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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-K

OR

Commission File Number:    0-16594

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

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

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

Indicated by check mark whether the Registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2).   [ ]    Yes     |X|    No

Approximate aggregate market value of voting Common Stock held by non-affiliates was $10,565,000 as of September 30, 2004.

The number of shares outstanding of the Registrant’s Common Stock, $.01 par value, was 5,601,937 as of June 21, 2004

Documents Incorporated by Reference

Parts of the Registrant’s definitive proxy statement, which will be filed by the Registrant within 120 days after the end of the Registrant’s 2003 fiscal year end, are incorporated by reference into Part III of this Form.

MEDICAL TECHNOLOGY SYSTEMS, INC.

CLEARWATER, FLORIDA

INDEX

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PART I

        This Annual Report on Form 10-K (the “10-K”) contains certain statements concerning the future that are subject to risks and uncertainties. Additional written or oral forward-looking statements may be made by us from time to time, in filings with the Securities and Exchange Commission (the “SEC”) or otherwise. Such statements include, among other things, information concerning possible-future results of operations, capital expenditures, the elimination of losses under certain programs, financing needs or plans relating to our products or services, assessments of materiality, predictions of future events, and the effects of pending and possible litigation, as well as assumptions relating to the foregoing, and those accompanied by the words “believes”, “anticipates,” “estimates,” “expects,” “intends,” “plans,” or similar expressions. For those statements we claim the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995.

        You should specifically consider the various factors identified in this 10-K, including the matters set forth in “Item 1. Business”; “Item 3. Legal Proceedings”; “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations”; and the Notes to Consolidated Financial Statements that could cause actual results to differ materially from those indicated in any forward-looking statements. Other factors that could contribute to or cause such differences include, but are not limited to, unanticipated increases in operating costs, labor disputes, capital requirements, increases in borrowing costs, product demand, pricing, market acceptance, intellectual property rights and litigation, risks in product and technology development and other risk factors detailed in our SEC filings.

        Readers are cautioned not to place undue reliance on any forward-looking statements contained in this 10-K, which speak only as of the date hereof. We undertake no obligation to publicly release the results of any revisions to these forward-looking statements that may be made to reflect events or circumstances after the date hereof or to reflect the occurrence of unexpected events.

        In this 10-K, unless otherwise indicated, the terms “we,” “us,” “our,” “registrant” and “Med Tech” refer to Medical Technology Systems, Inc., and its subsidiaries.

ITEM 1.    BUSINESS

Introduction

        We were incorporated in Delaware in March 1984. We are a holding company that operates through our subsidiaries, MTS Packaging Systems, Inc.™ (“MTS Packaging”) and MTS Packaging Systems International, Ltd. (“MTSPI”). MTS Packaging primarily manufactures and sells disposable medication punch cards, packaging equipment and ancillary products throughout the United States. Its customers are predominantly pharmacies that supply nursing homes, assisted living and correctional facilities with prescription medications for their patients. MTS Packaging manufactures its proprietary disposable punch cards and packaging equipment in its own facilities. This manufacturing process uses integrated machinery for manufacturing the disposable medication punch cards. The disposable medication punch cards and packaging equipment are designed to provide a cost effective method for pharmacies to dispense medications. MTS Packaging’s medication dispensing systems and products provide innovative methods for dispensing medications in disposable packages. MTSPI distributes products for MTS Packaging in the United Kingdom. We currently serve more than 3,000 institutional pharmacies in the long-term care and correctional facility markets, both domestically and internationally.

         On April 1, 2004, we provided our landlord with notice of intent to terminate the lease of our existing office, manufacturing and warehouse space in Clearwater, Florida on September 30, 2004. Effective October 1, 2004, we will occupy a new leased premises at 2003 Gandy Blvd., St Petersburg, Florida. The new facility will provide us with approximately 104,000 square feet of office and production space, which is an increase from the 79,600 square feet we currently occupy. The terms of the new lease allow us several months to make the transition from our current location without incurring any duplicative occupancy costs. We also have an option to lease an additional 28,000 square feet of contiguous space at any time, during the term of the new lease, provided that we give the landlord 120 days advance notice.

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        In April 2004, we announced that we would begin to do business as MTS Medication Technologies and seek the approval of our stockholders to formally change our name to MTS Medication Technologies, Inc. We also intend to merge MTS Packaging Systems, Inc. into MTS Medication Technologies, Inc. when our formal name change is approved by our stockholders.

        In May 2004, we entered into a co-marketing agreement with Cardinal Health, Inc. (“Cardinal”) that provides Cardinal with exclusive rights to market certain of our systems directly to specified customers that serve the long-term care and correctional facilities markets. In addition, the co-marketing agreement provides Cardinal with the right to market the complete line of our filling and sealing equipment, and our OnDemand® system. The agreement will still allow us to sell disposable products to existing and future customers through our current distribution channels.

        Our website is located at www.mts-mt.com. Information contained in our website is not a part of this document or the documents incorporated by reference in this document.

Products

        MTS Packaging manufactures proprietary medication dispensing systems and related products for use by medication prescription providers primarily servicing long-term care and correctional facilities. These systems utilize disposable medication punch cards and specialized machines that automatically or semi-automatically assemble, fill and seal drugs into medication punch cards representing a weekly or monthly supply of a patient’s medication.

         During fiscal 2002, we introduced our newest product, the OnDemand system, which we believe is the industry’s first automated system capable of dispensing prescription medications into punch card compliance packaging, improving accuracy and increasing productivity. We designed the OnDemand system to interface with the pharmacy information systems to receive orders and fill a patient-labeled medication compliance package on a “just-in-time,” fully-automated basis. The current system has the capacity to hold up to 400 different medications and dispense them into patient-specific labeled punch cards at a rate of up to eight cards per minute, utilizing only two employees. We believe this technology promotes a new industry standