount; and a loss on earnings of $121,399 from Medical Joint Venture due to the development cost of medical instruments incurred by the Medical Joint Venture.

For the reasons explained above, net loss for the year ended December 31, 2011 was $1,482,100 as compared to a net loss of $614,508 for the year ended December 31, 2010. The $867,592, or 141%, increase in net loss is primarily a result of a significant decrease in gross profit ($857,064), offset partially by a decrease in Selling, General and Administrative and Research and Development expenses of $334,298. There was a reduction in other income of $183,673, NJ Technology Tax Corporative program and increase to Loss on Earnings for Joint Venture in 2011 of $121,399, both of which had the effect of increasing the loss by $305,072.

Liquidity and Capital Resources

As of December 31, 2011, the Company had cash and cash equivalents of $96,324 and a negative working capital of $1,310,935. The decrease in working capital of $1,304,250 in 2011 was caused by a delay in obtaining regulatory approval to sell our instruments and handpieces in China. Based on the initial purchase order from our distributor in China in 2009, the Company ramped up purchasing of parts in anticipation of significant sales in 2010 and future years. As a result of the delay in shipping, the advances to contract manufacturer has increased significantly, (current and long term), in 2011 as compared to 2010. Additionally, the accounts payable due to suppliers has also increased and is classified as a current liability in 2011 and allocated as current and long term in 2010. And finally, the accounts receivable from the China distributor has been classified between current and long term net of a reserve of doubtful accounts in the aggregate of $516,000.

The Company entered a Medical Joint Venture agreement with a third party in 2011, for the development and commercialization of two medical instruments. The Company did not invest any funds into this Medical Joint Venture. See Note F to the Financial Statements.

As a result of this delay on shipments to China, current accounts receivable increased by $358,238, inventories decreased by $196,453 and current advances to contract manufacturer increased by $222,067. Also, cash decreased by $530,758, utilized in operations and to pay for parts required for the China production and for operations. Current liabilities increased by $1,214,059, principally due to an increase in current accounts payable for the purchase of materials to produce instruments and handpieces.

The Company has also incurred increases in noncurrent advances to contract manufacturer of $740,154 and a decrease in noncurrent accounts payable of $440,376 as a result of the delay in shipping instruments and handpieces to our distributor in China. The Company continues to take positive steps to maintain adequate inventory levels and advances to contract manufacturers to maintain available inventory to meet our domestic and international sales requirements. Milestone incurred net losses of $1,482,100 and $614,508 for the years ended 2011 and 2010, respectively. Cash flows from operating activities for the year ended December 31, 2011 was a negative $570,730 and for the year ended December 31, 2010 was a negative $293,777.

For the year ended December 31, 2011, net cash used in operating activities was $570,730. This was attributable primarily to a net loss of $1,482,100 adjusted for noncash items of $1,010,521 and changes in operating assets and liabilities of $99,150. The decrease in noncash items in 2011 as compared to 2010 is principally due to the increase in shares issued for compensation of $670,156 in 2011.

For the years ended December 31, 2011 and 2010, Milestone used $39,028 and $108,270, respectively, in investing activities, primarily attributable to legal fees related to payment for patent rights.

The Company borrowed $450,000 from a shareholder in 2008. In December 2008 and again in June 2011, the Company refinanced the $450,000 note, extending the due date to July 31, 2013. The $450,000 Note is classified as a Long Term Note Payable on the Balance Sheet at December 31, 2011. See Note I – Line of Credit to the Financial Statements.

The Company has incurred operating losses and negative cash flows from operating activities since its inception, except for 2009. The Company did not achieve positive cash flow in 2011. The Company is actively pursuing the generation of positive cash flows from operating activities through increases in revenues based upon management’s assessment of present contracts and current negotiations and reductions in operating expenses. As of December 31, 2011, the Company believes that it does not have sufficient cash reserves to meet all of its anticipated obligations for the next twelve months. However, if the Company requires a higher level of marketing and sales effort, or if the Company is unable to continue generating positive cash flows from its operating activities it will need to raise additional capital. There is no assurance that the Company will be able to continue to achieve positive operating cash flows or that additional capital can be raised on the terms and conditions satisfactory to the Company if at all. If additional capital is required and it cannot be raised, then the Company would be forced to curtail its development activities, reduce marketing expenses for existing dental products or adopt other cost savings measures, any of which might negatively affect the Company’s operating results.

The Company’s recurring losses and negative operating cash flows raise substantial doubt about its ability to continue as a going concern. The accompanying financial statements do not include any adjustment that might result from the outcome of this uncertainty.

Off-Balance Sheet Arrangements

The Company does not have any off-balance sheet arrangements that are currently material or reasonably likely to be material to the financial position or results of operations.

Contractual Obligations

The impact of the contractual obligations at December 31, 2011, expected on the liquidity and cash flows in future periods, is as follows:

		September 30,		September 30,		September 30,		September 30,
	Payments Due by Period
	Total		Less than 1 Year		1-3 Years		3-5 Years
Long-term debt obligations	$	450,000	$	—	$	450,000	$	—
Operating lease obligations		208,786		83,828		124,958		—
Purchase obligations (1)		4,940,410		1,570,768		3,369,642		—

Total	$	5,599,196	$	1,654,597	$	3,944,600	$	—

(1)	Purchase obligations include agreements for the purchase of instruments and handpieces. The agreements are referred as purchase orders.

Recent Accounting Pronouncements

See “Note B—Summary of Significant Accounting Policies” to the financial statements for explanation of recent accounting pronouncements impacting the Company.

Item 7A. Quantitative and Qualitative Disclosures about Market Risk

Milestone is a “smaller reporting company” as defined by Regulation S-K and as such, is not required to provide the information required by this item.

Item 8. Financial Statements

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

Item 9. Change in and Disagreements with Accountants on Accounting and Financial Disclosure

None.

Item 9A. Controls and Procedures

The Company’s management, including the Chief Executive Officer and Chief Financial Officer, has evaluated 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 the end of the period covered by this report. Based upon that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that the disclosure controls and procedures as of December 31, 2011 are effective to ensure that information required to be disclosed in the reports the Company files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and that such information is accumulated and communicated to the Company's management, including the Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

Management’s Annual Report on Internal Control Over Financial Reporting

Milestone management is responsible for establishing and maintaining an adequate instrument of internal control over financial reporting. The internal control over financial reporting includes those policies and procedures that:

•

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

•

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

•

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

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. All internal control instruments, no matter how well designed, have inherent limitations. Therefore, even those instruments determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Because of the inherent limitations of internal control, there is a risk that material misstatements may not be prevented or detected on a timely basis by internal control over financial reporting. However, these inherent limitations are known features of the financial reporting process. Therefore, it is possible to design into the process safeguards to reduce, though not eliminate, this risk.

Milestone management assessed the effectiveness of its instrument of internal control over financial reporting as of December 31, 2011. In making this assessment, management used the framework in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). Based on the assessment and the criteria set forth by COSO, management believes that the Company maintained effective internal control over financial reporting as of December 31, 2011.

There have been no changes in the Company’s internal control over financial reporting identified in connection with the evaluation that occurred during the Company’s last fiscal quarter ended December 31, 2011 that have materially affected, or that are reasonably likely to materially affect, the Company’s internal controls over financial reporting.

Item 9B. Other Information

None.

PART III

Item 10. Directors, Executive Officers, Promoters, Control Persons and Corporate Governance; Compliance with Section 16 (a) of the Exchange Act.

Milestone’s directors are elected annually by the shareholders and serve for one-year terms until his/her successor is elected and qualified or until such director’s earlier death, resignation or removal. The executive officers and key personnel are appointed by and serve as the pleasure of the Board of Directors.

The current executive officers and directors of Milestone and their respective ages as of March 13, 2012 are as follows:

	September 30,	September 30,	September 30,
NAME	AGE	POSITION	DIRECTOR SINCE
Leslie Bernhard (2)	68	Chairman of the Board and Director	2003
Leonard A. Osser	64	Chief Executive Officer and Director	1991
Joseph D’Agostino	60	Chief Financial Officer and Chief Operating Officer
Pablo Felipe Serna Cardenas (1)	36	Director	2006
Leonard M. Schiller(1)(2)	70	Director	1997

(1)	Member of the Audit Committee

(2)	Member of the Compensation Committee

Key Personnel

The following are the names of individuals who are not executive officers of Milestone but are deemed key personnel of Milestone, their respective ages and positions as of March 30, 2011:

	September 30,	September 30,
NAME	AGE	POSITION
Eugene Casagrande, D.D.S.	68	Director of Professional Relations
Mark Hochman, D.D.S.	54	Director of Clinical Affairs

Leslie Bernhard, Chairman of the Board

In October 2009, Leslie Bernhard assumed the position of Chairman of the Board, filing a position left vacant by Mr. Osser who assumed the position of Chief Executive Officer. Leslie Bernhard has served as an Independent Director of Milestone since May 2003 and was named Chairman of the Board in September of 2009. She co-founded AdStar, Inc. and since 1986 has served as its President, Chief Executive Officer and Executive Director. AdStar is an application service provider for the newspaper classified advertising industry. She serves on the Board of Directors of Universal Power Group (AMEX:UPG) of Dallas, Texas and has done so since 2006. Ms. Bernhard’s professional experience and background with AdStar and with us, as one of our directors since 2003, have given her the expertise needed to serve as Chairman of the Board.

Leonard Osser, Chief Executive Officer

Mr. Osser has been Milestone’s Chief Executive Officer and a director since September 2009. Prior to that, he served as the Company’s Chairman from 1991 until September of 2009, and during that time, from 1991 until 2007, was also Chief Executive Officer of the Company. In September 2009, he resigned as Chairman of the Company, but remained a director, and assumed the position of Chief Executive Officer. From 1980 until the consummation of Milestone’s public offering in November 1995, Mr. Osser was primarily engaged as the principal owner and Chief Executive Officer of U.S. Asian Consulting Group, Inc., a New Jersey-based provider of consulting services specializing in distressed or turnaround situations in both the public and private markets. Mr. Osser’s knowledge of our business and background with us since 1980 provides the Board with valuable leadership skills and insight into our business.

Joseph D’Agostino, Chief Financial Officer

Joining Milestone in January 2008 as Acting CFO, Joseph D’Agostino brings to Milestone a wealth of finance and accounting experience earned over 25 years serving both publicly and privately held companies. Following a nine month performance assessment by the Board of Directors, Mr. D’Agostino was officially named Milestone’s Chief Financial Officer in October 2008. Mr. D’Agostino was giving the additional position of Chief Operating Officer in September 2011. A results-oriented and decisive leader, he has specific proven expertise in treasury and cash management, strategic planning, information technology, internal controls, Sarbanes-

Oxley compliance, operations and financial and tax accounting. Immediately prior to joining Milestone, Mr. D’Agostino served as Senior Vice President and Treasurer of Summit Global Logistics, a publicly traded, full service international freight forwarder and customs broker with operations in the United States and China. Previous executive posts also included Executive Vice President and CFO of Haynes Security, Inc., a leading electronic and manned security solutions company serving government agencies and commercial enterprises; Executive Vice President of Finance and Administration for Casio, Inc., the U.S. subsidiary of Casio Computer Co., Ltd., a leading manufacturer of consumer electronics with subsidiaries throughout the world; and Manager of Accounting and Auditing for Main Hurdman’s National Office in New York City (merged into KPMG). Mr. D’Agostino is a Certified Public Accountant and holds memberships in the American Institute of CPA’s, New Jersey Society of CPA’s, Financial Executive Institute, Consumer Electronics Industry Association and Homeland Security Industry Association. He is a graduate of William Paterson University where he earned a Bachelor of Arts degree in Science.

Mark Hochman, D.D.S., Director of Clinical Affairs

Dr. Hochman has served as Director of Clinical Affairs and Director of Research and Development since 1999. He has a Doctorate of Dental Surgery with advanced training in the specialties of Periodontics and Orthodontics from New York University of Dentistry and has been practicing dentistry since 1984. He holds a faculty appointment as a clinical associate professor at NYU School of Dental Surgery. Recognized as a world authority on Advanced Drug Delivery Instruments, Dr. Hochman has published numerous articles in this area, and shares in the responsibility for inventing much of the technology currently available from Milestone.

Dr. Eugene Casagrande, Director of International & Professional Relations

Since 1998, Dr. Casagrande has served as Director of International and Professional Relations, charged with pursuing a broad range of clinical and industry-related strategic business opportunities for the Company. He has also lectured both nationally and internationally at over 35 dental schools and in over 22 countries on Computer-Controlled Local Anesthesia Delivery. Dr. Casagrande is past president of the California State Board of Dentistry and the Los Angeles Dental Society and is a Fellow of the American and International Colleges of Dentists and has served on the faculty of the University of Southern California, School of Dentistry.

Leonard M. Schiller, Director

Mr. Schiller has been a director of Milestone since April 1997. Mr. Schiller has been a partner in the Chicago law firm of Schiller, Klein & McElroy, P.C. since 1977. He has also been President of The Dearborn Group, a residential property management and real estate acquisition company since 1980. Mr. Schiller became a Director of the Gravitas Cayman Corporation in February 2010. Gravitas Cayman Corporation is an Investment Fund. Mr. Schiller’s professional experience and background as an attorney and a partner of a law firm and with us, as one of our directors since 1997, have given him the expertise needed to serve as one of our directors.

Pablo Felipe Serna Cardenas, Director

Mr. Serna Cardenas has been a director of Milestone since June 2006. He is the founder of SPOT Investments, a European-based financial services firm. Previously, from 2001 to 2005, he was a director and Senior Manager at Dynamic Decisions Group Ltd, an equity research and valuation consulting firm. In that capacity, Mr. Serna Cardenas led the corporate finance team at Dynamic Decisions in investment banking and project valuation consulting. Prior to joining Dynamic Decisions, from 1999-2001, Mr. Serna Cardenas served as an associate with Real Options Group. Real Options Group is an international academic research center consulting to business entities. Before joining Real Options Group, Mr. Serna Cardenas was the general manager with Estudios, Consultorias y Asesorias Financieras, a Financial Consulting firm in Columbia. He has been a director of Pairstech Fund, a UK hedge Fund since 2008. Mr. Cardenas’ professional experience and background as an entrepreneur and as a financial consultant and with us, as one of our directors since 2006, have given him the expertise needed to serve as one of directors.

Milestone’s Board of Directors has established compensation and audit committees. The Compensation Committee reviews and recommends to the Board of Directors the compensation and benefits of all the officers of Milestone, reviews general policy matters relating to compensation and benefits of employees of Milestone, and administers the issuance of stock options to Milestone’s officers, employees, directors and consultants. All compensation arrangements between Milestone and its directors, officers and affiliates are reviewed by the Compensation Committee. The Audit Committee meets with management and Milestone’s independent auditors to determine the adequacy of internal controls and other financial reporting matters; all of the members are independent directors. The Board of Directors has determined that Pablo Felipe Serna Cardenas qualifies as an Audit Committee Financial Expert pursuant to Item 407 (d)(5) of Regulation S-K. Mr. Cardenas is independent, as that term is defined in the listing standards of the NYSE AMEX.

Section 16(a) Beneficial Ownership Reporting Compliance

Section 16(a) of the Securities Exchange Act of 1934 requires our officers and directors, and person who own more than ten percent of a registered class of our equity securities, to file reports of ownership and changes in ownership with the SEC. Officers, directors and greater than ten-percent stockholders are required by SEC regulation to furnish us with copies of all Section 16(a) forms they file. Based solely on review of the copies of such forms furnish to us, or written representations that no Forms 5 were required, we believe that all Section 16(a) filing requirements applicable to our officers and director were complied with during the fiscal year ended December 31, 2011 except that each of Leonard Osser and Joseph D’Agostino did not timely file one Form 4.

Code of Ethics

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

Item 11. Executive Compensation.

The following Summary Compensation Table sets forth all compensation earned, in all capacities, during the fiscal years ended December 31, 2011 and 2010 by (i) Milestone’s CEO and (ii) the most highly compensated executive officers, other than the CEO who were serving as executive officers at the end of the 2011 fiscal year and whose salary as determined by Regulation S-K, Item 402, exceeded $100,000 (the individuals falling within categories (i) and (ii) are collectively referred to as the “Named Executive Officers”).

SUMMARY OF COMPENSATION TABLE

		September 30,		September 30,		September 30,			September 30,			September 30,		September 30,
NAME AND PRINCIPAL POSITION	YEAR		Salary		Bonuses			Other Compensation			Option Awards (2)		Total
Leonard A. Osser
Chief Executive Officer		2011	$	300,000	$	400,000	(1)	$	75,708	(1)	$	—	$	775,708
		2010	$	300,000	$	100,000	(1)	$	50,880	(1)	$	—	$	450,880

Joseph D’Agostino		2011	$	171,600	$	100,000	(3)	$	27,442	(3)	$	100,000	$	399,042
Chief Financial Officer		2010	$	171,600	$	50,000	(3)	$	9,000		$	168,000	$	398,600

(1)

Payment of $350,000 of the bonuses have been deferred and will be paid in common stock upon the termination of his employment with the Company in accordance with the terms of his employment agreement. Other compensation represents payments made for personal use of corporate apartment, health insurance coverage and car allowance.

(2)

The amounts in this column reflect the fair value of the options at date of grant. For details used in the assumption calculating the fair value of the option reward, see Note B to the Financial Statements for the year ended December 31, 2011 and 2010, which is located on pages F-7 through F-11 of the Annual Report on Form 10-K. Compensation cost is generally recognized over the vesting period of the award. See the table below entitled “Outstanding Equity Awards at December 31, 2011.

(3)	Payment of the bonuses have been deferred and will be paid in common stock upon the termination of his employment with the Company in accordance with the terms of his employment agreement. Other compensation represents payments made for health insurance coverage and car allowance.

Employment Contracts

In March 2009, the Mr. Osser assumed the position of Milestone’s Acting Chief Executive Officer. In September 2009, he stepped down as Chairman to fill the position of Chief Executive Officer and entered into a new employment agreement with the Company effective September 1, 2009. This new agreement suspends the previous agreement scheduled to terminate on December 31, 2012. The new agreement is for five years ending on August 31, 2014. The contract shall be extended for successive one-year periods, unless prior to August 1 of any year, either party notifies the other that he or it chooses not to extend the New Employment Term. As part of this agreement, Mr. Osser relinquished the title and position of Chairman. Under the new agreement, the Chief Executive Officer will receive a base compensation of $300,000 per year. In addition, the CEO, may earn annual bonuses up to an aggregate of $400,000, payable one half in cash and one half in common stock, contingent upon achieving targets set for each year by the Compensation Committee of the Board of Directors of the Company.

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

In accordance with the employment contract 1,025,735 shares of common stock are to be paid out at the end of the contract in settlement of $1,058,333 at December 31, 2011 and 571,190 shares of common stock to be paid out at the end of the contract in settlement of $758,333 at December 31, 2010 of accrued deferred compensation and, accordingly, such shares have been classified in stockholders’ equity with the common shares classified as to be issued.

Objective of Executive Compensation Program

The primary objective of the executive compensation program is to attract and retain qualified, energetic managers who are enthusiastic about the mission and culture. A further objective of the compensation program is to provide incentives and reward each manager for their contribution. In addition, Milestone strives to promote an ownership mentality among key leadership and the Board of Directors.

The Compensation Committee reviews and approves, or in some cases recommends for the approval of the full Board of Directors, the annual compensation procedures for the Named Executive Officers.

The compensation program is designed to reward teamwork, as well as each manager’s individual contribution. In measuring the Named Executive Officers’ contribution, the Compensation Committee considers numerous factors including the growth, strategic business relationships and financial performance. Regarding most compensation matters, including executive and director compensation, the management provides recommendations to the Compensation Committee; however, the Compensation Committee does not delegate any of its functions to others in setting compensation. Milestone does not currently engage any consultant to advice on executive and/or director compensation matters.

Stock price performance has not been a factor in determining annual compensation because the price of Milestone’s common stock is subject to a variety of factors outside of the control. Milestone does not have an exact formula for allocating between cash and non-cash compensation.

Annual chief executive officer compensation consists of a base salary component and periodic stock option grants. It is the Compensation Committee’s intention to set totals for the chief executive officer for cash compensation sufficiently high enough to attract and retain a strong motivated leadership team, but not so high that it creates a negative perception with the other stakeholders. The chief executive officer receives stock option grants under the stock option plan. The number of stock options granted to the executive officer is made on a discretionary rather than a formula basis by the Compensation Committee. The chief executive officer’s current and prior compensation is considered in setting future compensation. In addition, Milestone reviews the compensation practices of 28 other companies. To some extent, the compensation plan is based on the market and the companies that compete for executive management. The elements of the plan (e.g., base salary, bonus and stock options) are similar to the elements used by many companies. The exact base pay, stock option grant, and bonus amounts are chosen in an attempt to balance the competing objectives of fairness to all stakeholders and attracting/retaining executive managers.

Outstanding Equity Awards at December 31, 2011

The following table includes certain information with respect to the value of all unexercised options previously awarded to the Named Executive Officers.


	2011 Options Awards								Stock Awards
Name	Number of Securities Underlying Unexercised Options (#) Exercisable (1)		Number of Securities Underlying Unexercised Options (#) Unexercisable (1)		Option Exercise Price ($)		Option Expiration Date		Number of Shares or Units of Stock that have not vested (#) (2)		Number of Shares or Units of Stock that have not vested (#) (3)
Leonard Osser		—		—		—		—		1,025,736	$	369,265

Joseph D’Agostino		91,667		186,111	$	0.36		12/31/2016		333,943	$	120,219
		33,333		66,667	$	1.00		12/20/2015
		55,555		44,445	$	1.00		12/20/2015
		27,777		22,223	$	1.15		12/17/2014
		24,613		7,033	$	1.58		12/17/2014
		33,300		16,700	$	1.15		9/1/2014
		60,000		—	$	0.40		3/31/2014

Total		326,245		343,179

(1)	Represents stock option grants at fair market value on the date of grant.

(2)	Issuance of the shares of common stock has been deferred until the termination of his employment with the Company in accordance with the terms of his employment agreement.

(3)	Based on the closing price per share of $0.36 as reported on the OTCQB on December 31, 2011.

Compensation of Directors

Milestone issued company shares as compensation to its independent directors in 2011 as stated below in the compensation table. On June 16, 2011 Milestone approved annual compensation to its directors in the amount of $30,000, one half payable in common stock shares and one half in cash. On June 16, 2011, $15,000 of common shares were issued to each independent director.

The following table provides compensation information for the year ended December 31, 2011 for each of the independent directors. Directors are reimbursed for the costs relating to attending board and committee meetings.

Director Compensation

		September 30,		September 30,		September 30,
	2011		Fees Earned or
Name	Stock Awards (1)		Paid in Cash ($)		Total ($)
Leonard M. Schiller	$	15,000	$	15,000	$	30,000
Leslie Bernhard	$	15,000	$	15,000	$	30,000
Pablo Felipe Serna Cardenas	$	15,000	$	15,000	$	30,000

(1)	Represents the aggregate grant-date fair value of the awards computed in accordance with the FASB ASC Topic 718. 15,000 Shares, valued at $0.60 per share on June 16, 2011, were issued to each director

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

The following table, together with the accompanying footnotes, sets forth information, as of March 13, 2012, regarding stock ownership of all persons known by Milestone to own beneficially more than 5% of Milestone’s outstanding common stock, Named Executives, all directors, and all directors and officers of Milestone as a group:

		September 30,			September 30,
	March 13, 2012
Names of Benefical Owner (1)	Shares of Common Stock Beneficially Owned (2)			Percentage of Ownership
Executive Officers and Directors
Leonard Osser		2,562,483	(3)		16.30	%
Joseph D’Agostino		660,188	(4)		4.20	%
Leonard Schiller		114,766	(5)		*
Pablo Felipe Serna Cardenas		101,558	(6)		*
Leslie Bernhard		76,538	(7)		*
All directors & executive officers as group (5 persons)		3,515,533	(8)		22.40	%
K. Tucker Andersen		2,556,230			16.30	%
Tom Cheng		752,852			4.78	%

*	Less than 1%

(1)

The addresses of the persons named in this table are as follows: Leonard Osser and Joseph D’Agostino are at 220 South Orange Avenue in, New Jersey 07039; Leonard M. Schiller, c/o Schiller, Klein & McElroy, P.C., 33 North Dearborn Street, Suite 1030, Chicago, Illinois 60602; Pablo Felipe Serna Cardenas, Via Camillo Golgi 2 Opera, Italy 20090; Leslie Bernhard, c/o AdStar, Inc., 4553 Glencoe Avenue, Suite 325, Marina del Rey, California 90292; K. Tucker Andersen, c/o Cumberland Associates LLC, 1114 Avenue of the Americas, New York, New York 10036.

(2)

A person is deemed to be a beneficial owner of securities that can be acquired by such person within 60 days from March 13, 2012, as applicable, upon the exercise of options and warrants or conversion of convertible securities. Each beneficial owner’s percentage ownership is determined by assuming that options, warrants and convertible securities that are held by such person (but not held by any other person) and that are exercisable or convertible within 60 days from the filing of this report have been

exercised or converted. Except as otherwise indicated, and subject to applicable community property and similar laws, each of the persons named has sole voting and investment power with respect to the shares shown as beneficially owned. All percentages are determined based on the number of all shares, including those underlying options exercisable within 60 days from the filing of this report held by the named individual, divided by 15,693,678 outstanding shares on March 13, 2012, plus those shares underlying options exercisable within 60 days from the filing of this report held by the named individual or the group.

(3)	Includes 1,378,413 shares held by Mr. Osser or family, 1,092,403 Shares to Be Issued at the termination of his employment agreement, and 91,667 shares subject to options at $0.75 shares.

(4)

Includes 304,712 Shares to Be Issued at the termination of employment. Also 29,231 shares held by Mr. D’Agostino at March 13, 2012. Additionally, this includes 326,245 shares subject to options as follows: 60,000 shares at $0.40; 61,077 shares at $1.15; 24,613 shares at $1.58;, 88,888 shares at $1.00; and 91,667 shares at $0.36.

(5)	Includes 65,000 stock options as follows: 25,000 shares at $0.55 issued in June 2009; 20,000 shares at $1.68 and 20,000 shares at $0.74.

(6)	Includes 65,000 stock options as follows: 25,000 shares at $0.55 issued in June 2009, 20,000 shares at $1.68 and 20,000 shares at $0.74.

(7)	Includes 65,000 stock options as follows: 20,000 shares at $1.68; 20,000 shares at $0.74; and 25,000 shares at $0.55.

(8)	Includes 612,912 shares of Common Stock underlying outstanding options.

Securities Authorized for Issuance Under Equity Compensation Plans

Equity Compensation Plan Information

The following table summarizes the (i) options granted under the Milestone 2004 Stock Option Plan, (ii) options and warrants granted outside the Milestone 2004 Stock Option Plan, as of December 31, 2011, and (iii) options granted under the Milestone 2011 Stock Option Plan. The shares covered by outstanding options and warrants are subject to adjustment for changes in capitalization, stock splits, stock dividends and similar events. No other equity compensation has been issued.

		September 30,		September 30,		September 30,
	Number of Securities to be issued upon exercise of outstanding options and warrants		Weighted-average exercise price of outstanding options and warrants		Number of securities remaining available for future issuance under equity compensation plan

Equity compensation plan approved by stockholders
Grants under our 2004 Stock Option Plan (1)		109,000	$	2.77		641,000
Grants under our 2011 Stock Option Plan (3)		377,778	$	0.33		1,622,222
Equity compensation plan not approved by stockholders (2)						Not applicable
Aggregate individual option and warrants grants		1,112,503	$	1.24
Total		1,599,281	$	1.13

(1)

In July 2004 the Board of Directors approved the adoption of the 2004 Stock Option Plan. The 2004 Stock Option Plan provides for the grant of options to purchase up to 500,000 shares of Milestone’s common stock. Options may be granted to employees, officers, directors and consultants of Milestone for the purchase of common stock of Milestone at a price not less than the fair market value of the common stock on the date of the grant. In general, options become exercisable over a three-year period from the grant date and expire five years after the date of grant. No options were exercised in 2011.

In March 2008, the Board of Directors authorized an additional 250,000 options to this Plan.

(2)

The aggregate individual option grants outside the Stock Option Plans referred to in the table above include options issued as payment for services rendered to us by outside consultants and providers of certain services. The aggregate individual warrant grants referred to in the table above include warrants granted to investors in Milestone as part of private placements and credit line arrangements. 100,000 options were exercised at $ 0.24 per share in 2011.

(3)

In June 2011, the Stockholders approved the adoption of the 2011 Stock Option Plan. The 2011 Stock Option Plan provides for the grant of options to purchase 2,000,000 shares of Milestone’s Common Stock. Options may be granted to employees, directors and consultants of Milestone for the purchase of Common Stock of Milestone at a price not less than the fair market value of the Common Stock on the date of grant. In general, options become exercisable over a three-year period from the grant date and expire five years after the date of grant. No options were exercised in 2011.

Stock Plan

In 2006 Milestone adopted an equity compensation plan for the issuance of up to 300,000 shares of the common stock in lieu of cash compensation for services performed by employees, officers, directors and consultants (the “2006 Stock Plan”). The purpose of the 2006 Stock Plan is to conserve cash while allowing the Company to adequately compensate existing employees, officers, directors and consultants, or new employees, officers, directors and consultants, whose performance will contribute to the long-term success and growth. Milestone believe that the availability of these shares will also strengthen the ability to attract and retain employees, officers, directors and consultants of high competence, increase the identity of interests of such people with those of the stockholders and help maintain loyalty to us through recognition and the opportunity for stock ownership. All shares granted under this plan will be at fair market value, or at a premium to that value, on the date of grant.

As of December 31, 2011 there are no shares remaining under this plan.

In December 2007, the Board of Directors authorized the Company to issue up to $2 million of its Company stock to vendors or employees, and to grant them piggy back registration rights in the usual form, at a value of not less than 90% of the market value on the date of the agreement for the vendor or employee to accept said shares. Such future shares are not included in the above noted shares reserved for future issuance.

In 2010, the Company issued the following shares under this Plan; 50,000 shares valued at of $50,000 for Officer Compensation, 76,661 shares valued at $104,000 for consulting services, 23,388 shares valued at $33,354 for employee compensation, 34,614 shares valued at $45,000 issued to Directors as compensation.

At December 31, 2011 and 2010 there was $11,316, respectively, available to be issued under this plan.

The Vendor Shares were issued in reliance upon the exemption from the registration requirements of the Act, as provided in Section 4(6) and thereof, as a transaction by an issuer not involving a public offering. Milestone reasonably believed that each vendor had such knowledge and experience in financial and business matters to be capable of evaluating the merits and risks of the investment, each vendor represented an intention to acquire the securities for investment only and not with a view to distribution thereof and appropriate legends were affixed to the stock certificates. No commissions were paid in connection with such issuances.

Item 13.

Certain Relationships and Related Transactions and Director Independence.

On June 28, 2007 the Company secured a $1 million line of credit from K. Tucker Andersen, a stockholder, beneficially owning approximately 18% of the Company’s outstanding stock. This borrowing was amended to $1,300,000 as of September 30, 2008 under the same terms and conditions as the original. In December 2009, the Company converted the $1.3 million principal amount of the borrowing under the line of Credit into 822,785 shares of Common Stock at a price of $1.58 per share. Additionally, the interest due on the principal is payable over a two year period (quarterly payments of $23,000).

The Company borrowed an additional $450,000 from the same stockholder in 2008. The borrowing was originally on short term loan with a maturity date of January 19, 2009. In December 2008 and again on June 30, 2011, this borrowing was refinanced with the shareholder with a due date of July 31, 2013. The borrowing includes a twelve percent interest rate, interest compound quarterly, with interest and principle due at the maturity. Further, the note provides for the issuance of warrants to the stockholder that is exercisable for five years at the price of $0.32 per share for 45,000 shares of stock. The warrants were valued using the Black-Scholes model and are reflected as a discount against the debt. The Company did not have any other related party transactions pursuant to Item 404 of Regulation S-K of the Exchange Act. Milestone has adopted a policy that, in the future, the Audit Committee must review all transactions with any officer, director or 5% stockholder. The amount outstanding to the stockholder was $450,000 for both years ending December 31, 2011 and 2010. Interest expense accrued on this debt was $77,722 and $61,398 for the years ended December 31, 2011 and 2010, respectively.

Tom Cheng, a shareholder, is also a supplier of handpieces to the Company. Mr. Cheng is also a shareholder in 3H Bejing, a 50 percent owner in the Medical Joint Venture.

Director Independence

The Board has determined that Leonard M. Schiller and Pablo Felipe Serna Cardenas (the “Independent Directors”) are independent as that term is defined in the listing standards of the NYSE Amex. As disclosed above, Pablo Felipe Serna Cardenas and Leonard M. Schiller members of the Audit Committee and are independent for such purposes, and Leonard M. Schiller and Leslie Bernhard are members of the Compensation Committee and Leonard Schiller is independent for such purposes.

In determining director independence, the Board considered the stock awards to the Independent Directors for the year ended December 31, 2011, disclosed in “Item 11 – Executive Compensation – Director Compensation” above, and determined that such awards were compensation for services rendered to the Board and therefore did not impact their ability to continue to serve as Independent Directors.

Item 14.

Principal Accounting Fees and Services

Audit Fees

Milestone incurred audit and financial statement review fees totaling $132,033 and $110,738, respectively from Holtz Rubenstein Reminick LLP, the principal accountant for 2011 and 2010.

Audit Related Fees

There were no audit related fees to the principal accountant Holtz Rubenstein Reminick LLP in 2011 and 2010.

Tax Fees

There were no fees for services related to tax compliance, tax advice and tax planning billed by the principal accountant in 2011 and 2010.

All Other Fees

There were no other fees billed during 2011 and 2010 by Milestone’s principal accountants.

Audit Committee Administration of the Engagement

The engagement with Holtz Rubenstein Reminick LLP, the principal accountants, was approved in advance by the Board of Directors and the Audit Committee. No non-audit or non-audit related services were approved by the Audit Committee in 2011.

Audit Committee Pre-Approval Policies and Procedures

The Audit Committee charter provides that the Audit Committee will pre-approve audit services and non-audit services to be provided by the independent auditors before the accountant is engaged to render these services. The Audit Committee may consult with management in the decision-making process, but may not delegate this authority to management. The Audit Committee may delegate its authority to preapprove services to one or more committee members, provided that the designees present the pre-approvals to the full committee at the next committee meeting. All audit and non-audit services performed by the independent accountants have been pre-approved by the Audit Committee to assure that such services do not impair the auditors’ independence from us.

PART IV

Item 15.

Exhibits and Financial Statement Schedules

(a) The following documents are filed as part of this Report:

Financial Statements. The following financial statements and the reports of Milestone’s independent auditor thereon, are filed herewith.

•

Report of Independent Registered Public Accounting Firm (Holtz Rubenstein LLP -2011 and 2010)

•

Balance Sheets at December 31, 2011 and 2010

•

Statements of Operations for the years ended December 31, 2011 and 2010

•

Statements of Changes in Stockholder’s Equity for the years ended December 31, 2011 and 2010

•

Statements of Cash Flows for the years ended December 31, 2011 and 2010

•

Notes to Financial Statements

Financial Statement Schedule

Schedules are omitted because the information required is not applicable or the required information is shown in the consolidated financial statements or notes thereto

Exhibits

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


Exhibit NO.		Description

3.1		Certificate of Incorporation of Milestone (1)
3.2		Certificate of Amendment filed July 13, 1995 (2)
3.3		Certificate of Amendment filed December 6, 1996 (3)
3.4		Certificate of Amendment filed December 17, 1997 (4
3.5		Certificate of Amendment filed July 23, 2003 (5)
3.6		Certificate of Amendment filed January 8, 2004. (5)
3.7		Certificate of Designation filed January 15, 2004 (5)
3.8		By-laws of Milestone (1)
4.1		Speciman stock certificate (2)
4.3		Form of warrant agreement, including form of warrant (6)
10.1		Lease dated November, 25, 1996 between Livingston Corporate Park Associates, L.L.C. and Milestone (3)
10.2		Agreement with DaVinci Instruments, dated July 30, 2003 (5)
10.3		Agreement with Strider, dated September 3, 2003 (5)
10.4		Agreement with Len Osser and K. Tucker Andersen, dated October 9, 2003 (5)
10.5		Agreement with Morse, Zelnick, Rose & Lander, dated December 22, 2003 (5)
10.6**		Employment Agreement with Leonard Osser, dated December 20, 2003 (5)
10.7		Agreement with United Instruments, dated October 20, 2004 (7)
10.8		Agreement with Mark Hochman, dated January 1, 2005 (7)
10.9		Lease amendment dated April 28, 2004 between Livingston Corporate Park Associates, L.L.C. And Milestone (7)
10.10		Agreement with DaVinci regarding exclusive license over patented products, dated June 1, 2004 (8)
10.11**		Employment Agreement with Leonard Osser, dated September 1, 2009 (9))
10.12		Loan agreement of $1 million from K. Tucker Andersen, dated June 29, 2007 (10)
10.13		Amendment to the loan agreement of $1.3 million from K. Tucker Andersen, dated April 18, 2008 (10)
10.14		Promissory note in the principal amount of $450,000 held by K. Tucker Andersen, dated December 24, 2008 (10)
10.15*		Amendment to the $450,000 promissory note held by K. Tucker Andersen, dated June 30, 2011 (10)
10.16*		2004 Stock Option Plan (11)
10.17*		2005 Stock Option Plan (12)
14		Code of Ethics (6)
23.1		Consent of Holtz Rubenstein Reminick LLP*
31.1		Rule 13a-14(a) Certification-Chief Executive Officer*
31.2		Rule 13a-14(a) Certification-Chief Financial Officer*
32.1		Section 1350 Certifications-Chief Executive Officer*
32.2		Section 1350 Certifications-Chief Financial Officer*
101.INS***		XBRL Instance Document
101.SCH***		XBRL Taxonomy Extension Schema Document
101.CAL***		XBRL Taxonomy Extension Calculation Linkbase Document
101.LAB***		XBRL Taxonomy Extension Label Linkbase Document
101.PRE***		XBRL Taxonomy Extension Presentation Linkbase Document
101.DEF***		XBRL Taxonomy Extension Definition Linkbase Document

*	Filed herewith.

**	Indicates management contract or compensatory plan or arrangement

***

Furnished with this report. In accordance with Rule 406T of Regulation S-T, the information in these exhibits shall not be deemed to be “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to liability under that section, and shall not be incorporated by reference into any registration statement or other document filed under the Securities Act of 1933, as amended, except as expressly set forth by specific reference in such filing.

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

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

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

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

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

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

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

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

(9) Incorporated by reference to Milestone’s Form 10-K for the year ended December 31, 2009.

(10) Incorporated by reference to Milestone’s Form 10-K for the year ended December 31, 2010.

(11) Filed as Appendix C to the Company’s Proxy Statement filed with the SEC on June 28, 2004 and incorporated herein by reference.

(12) Filed as Appendix A to the Company’s Proxy Statement filed with the SEC on May 2, 2011 and incorporated herein by reference.

SIGNATURES

In accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.


Milestone Scientific Inc.

By:		/s/ Leonard Osser
		Chief Executive Officer
		(Principal Executive Officer)

Date: March 13, 2012

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


Signature	Date	Title

/s/ Leonard Osser Leonard Osser	March 13, 2012	Chief Executive Officer and Director (Principal Executive Officer)

/s/ Joseph D’Agostino Joseph D’Agostino	March 13, 2012	Chief Financial Officer (Principal Financial Officer)

/s/ Leonard Schiller Leonard Schiller	March 13, 2012	Director

/s/ Leslie Bernard Leslie Bernhard	March 13, 2012	Chairman and Director

/s/ Pablo Felipe Serna Cardenas Pablo Felipe Serna Cardenas	March 13, 2012	Director

INDEX TO FINANCIAL STATEMENTS

		September 30,
	Page
Report of Independent Registered Public Accounting Firm		F-2
Balance Sheets as of December 31, 2011 and 2010		F-3
Statements of Operations for the years ended December 31, 2011 and 2010		F-4
Statements of Changes in Stockholders’ Equity for the years ended December 31, 2011 and 2010		F-5
Statements of Cash Flows for the years ended December 31, 2011 and 2010		F-6
Notes to Financial Statements		F-7

F-1

Report of Independent Registered Public Accounting Firm

Board of Directors and Stockholders

Milestone Scientific Inc.

We have audited the accompanying balance sheets of Milestone Scientific Inc. as of December 31, 2011 and 2010 and the related 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. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Milestone Scientific Inc. as of December 31, 2011 and 2010 and the results of its operations and its cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.

The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note A to the financial statements, the Company has suffered recurring losses from operations since inception, which raises substantial doubt about its ability to continue as a going concern. Management's plans in regard to these matters are described in Note A. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

/s/ Holtz Rubenstein Reminick LLP

New York, New York

March 13, 2012

F-2

MILESTONE SCIENTIFIC INC.

BALANCE SHEETS

December 31, 2011 and 2010

		September 30,			September 30,
	December 31, 2011			December 31, 2010

ASSETS
Current Assets:
Cash and cash equivalents	$	96,324		$	627,082
Accounts receivable, net of allowance for doubtful accounts of $182,880 in 2011 and $202,160 in 2010		1,154,459			796,221
Inventories		790,494			986,947
Advances to contract manufacturer		952,558			730,491
Prepaid expenses and other current assets		304,180			247,465

Total current assets		3,298,015			3,388,206
Accounts receivable-long term, net of allowance for doubtful accounts of $372,000 in 2011 and $438,840 in 2010		261,256			361,160
Advances to contract manufacturer		2,453,948			1,713,794
Investment in distributor, at cost		76,319			76,319
Investment in Medical Joint Venture		124,179			—
Furniture, Fixtures & Equipment net of accumulated depreciation of $446,484 as of December 31, 2011 and $426,482 as of December 31, 2010		52,309			66,936
Patents, net of accumulated amortization of $344,238 as of December 31, 2011 and $294,934 as of December 31, 2010		698,357			944,858
Other assets		27,819			57,750

Total assets	$	6,992,202		$	6,609,023

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities:
Accounts payable—short term	$	3,931,531		$	2,883,587
Accrued expenses and other payable		677,419			511,304

Total current liabilities		4,608,950			3,394,891


Long-term Liabilities:
Accounts payable—long term		—			440,376
Notes payable-net of discount of $3,065 and $8,361, respectively		446,935			441,639

Total long-term liabilities		446,935			882,015


Commitments and Contingencies

Stockholders’ Equity
Common stock, par value $.001; authorized 50,000,000 shares; 15,556,878 shares issued 1,501,457 shares to be issued and 15,523,545 shares outstanding as of December 31, 2011; 14,915,959 shares issued, 637,013 shares to be issued, and 14,882,626 shares outstanding as of December 31, 2010		17,058			15,552
Additional paid-in capital		63,690,837			62,606,043
Accumulated deficit		(60,860,062	)		(59,377,962	)
Treasury stock, at cost, 33,333 shares		(911,516	)		(911,516	)

Total stockholders’ equity		1,936,317			2,332,117

Total liabilities and stockholders’ equity	$	6,992,202		$	6,609,023

See Notes to Financial Statements

F-3

MILESTONE SCIENTIFIC INC.

STATEMENTS OF OPERATIONS

YEARS ENDED DECEMBER 31, 2011 AND 2010

		September 30,			September 30,
	2011			2010
Product sales, net	$	8,378,094		$	9,749,968
Cost of products sold		3,016,642			3,531,452

Gross profit		5,361,452			6,218,516

Selling, general and administrative expenses		6,445,001			6,648,859
Research and development expenses		140,053			270,494

		6,585,054			6,919,353


Loss from operations		(1,223,602	)		(700,837	)
Other income (expense)
Other income		—			183,673
Interest income		35			587
Interest expense		(131,838	)		(95,135	)
Amortized debt issuance		(5,296	)		(2,796	)
Loss on Earnings from Medical Joint Venture		(121,399	)		—

Total other (expense) income		(258,498	)		86,329

Net loss	$	(1,482,100	)	$	(614,508	)


Net loss applicable to common stockholders	$	(1,482,100	)	$	(614,508	)

Loss per share applicable to common stockholders—basic and diluted	$	(0.10	)	$	(0.04	)

Weighted average shares outstanding and to be issued—basic and diluted		15,174,893			14,824,802

See Notes to Financial Statements

F-4

MILESTONE SCIENTIFIC INC.

STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

YEARS ENDED DECEMBER 31, 2011 AND 2010

		September 30,			September 30,			September 30,			September 30,			September 30,			September 30,
							Additional
	Common Stock						Paid-in			Accumulated			Treasury
	Shares			Amount			Capital			Deficit			Stock			Total
Balance, December 31, 2009		15,473,794		$	15,472		$	62,300,619		$	(58,763,454	)	$	(911,516	)	$	2,641,121

Options issued to employees and consultants		—			—			239,817									239,817
Common stock issued for director’s compensation		34,614			35			44,965									45,000
Common stock issued for payment of consulting services to settle accounts payable		76,661			77			103,923									104,000
Common stock issued for payment of employee compensation		23,388			23			33,331									33,354
Common stock to be issued for settlement of bonus compensation		50,000			50			49,950									50,000
Reversal of common stock to be issued for settlement of bonus compensation		(105,485	)		(105	)		(166,562	)								(166,667	)
Net loss											(614,508	)					(614,508	)

Balance, December 31, 2010		15,552,972			15,552			62,606,043			(59,377,962	)		(911,516	)		2,332,117

Options issued to consultants		—			—			255,899			—			—			255,899
Options exercised		100,000			100			24,900			—			—			25,000
Common stock to be issued to employee for bonuses		748,990			749			419,251									420,000
Common stock to be issued to employee for compensation		12,153			12			4,363									4,375
Common stock to be issued to consultants		103,300			103			60,710									60,813
Sale of common stock		99,999			100			29,900									30,000
Common stock issued for directors compensation		75,000			75			44,925									45,000
Common stock issued for payment of consulting services to settle accounts payable		327,222			327			190,886			—			—			191,214
Proceeds on sale of option rights								24,000									24,000
Common stock issued for payment of employee compensation		38,699			39			29,961			—			—			30,000
Net Loss		—			—			—			(1,482,100	)		—			(1,482,100	)

Balance, December 31, 2011		17,058,335		$	17,058		$	63,690,837		$	(60,860,062	)	$	(911,516	)	$	1,936,317

See Notes to Financial Statements

F-5

MILESTONE SCIENTIFIC INC.

STATEMENTS OF CASH FLOWS

YEARS ENDED DECEMBER 31, 2011 AND 2010

		September 30,			September 30,
	2011			2010
Cash flows from operating activities:
Net loss	$	(1,482,100	)	$	(614,508	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation expense		22,094			45,243
Amortization of patents		83,297			83,395
Amortization of debt discount		5,296			2,796
Common stock and options issued for compensation, consulting, and vendor services		864,555			194,399
Bad debt expense		(86,120	)		640,558
Loss on sale/disposal of equipment		—			(7,494	)
Loss on Earnings on Joint Venture		121,399			—
Changes in operating assets and liabilities:
(Increase) in accounts receivable		(172,214	)		(734,197	)
Decrease (Increase) in inventories		196,453			(182,211	)
(Increase) to advances to contract manufacturer		(962,221	)		(1,981,060	)
Decrease to prepaid expenses and other current assets		17,717			73,708
Decrease in other assets		47,432			120,356
Increase in accounts payable		607,568			2,169,950
Increase (Decrease) in accrued expenses		166,114			(104,712	)

Net cash used in operating activities		(570,730	)		(293,777	)

Cash flows from investing activities:
Purchases of property and equipment		(7,467	)		(29,355	)
Proceeds on sale of equipment		—			2,023
Payment for patent rights		(31,561	)		(80,938	)

Net cash used in investing activities		(39,028	)		(108,270	)

Cash flows from financing activities:
Proceeds from the sale of stock options rights		24,000			—
Proceeds from the exercise of stock options		25,000			—
Proceeds from the sale of common stock		30,000			—

Net cash provided by financing activities		79,000			—


NET DECREASE IN CASH AND CASH EQUIVALENTS		(530,758	)		(402,047	)
Cash and cash equivalents at beginning of year		627,082			1,029,129

Cash and cash equivalents at end of year	$	96,324		$	627,082

Supplemental disclosure of cash flow information:
Interest expense paid in cash	$	23,000		$	92,000

Supplemental disclosure of non cash activities:
Shares issued to directors for compensation	$	45,000		$	45,000

Shares issued to employees in lieu of cash compensation	$	30,000		$	33,354

Shares issued to settle accounts payable	$	191,214		$	104,000

Non-Cash
Transfer of assets to JV	$	194,765		$	—

See Notes to Financial Statements

F-6

MILESTONE SCIENTIFIC INC.

NOTES TO FINANCIAL STATEMENTS

NOTE A — ORGANIZATION, BUSINESS AND BASIS OF PRESENTATION

Milestone Scientific Inc. (“Milestone”) or (“the Company”) was incorporated in the State of Delaware in August 1989. Milestone has developed a proprietary, computer-controlled anesthetic delivery instrument, through the use of The Wand, a single use disposable handpiece. The instrument is marketed in dentistry under the trademark CompuDent, Wand Plus and STA (Single Tooth Anesthesia) and in medicine under the trademark CompuMed. CompuDent is suitable for all dental procedures that require local anesthetic. CompuMed and Wand Plus are suitable for many medical procedures regularly performed in Plastic Surgery, Hair Restoration Surgery, Podiatry, Colorectal Surgery, Dermatology, Orthopedics and a number of other disciplines. The instruments are sold in the United States and in over 47 countries abroad. Milestone’s products are manufactured by a third-party contract manufacturer.

The Company had incurred operating losses since its inception. The Company had negative cash flows from operating activities at December 31, 2011 of $570,730 and a negative cash flow from operating activities at December 31, 2010 of $293,777. At December 31, 2011, the Company had cash and cash equivalents and a negative working capital of $96,324 and $$1,310,935, respectively. The negative working capital increase of $1,304,250 in as compared to 2010 is due to the Company’s continued commitment of purchasing parts in anticipation of significant sales to our distributor in China. Such sales have been delayed. As a result of this delay, the advances to contract manufacturer has been allocated between current and long term. Additionally, the accounts payable due to suppliers is presented as short term in 2011 and has been allocated between long term and short term in 2010. And finally, the accounts receivable for the China distributor had been allocated between current and long term, with a reserve of $516,000 provided against the accounts receivable. Additionally, the Company borrowed $450,000 in 2008 from a shareholder, with a due date of January 2009. This additional borrowing was refinanced at December 31, 2008 and June 30, 2011 and the due date was extended to July 31, 2013. The Company is actively pursuing the generation of positive cash flows from operating activities through an increase in revenue based upon management’s assessment of present contracts and current negotiations and reductions in operating expenses. As of December 31, 2011, the Company does not expect to have sufficient cash reserves to meet all of its anticipated obligations for the next twelve months. The Company may require the need for a higher level of marketing and sales efforts that at present it cannot fund. If the Company is unable to generate positive cash flows from its operating activities it will need to raise additional capital. There is no assurance that the Company will be able to achieve positive operating cash flows or that traditional capital can be raised on terms and conditions satisfactory to the Company, if at all. If positive cash flow cannot be achieved or if additional capital is required and it cannot be raised, then the Company would be forced to curtail its development activities, reduce marketing expenses for existing dental products or adopt other cost saving measures, any of which might negatively affect the Company’s operating results.

The Company’s recurring losses raise substantial doubt about its ability to continue as a going concern. The accompanying financial statements do not include any adjustments that might result from the outcome of this uncertainty.

NOTE B — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

1. Cash and Cash Equivalents

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

2. Accounts Receivable

The realization of Accounts Receivable current and long-term will have a significant impact on the Company. Consequently, Milestone estimates losses resulting from the inability of its customers to make payments for amounts billed. The collectability of outstanding amounts is continually assessed.

3. Product Return and Warranty

Milestone does not accept non-defective returns from its customers. Product returns under warranty are accepted, evaluated and repaired or replaced in accordance with the Warranty Policy. Returns not within the Warranty Policy are charged to the customer. Warranty expense was $63,445 and $43,397 for 2011 and 2010, respectively. Non-Warranty repairs are collected from the customers. Non-Warranty repair income was $100,017 and $76,172 for 2011 and 2010, respectively.

F-7

4. Inventories

Inventories principally consist of finished goods and component parts stated at the lower of cost (first-in, first-out method) or market. Inventory quantities on hand are reviewed on a quarterly basis and a provision for excess and obsolete inventory is recorded if required based on past and expected future sales.

5. Investment in Medical Joint Venture

The Company has entered into a Joint Venture with a third party for the development and commercialization of two medical instruments. The Company owns fifty percent of the joint venture and has recorded its investment on the equity basis of accounting. The Company’s proportionate share of losses incurred by the Joint Venture is charged to the Statement of Operations and adjusted against the Investment in Joint Venture.

6. Furniture, Fixture and Equipment

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

7. Investments

Investments in less than twenty percent owned entities are accounted for under the cost basis and are reviewed for impairment periodically. The Company does not have any significant control over the operations of this investee.

8. Patents

Patents are recorded at actual cost to prepare and file the applicable documents with the United States Patent Office, or internationally with the applicable governmental office in the respective country. Although certain patents have not yet been approved, the costs related to these patents are being amortized using the straight-line method over the estimated useful life of the patent. If the applicable patent application is ultimately rejected, the remaining unamortized balance will be expensed in the period in which the Company receives a notice of such rejection. Patent applications filed and patents obtained in foreign countries are subject to the laws and procedures that differ from those in the United States. Patent protection in foreign countries may be different from patent protection under United States laws and may not be favorable to the Company. The Company also attempts to protect the proprietary information through the use of confidentiality agreements and by limiting access to the facilities. There can be no assurance that the program of patents, confidentiality agreements and restricted access to the facilities will be sufficient to protect the proprietary technology.

9. Impairment of Long-Lived Assets

Milestone reviews long-lived assets for impairment whenever events or circumstances indicate that the carrying amounts may not be recoverable. The carrying value of the assets is evaluated in relation to the operating performance and future undiscounted cash flows of the underlying assets. Milestone adjusts the net book value of an underlying asset if its fair value is determined to be less than its net book value. The Company has reviewed long-lived assets for impairment and concluded no impairment exist as of December 31, 2011 and December 31, 2010, respectively.

10. Accounts Payable

Current and long term accounts payable represents amounts due to suppliers of the Company. Long term accounts payable is based on an informal financing agreement with the supplier to assist in the purchasing of instruments and handpieces, beyond one year from the balance sheet date.

11. Revenue Recognition

Revenue from product sales is recognized net of discounts and allowances to the domestic distributor on the date of shipment of the goods, for essentially all shipments, since the terms are FOB warehouse. The Company will recognize revenue on date of arrival where shipments are FOB destination. Shipments to the international distributors are FOB the warehouse and revenue is therefore recognized on shipment. In both cases, the price to the buyer is fixed and the collectability is reasonably assured. Further, Milestone has no obligation on these sales for any post sale installation, set-up or maintenance, these being the responsibility of the buyer. Customer acceptance is considered made at delivery. The only obligation after sale is the normal commercial warranty against manufacturing defects if the alleged defective unit is returned within the warranty period.

F-8

12. Shipping and Handling Costs

The Company includes shipping and handling costs in cost of goods sold. These costs are billed to customers at the time of shipment for domestic shipments. International shipments are FOB the warehouse, therefore no costs are incurred by the Company.

13. Research and Development

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

14. Advertising Expenses

Milestone expenses advertising costs as they are incurred. For the years ended December 31, 2011 and 2010, Milestone recorded advertising expenses of $83,764 and $107,011, respectively.

15. Income Taxes

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

16. Basic and diluted net loss per common share

Milestone presents “basic” earnings (loss) per common share applicable to common stockholders and, if applicable, “diluted” earnings (loss) per common share applicable to common stockholders pursuant to the provisions of Statement of Financial Accounting Standards ASC Topic 260. Basic earnings (loss) per common share is calculated by dividing net income or loss applicable to common stockholders by the weighted average number of common shares outstanding and to be issued during each period. The calculation of diluted earnings per common share is similar to that of basic earnings per common share, except that the denominator is increased to include the number of additional common shares that would have been outstanding if all potentially dilutive common shares, such as those issuable upon the exercise of stock options, warrants, and the conversion of debt were issued during the period.

Since Milestone had net losses for 2011 and 2010, the assumed effects of the exercise of outstanding stock options and warrants, and the conversion of convertible debt were not included in the calculation as their effect would have been anti-dilutive. Such outstanding options and warrants totaled 1,599,281 at December 31, 2011 and 1,538,503 at December 31, 2010.

17. Use of Estimates

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

18. Fair Value of Financial Instruments

Fair Value Measurements: We follow the provisions of ASC 820, Fair Value Measurements and Disclosures related to financial assets and liabilities that are being measured and reported on a fair value basis. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants in the principal market at the measurement date (exit price). We are required to classify fair value measurements in one of the following categories:

Level 1 inputs which are defined as quoted prices (unadjusted) in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date.

Level 2 inputs which are defined as inputs other than quoted prices included within Level 1 that are observable for the assets or liabilities, either directly or indirectly.

Level 3 inputs are defined as unobservable inputs for the assets or liabilities.

Financial assets and liabilities are classified based on the lowest level of input that is significant to the fair value measurement. Our assessment of the significance of a particular input to the fair value measurement requires judgment, and may effect the valuation of the fair value of assets and liabilities and their placement within the fair value hierarchy levels.

F-9

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

19. Stock-Based Compensation

Milestone accounts for stock-based compensation under ASC Topic 718, Share-Based Payment. ASC Topic 718 requires all share-based payments to employees, including grants of employee stock options, to be recognized in the statements of operations over the service period, as an operating expense, based on the grant-date fair values.

The weighted-average fair value of the individual options granted during 2011 and 2010 was estimated as $0.33 and $0.91, respectively, on the date of grant. The fair value for 2011 and 2010 was determined using the Black-Scholes option-pricing model with the following weighted average assumptions:

		September 30,			September 30,
	December 31,
	2011			2010
Volatility		181	%		122	%
Risk-free interest rate		0.84	%		2.13	%
Expected life		3 years			3 years
Dividend yield		0	%		0	%
Forfeiture Rate		6	%		6	%

Issuances of common stock, stock options or other equity instruments to non-employees as consideration for goods or services received by Milestone are accounted for based on the fair value of the equity instruments issued (unless the fair value of the consideration received can be more reliably measured). The fair value of any options or similar equity instruments issued is estimated based on the Black-Scholes option-pricing model, and the assumption that all of the options or other equity instruments will ultimately vest. Such fair value is measured as of an appropriate date pursuant to the guidance in the consensus of the party becomes committed to provide goods or services or the date performance by the other party is complete and capitalized or expensed as if Milestone had paid cash for the goods or services.

Expected volatilities are based on historical volatility of Milestone’s common stock over a period commensurate with expected term. Milestone uses historical data to estimate option exercise and employee termination within the valuation model. The Company has granted performance based options to the chief executive officer. Such performance based options are earned based on specific criteria established by the Company. The Company records these options based on the likelihood of the officer achieving the specified performance objective and accrues these costs over the performance period. The estimates inherent in making this assessment are reviewed periodically by management and the resulting changes are booked through the statement of operations.

20. Concentration of Credit Risk

Milestone’s financial instruments that are exposed to concentrations of credit risk consist primarily of cash and trade accounts receivable, and advances to contract manufacturer. Milestone places its cash and cash equivalents with large financial institutions. At times, such investments may be in excess of the Federal Deposit Insurance Corporation insurance limit. Milestone has not experienced any losses in such accounts and believes it is not exposed to any significant credit risks. Financial instruments which potentially subject Milestone to credit risk consist principally of trade accounts receivable, as Milestone does not require collateral or other security to support customer receivables, and advances to contract manufacturer. Milestone entered into a purchase agreement with a vendor to supply Milestone with 5,000 instruments of CompuDent and 12,000 STA Instrument. As part of these agreements, Milestone has advanced approximately $3,407,000 and $2,444,000 to the vendor for purchase of materials at December 31, 2011 and 2010, respectively. The advance will be credited to Milestone as the goods are delivered. Milestone does not believe that significant credit risk exists with respect to this advance to the contract manufacturer at December 31, 2011 and 2010.

Milestone closely monitors the extension of credit to its customers while maintaining allowances, if necessary, for potential credit losses. On a periodic basis, Milestone evaluates its accounts receivable and establishes an allowance for doubtful accounts, based on a history of past write-offs and collections and current credit conditions. Management has provided a reserve that it believes is sufficient record accounts receivable at net realizable value as of December 31, 2011 and 2010.

A five percent shareholder of the Company is also a shareholder of a major supplier of handpieces to the Company. In addition, he is an investor in the PRC entity, Beijing 3H, which entered into a joint venture agreement with Milestone.

The Company purchased $2,006,885 and $2,016,212 from the supplier for the years ended December 31, 2011 and 2010, respectively. The Company owed $1,207,280 and $1,118,757 to this supplier as of December 31, 2011 and 2010, respectively.

F-10

21. Recent Accounting Pronouncements

Fair Value Measurements and Disclosures (Topic 820): Improving Disclosures about Fair Value Measurements. Effective for interim and annual reporting periods beginning after December 15, 2009, except for the disclosures about purchases, sales, issuances, and settlements in the roll forward of activity in Level 3 fair value measurements. Those disclosures are effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years. This statement does not currently impact the financial statement of the Company.

In the second quarter of 2010, the FASB issued Accounting Standards Updates (ASU) 2010-09, Fair Value Measurements and Disclosures: Improving Disclosures about Fair Value Measurements (ASU 2010-06). ASU 2010-06 amends FASB ASC Topic 820, Fair Value Measurements and Disclosures, and requires reporting entities to make new disclosures about recurring or nonrecurring fair-value measurements. ASU 2010-06 also clarifies existing fair-value measurement disclosure guidance about the level of disaggregation, inputs and valuation techniques. Except for the detailed Level 3 rollforward disclosures, we adopted the provisions of ASU 2010-06 in the first quarter of 2010. This adoption did not affect our financial statements. We have adopted the provisions of ASU 2010-06 related to the new Level 3 rollforward disclosures.

In the first quarter of 2010, the FASB issued ASU 2010-09, Subsequent Events: Amendments to Certain Recognition and Disclosure Requirements (ASU 2010-09). ASU 2010-09 amends ASC 855, Subsequent Events, so that SEC filers are no longer required to disclose the date through which subsequent events have been evaluated in financial statements. We adopted the provisions of ASU 2010-09 in the first quarter of 2010.

In December 2010, the FASB issued ASU No. 2010-28, “Intangibles-Goodwill and Other (Topic 350) When to Perform Step 2 of the Goodwill Impairment Test for Reporting Units with Zero or Negative Carrying Amounts.” This guidance clarifies application of Step 2 of the goodwill impairment test. The guidance requires an entity to perform Step 2 if it is more likely than not that an impairment exists. This accounting guidance is effective for fiscal years beginning after December 15, 2010. This statement does not currently impact the financial statements of the Company.

In October 2009, the FASB issued ASU 2009-13, “Revenue Recognition (Topic 605): Multiple-Deliverable Revenue Arrangements – a consensus of the FASB Emerging Issues Task Force,” which amends the criteria for when to evaluate individual delivered items in a multiple deliverable arrangement and how to allocate consideration received. This ASU is effective for fiscal years beginning on or after June 15, 2010, which is January 1, 2011 for the Corporation. This statement does not currently impact the financial statement of the Company.

In May 2011, the FASB issued ASU No. 2011-04, “Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs”, which is intended to improve comparability of fair value measurements presented and disclosed in financial statements prepared in accordance with U.S. generally accepted accounting principles and International Financial Reporting Standards. This standard clarifies the application of existing fair value measurement requirements including (1) the application of the highest and best use valuation premise, (2) the methodology to measure the fair value of an instrument classified in a reporting entity’s shareholders’ equity, (3) disclosure requirements for quantitative information on Level 3 fair value measurements and (4) guidance on measuring the fair value of financial instruments managed within a portfolio. In addition, the standard requires additional disclosures of the sensitivity of fair value to changes in unobservable inputs for Level 3 securities. This standard is effective for interim and annual reporting periods ending on or after December 15, 2011. The adoption of this guidance is not expected to have a significant impact on the Company’s financial statements.

In June 2011, the FASB issued ASU No. 2011-05, “Presentation of Comprehensive Income”, which requires that comprehensive income be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements. The standard also requires entities to disclose on the face of the financial statements reclassification adjustments for items that are reclassified from other comprehensive income to net earnings. This standard no longer allows companies to present components of other comprehensive income only in the statement of equity. This standard is effective for interim and annual reporting periods beginning after December 15, 2011. The adoption of this guidance is not expected to have a significant impact on the Company’s financial statements other than the prescribed change in presentation.

In September 2011, the FASB amended its guidance for goodwill impairment testing. The amendment allows entities to first assess qualitative factors in determining whether or not the fair value of a reporting unit exceeds its carrying value. If an entity concludes from this qualitative assessment that it is more likely than not that the fair value of a reporting unit exceeds its carrying value, then performing a two-step impairment test is unnecessary. This standard is effective for fiscal years beginning after December 15, 2011 and is not expected to have an impact on the financial statements.

F-11

NOTE C — ACCOUNTS RECEIVABLE – CURRENT AND LONG TERM

The Company sells a significant amount of its product on credit terms to its major distributors. The Company estimates losses from the inability of its customers to make payments on amounts billed. A majority of credit sales are due within ninety days from invoicing. In 2010, the Company shipped a significant order to a major international distributor. At the time of the shipment, regulatory approval to sell the product in the respective country was in process. Obtaining such regulatory approval was not a condition of the purchase order and sale to the distributor. The regulatory approval has been delayed and as such the customer has not paid the full amount of the invoiced shipment. The Company is receiving periodic payments from the international distributor. Based on the periodic payment plan prepared by the international distributor, the Company has recorded a long term net accounts receivable of $261,000 as of December 31, 2011. The current portion of this net accounts receivable is approximately $96,000. The Company reserved $516,000 of the total accounts receivable from this distributor as December 31, 2011.

NOTE D — INVENTORIES

		September 30,		September 30,
	December 31
	2011		2010
Inventories consist of the following:
Finished Goods	$	604,320	$	766,693
Component parts and other materials		186,175		220,254

	$	790,494	$	986,947

NOTE E — ADVANCES TO CONTRACT MANUFACTURER

The net advances to contract manufacturer represent funding of future STA, CompuDent and Wand Plus inventory purchases. The balance of the net advances as of December 31, 2011 and 2010 totaled $3,406,506 and $2,444,285, respectively. The portion of this advance expected to be utilized in the next twelve months is classified as current asset, with the remainder classified as non-current asset. The Company has an outstanding accounts payable of $1,752,000 and $1,521,000 at December 31, 2011 and 2010, respectively to the contract manufacture specifically related to the advances.

NOTE F — INVESTMENT IN MEDICAL JOINT VENTURE

In March 2011, Milestone entered into an agreement with a People’s Republic of China ("PRC") entity (Bejing 3H) to establish a joint venture entity in the PRC to develop intra-articular and epidural drug delivery instruments utilizing Milestone’s patented CompuFlo technology. The PRC entity agreed to contribute up to $1.5 million to this joint venture entity, based on progress reports from Milestone and subject to refund if the instruments are not developed because of technological problems within 30 months of the inception date. Milestone evaluates the technological feasibility of the products to be developed using the CompuFlo technology periodically and at every reporting date, to establish if circumstances indicate that the technology continues to be feasible. Based on the available evidence Milestone concluded that the contingency associated with the return of capital to 3H would be remote as of December 31, 2011 and accordingly no amounts have been accrued in the accompanying financial statements relating to this contingency. The initial $500,000 capital contribution was to have been made at inception. The PRC joint venture entity was established in September 2011. However, to move the process forward, Milestone, with the consent of Beijing 3H, organized a domestic research and development corporation to which its joint venture partner completed a capital contribution of $500,000 to the US research and development corporation. The joint venture is owned fifty percent by the PRC entity and fifty percent by Milestone. Milestone contributed an exclusive worldwide royalty-free license to use CompuFlo technology to the joint venture which has been valued at approximately $245,000 and has accounted for its investment in the joint venture using the equity method of accounting.

Milestone will have distribution responsibility in the U.S. and Canada and the rest of the world, while Beijing 3H will distribute products exclusively in the PRC, Macao, Hong Kong and other regions of Asia. As of December 31, 2011, Bejing 3H has contributed $670,000 to the Joint Venture and the development project has been initiated.

The joint venture reimbursed Milestone approximately $105,000 for previously incurred research and development expenses, which has been included as a credit to research and development expenses in the accompanying statement of operations in 2011. The medical joint venture’s total year-to-date expenses were approximately $243,000 of which Milestone’s share of approximately $121,000 has been included in the accompanying statement of operations as the proportionate share of losses from the joint venture. Further, Milestone was authorized by the joint venture to manage and oversee the development of the two products for the joint venture. In connection with this, Milestone also entered into an agreement with a significant vendor to develop the two instruments included in the joint venture.

F-12

NOTE G — FURNITURE, FIXTURES AND EQUIPMENT

		September 30,			September 30,
	December 31
	2011			2010
Furniture, Fixtures and Equipment consist of the following:
Leasehold improvements	$	22,317		$	22,317
Office furniture and equipment		98,268			98,268
Molds		7,200			7,200
Trade show displays		89,395			89,395
Computers and software		186,384			181,008
Tooling equipment-STA & Wand		31,477			31,477
STA Trials Instruments		63,752			63,752

Total		498,793			493,418
Less accumulated depreciation		(446,484	)		(426,482	)

	$	52,309		$	66,936

Depreciation expense was $22,094 and $45,243 for the years ended December 31, 2011 and 2010, respectively.

NOTE H — PATENTS

Patents are being amortized by the straight-line method over estimated useful lives ranging from 10 to 20 years, with a weighted average amortization period of 12 years. Amortization expense amounted to $83,297 in 2011 and $83,395 in 2010. Estimated amortization expense of existing patents for each of the next five fiscal years amounts to approximately $75,393 per year.

NOTE I— LINE OF CREDIT and NOTES PAYABLE

On June 28, 2007 the Company secured a $1 million line of credit from a stockholder. This borrowing was amended to $1,300,000 as of September 30, 2008 under the same terms and conditions as the original. The $1.3 million Line of Credit was converted into shares of Milestone’s common stock in December 2009 at a conversion rate of $1.58 per share. A total of 822,785 shares were issued and the debt liquated at that date. Interest on the Line of Credit of aggregated $176,655 was accrued as of December 31, 2009. This interest will be paid in equal quarterly payments of $23,000 over the next two years. The Company borrowed an additional $450,000 from the same shareholder in 2008. The borrowing was originally on short term loan with a maturity date of January 19, 2009. In December 2008 and again on June 30, 2011, this borrowing was refinanced with the shareholder with a due date of July 13, 2013. The borrowing includes a twelve percent interest rate, interest compound quarterly, with interest and principle due at the maturity. Further, the note has warrants exercisable for five years at the price of $0.32 per share for 45,000 shares of stock. The warrants were valued using the Black-Scholes model and are reflected as a discount against the debt. At December 31, 2011, the discount was $3,065.

Interest expense on this Line of Credit for the year ended December 31, 2011 and 2010 was $77,722 and $95,135, respectively. Accrued interest related to this line of credit was $269,547 and $214,825 at December 31, 2011 and December 31, 2010, respectively. The charge for amortization of Debt Discount related to this Line of Credit is $5,296 and $2,796 for the year ended December 31, 2011 and December 31, 2010, respectively.

NOTE J — STOCKHOLDERS’ EQUITY

ISSUANCES OF COMMON STOCK

During 2011, Milestone issued 75,000 shares valued at $45,000 for the directors compensation.

During 2011, Milestone issued 327,222 shares valued at $191,214 for payment of consulting services.

During 2011, Milestone issued 38,699 shares valued at $30,000 for payment of employee compensation.

During 2011, Milestone sold 99,999 shares valued at $30,000.

During 2011, Milestone’s to be issued shares are 12,153 valued at $4,375 for the officer’s deferred compensation.

During 2011, Milestone’s to be issued shares are 748,990 valued at $420,000 for employee for bonus compensation.

During 2011, Milestone’s to be issued shares are 103,300 valued at $60,813 for the consulting services.

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SHARES TO BE ISSUED

As of December 31, 2011 and 2010, there were 1,501,456 and 637,013 shares that have been deferred from being issued, subject to employment agreements with the Chief Executive Officer, Chief Financial Officer and employees of the Company. Such shares will be issued to each party upon termination of their employment.

OUTSTANDING WARRANTS

At December 31, 2011, there were 45,000 warrants outstanding. These warrants were issued in connection with the Long Term note of $450,000, exercisable at $0.32 per share, expiring in June 2012.

There were no warrants issued in 2011 and 2010.

SHARES RESERVED FOR FUTURE ISSUANCE

At December 31, 2011 and 2010 there were 3,694,072 and 3,521,850 shares reserved for future; 1,599,281 and 1,538,503 shares underlying other stock options and warrants that were outstanding at December 31, 2011 and 2010, respectively: 1,501,457 shares in 2011 and 637,013 shares in 2010 to be issued in settlement of deferred compensation to Officers of the Company; and 593,335 shares in 2011 and 2010, respectively, for Performance Options issued to an Officer of the Company. 73,333 options were issued but not vested in 2010 for the Performance Options noted above.

In June 2011, the Shareholders of the Company approved the 2011 Stock Option Plan (the “2011 Plan”) that provides for stock options to our employees, directors and consultants an incentive and non-qualified stock options to purchase up to 2,000,000 shares of Common Stock. Such future shares are included in the above noted shares reserved for future issuances.

NOTE K — STOCK OPTION PLANS

In July 2004, the Board of Directors approved the adoption of the 2004 Stock Option Plan. The 2004 Stock Option Plan provides for the grant of options to purchase up to 750,000 shares of Milestone’s common stock. Options may be granted to employees, officers, directors and consultants of Milestone for the purchase of common stock of Milestone at a price not less than the fair market value of the common stock on the date of the grant. In general, options become exercisable over a three-year period from the grant date and expire five years after the date of grant.

In November 2009, the Board of Directors authorized 666,667 options be reserved for a special bonus to the Chief Executive Officer of the Company, for obtaining a three year purchase order for the sale of 12,000 STA Instruments and related handpieces over a four year period. These options were reserved and 73,333 were granted but not vested in 2010. The remaining 593,334 were reserved until specific performance targets are achieved. The options will be issued upon achievement of the specific target on a yearly basis. The options were valued at $1.49 per share.

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A summary of option activity for employees under the plans as of December 31, 2011 and 2010, and changes during the year then ended is presented below:

		September 30,			September 30,		September 30,		September 30,
	Number of Options			Weighted Averaged Exercise Price $		Weighted Average Remaining Contractual Life (Years)		Aggregate Intrinsic Options Value $
Outstanding, January 1, 2010		1,060,142			1.33		3.61		632,624
Granted		313,333			1.11		5.88		—
Exercised		—			—		—		—
Forfeited or expired		(444,971	)		1.72		—		—
Outstanding, December 31, 2010		928,504			1.07		3.92		115,849
Exercisable, December 31, 2010		471,722			0.95		2.74		110,142
Granted		277,778			0.36		5.00
Exercised during 2011		—			—		—		—
Forfeited or expired		67,000			1.17		—		—
Outstanding, December 31, 2011		1,139,282			0.89		3.62		1,000
Exercisable, December 31, 2011		638,176			0.89		2.79		1,000

		September 30,			September 30,		September 30,
	Number of Options			Weighted Averaged Exercise Price $		Weighted Average Grant Date Fair Value $
VESTED OPTIONS
Outstanding, January 1, 2010		559,154			1.45		—
Exercised during 2010		—			—		—
Vested Options during 2010		214,456			0.81		—
Forfeited during 2010		(301,888	)		1.72		—
Outstanding, December 31, 2010		471,722			0.95		—
Exercised during 2011		—			—		—
Vested Options during 2011		233,454			0.83		—
Forfeited during 2011		67,000			1.17		—
Outstanding, December 31, 2011		638,176			0.89		—
NONVESTED OPTIONS
Nonvested, January 1, 2010		500,988			1.20		—
Granted during 2010		313,333			1.11		—
Vested during 2010		(214,456	)		0.81		—
Forfeited during 2010		(143,083	)		1.62		—
Nonvested, December 31, 2010		456,782			1.20		—
Granted during 2011		277,778			0.36		—
Vested during 2011		(233,454	)		0.83		—
Forfeited during 2011		—			—		—
Nonvested, December 31, 2011		501,106			0.90		—

Milestone recognizes compensation expense on a straight line basis over the requisite service period and in case of performance based options over the period of the expected performance. During the years ended December 31, 2011 and 2010 Milestone recognized $225,257, and $140,226 of total compensation cost related to options that vested each year, respectively. As of December 31, 2011 and 2010, there was $156,753 and $258,369 of total unrecognized compensation cost related to non-vested options which Milestone expects to recognize over a weighted average period of 2.3 years and 2.5 years for December 31, 2011 and December 31, 2010, respectively.

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A summary of option activity for non-employees under the plans as of December 31, 2010 and 2011, and changes during the year ended is presented below:

		September 30,			September 30,		September 30,		September 30,
	Number of Options			Weighted Averaged Exercise Price $		Weighted Average Remaining Contracted Life (years)		Aggregate Intrinsic Options Value $
Outstanding, January 1, 2010		414,999			1.90		2.70		236,083
Exercisable, December 31, 2010		336,387			1.96		2.71		234,638
Granted during 2010		136,666			1.69		0.72		—
Forfeited during 2010		(16,666	)		1.98		—		—
Outstanding, December 31, 2010		534,999			1.85		1.51		99,617
Exercisable, December 31, 2010		514,998			1.87		1.41		99,311
Granted during 2011		100,000			0.24		2.50		—
Exercised during 2011		(100,000	)		0.25		—
Forfeited during 2011		(120,000	)		1.75		—		—
Outstanding, December 31, 2011		414,999			1.87		1.43		12,000
Exercisable, December 31, 2011		399,443			1.90		1.36		12,000

		September 30,			September 30,
	Number of Options			Weighted Averaged Exercise Price $
VESTED OPTIONS
Outstanding, January 1, 2010		336,387			1.96
Vested during 2010		195,277			1.72
Forfeited during 2010		(16,666	)		1.98
Outstanding, December 31, 2010		514,998			1.87
Exercised during 2011		(100,000	)		0.25
Vested during 2011		104,445			0.29
Forfeited during 2011		(120,000	)		1.75
Outstanding, December 31, 2011		399,443			1.90

NONVESTED OPTIONS
Nonvested January 1, 2010		78,612			1.64
Granted during 2010		136,666			1.69
Vested during 2010		(195,277	)		1.72
Forfeited during 2010		—			—
Nonvested December 31, 2010		20,001			1.21
Granted during 2011		100,000			0.24
Exercised during 2011		—			—
Vested during 2011		(104,445	)		0.29
Outstanding, December 31, 2011		15,556			1.16

The fair value of the options was estimated on the date of grant using the Black Scholes option-pricing model. For the year ended December 31, 2011, the following weighted average assumptions were used in calculating fair value; expected life of 3 years; volatility of 117.82 and risk-free interest rate of 1.64%. During the year ended December 31, 2011 and 2010 Milestone recognized $44,002 and $86,231 of expense related to non-employee options that vested, respectively. The total unrecognized compensation cost related to nonvested options was $2,358 and $24,316 as of December 31, 2011 and 2010.

NOTE L — EMPLOYMENT CONTRACT AND DEFERRED COMPENSATION

Employment Contracts

In March 2009, the Chairman assumed the position of Milestone’s Acting Chief Executive Officer. In September 2009 The Chairman stepped down as Chairman to fill the position of Chief Executive Officer. The Chief Executive Officer entered into a new employment agreement with the Company effective September 1, 2009. This new agreement succeeds the previous agreement scheduled to

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terminate on December 31, 2012. The new agreement is for five years ending on August 31, 2014. The contract shall be extended for successive one-year periods, unless prior to August 1 of any year, either party notifies the other that he or it chooses not to extend the New Employment Term. As part of this agreement the Chairman relinquished the title and position of Chairman. Under the new agreement, the Chief Executive Officer will receive a base compensation of $300,000 per year payable. In addition, the CEO, may earn annual bonuses up to an aggregate of $400,000, payable one half in cash and one half in common stock, contingent upon achieving targets set for each year by the Compensation Committee of the Board of Directors of the Company.

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

NOTE M — INCOME TAXES

The Company’s expected federal income tax benefit computed at the statutory rate (34%) on the pre-tax loss amounted to $504,000 in 2011 and $209,000 in 2010. Such benefit was not recognized in the accompanying financial statements due to Milestone’s history of past operating losses, which required full valuation allowances for all of Milestone’s deferred tax assets at December 31, 2011 and 2010.

Deferred tax attributes resulting from differences between financial accounting amounts and tax bases of assets and liabilities at December 31, 2011 and 2010 are as follows:

		September 30,			September 30,
	2011			2010
Current Assets
Allowance for doubtful accounts-short term	$	73,000		$	81,000
Inventory allowance		79,000			79,000
Warranty reserve		10,000			10,000
Deferred officers compensation		527,000			333,000

Subtotal		689,000			503,000

Valuation allowance		(689,000	)		(503,000	)

Current deferred tax asset	$	—		$	—

Non-current assets
Allowance for doubtful accounts-long term	$	149,000		$	175,000
Net operating loss carryforward		16,715,000			16,100,000

Subtotal		16,864,000			16,275,000

Valuation allowance		(16,864,000	)		(16,275,000	)

Non-current deferred tax asset	$	—		$	—

The current deferred asset allowance increased by $186,000 for the year ended December 31, 2011 and increased by $335,000 for the year ended December 31, 2010, respectively. The non-current deferred allowance increased by $589,000 for the year ended December 31, 2011.

As of December 31, 2011 and 2010, Milestone has federal net operating loss carryforwards of approximately $48,805,000 and $47,657,000, respectively that will be available to offset future taxable income, if any, through December 2031. Milestone has state net operating losses of $2,028,000 and $886,000 in 2011 and 2010, respectively, expiring through December 2015.The utilization of Milestone’s net operating losses may be subject to a substantial limitation due to the “change of ownership provisions” under Section 382 of the Internal Revenue Code and similar state provisions. Such limitation may result in the expiration of the net operating loss carry forwards before their utilization. Milestone has established a 100% valuation allowance for all of its deferred tax assets due to uncertainty as to their future realization.

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A reconciliation of the statutory tax rates for the years ended December 31, is as follows:

		September 30,			September 30,
	2011			2010
Statutory rate		(34	)%		(34	)%
State income tax—all states		(6	)%		(6	)%

		(40	)%		(40	)%
Current year valuation allowance		40	%		40	%

Benefit for income taxes		0	%		0	%

In 2010, Milestone received $183,673 for sale of tax credits under the New Jersey Technology Business Tax Certificate Transfer Program and is included in other income as of December 31, 2010.

Accounting for Uncertain Tax Positions:

The Company follows the Income Taxes Topic of the FASB Accounting Standards Codification, which provides clarification on accounting for uncertainty in income taxes recognized in an enterprise’s financial statements. The guidance prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return, and also provides guidance on derecognition, classification, interest and penalties, disclosure and transition. At December 31, 2011, no significant income tax uncertainties have been included in the Company’s Balance Sheets. The Company’s policy is to recognize interest and penalties on unrecognized tax benefits in income tax expense in the Statements of Operations. No interest and penalties are present for periods open. Tax returns for the 2008, 2009, and 2010 years are subject to audit by federal and state jurisdictions.

NOTE N — PRODUCT SALES AND SIGNIFICANT CUSTOMERS AND VENDORS

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

		September 30,		September 30,
	Year End December 31,
	2011		2010
Instruments	$	2,823,669	$	3,690,456
Handpieces		5,457,196		5,962,965
Other		97,229		96,547

	$	8,378,094	$	9,749,968


United States	$	4,658,327	$	4,529,420
Canada		468,786		601,034
Other foreign		3,250,981		4,619,514

	$	8,378,094	$	9,749,968

The Company has informal arrangements with the manufacturer of the STA, CompuDent and CompuMed instruments, one of the principal manufacturers for those instruments pursuant to which they manufacture these products under specific purchase orders but without any long-term contract or minimum purchase commitment. Purchases from this supplier were $2,049,103 (50%) and $3,541,806 (60.8%) in 2011 and 2010, respectively. The Company has a manufacturing agreement with one of the principal manufacturers of the handpieces pursuant to which they manufacture products under specific purchase orders but without minimum purchase commitments. Purchases from this supplier for handpieces were $56,231 (1%) and $270,517 (4.6%) in 2011 and 2010, respectively. The Company has established an alternate source of supply for the handpieces from a vendor in China and other alternate sources of supply exist. Purchases of handpieces from this vendor in China were $2,006,885 (40%) and $2,016,212 (34.6%) in 2011 and 2010, respectively. As further described in Note B, a five percent shareholder of the Company is also a shareholder of this vendor. All other purchases from other suppliers were not significant in either 2011 or 2010.

For the year ended December 31, 2011, Milestone had two customers (distributors) that had approximately 43%, (30% and 13%) of its net product sales. Accounts receivable, current and long term, for the three customers amounted to approximately $917,575, or 65%, (28%, 12% and 25%) of gross accounts receivable. For the year ended December 31, 2010, Milestone had three customers (distributors) that had approximately 60%, (30%, 11%, and 19%) of its net product sales. Accounts receivable from these three customers amounted to approximately and $1,346,966, or 73% (5%, 7% and 61%) of gross accounts receivable.

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NOTE O — COMMITMENTS AND OTHER

(1) Lease Commitments

The headquarters for the Company is located at 220 South Orange Ave, Livingston, New Jersey. The Company leases approximately 6,300 square feet of office space at 220 South Orange Avenue in Livingston, New Jersey. The lease term expires June 30, 2014 at a monthly cost of $6,942 which Milestone believes to be competitive. The leased office space is in good condition. Additionally, Milestone leased a corporate apartment in Maplewood, NJ. This lease expired in November 2010 at a monthly cost of $4,000. The Company terminated the lease in December 2011. A third party distribution and logistics center in Pennsylvania handles shipping and order fulfillment on a month-to-month basis. Milestone also leases office and telecom equipment under operating leases with payments ranging from $130-$522 per month.

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

		September 30,
2012	$	83,828
2013		83,306
2014		41,653

	$	208,786

For the years ended December 31, 2011 and 2010, respectively, rent expense amounted to approximately $130,806 and $144,954 respectively.

(2) Contract Manufacturing Arrangement

Milestone has informal arrangements for the manufacture of its products. STA, single tooth anesthesia, CompuDent and CompuMed instruments are manufactured for Milestone by Tricor Systems, Inc. pursuant to specific purchase orders. The Wand disposable handpiece is manufactured for Milestone in Mexico pursuant to scheduled production requirements. The STA and The Wand Handpiece with Needle is supplied to Milestone by a contractor in the United States, which arranges for its manufacturer in China. These contractors provide an informal long term financing basis for the Company.

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

(3) Other Commitments

The technology underlying the SafetyWand and CompuFlo, and an improvement to the controls for CompuDent were developed by the Director of Clinical Affairs and assigned to us. Milestone purchased this technology pursuant to an agreement dated January 1, 2005, for 43,424 shares of restricted common stock and $145,000 in cash, payable on April 1, 2005. In addition, the Director will receive additional payments of 2.5% of the total sales of products using certain of these technologies, and 5% of the total sales of products using certain other of the technologies. In addition, he is granted, pursuant to the agreement, an option to purchase, at fair market value on the date of the grant, 8,333 shares of the common stock upon the issuance of each additional patent relating to these technologies. If products produced by third parties use any of these technologies (under license from us) then he will receive the corresponding percentage of the consideration received by Milestone for such sale or license. Milestone expensed the Director’s royalty fees of $291,783 and $344,786 in 2011 and 2010, respectively. Additionally, Milestone expensed consulting fee to the Director $156,000 for year ended 2011 and 2010, and granted him 16,666 options, in 2010.

In January 2010, the Company issued a purchase order to Tricor Instruments for the purchase of 12,000 STA Instruments to be delivered over the next three years. The purchase order is for $5,261,640. The Company will be required to make periodic payments over the next eighteen months to purchase the parts necessary to complete this production. As of December 31, 2011, the Company’s production and sales of instruments to this commitment has been delayed. Consequently, advances to contractor has been classified as current and long term at December 31, 2011.

F-19

(4) Subsequent Events

On February 1, 2012, Milestone, announced that it closed on a $150,000 offshore offering of Common Stock at $1.40 per share. This offering resulted in the issuance of 107,142 shares of Common Stock. The Company has reviewed events for inclusion in their financial statements through the date of filing its financial statements with the SEC.

NOTE P — PENSION PLAN

Milestone has a Defined Contribution Plan that allows eligible employees to contribute part of their salary through payroll deductions. Milestone does not contribute to this plan, but does pay the administrative costs of the plan.

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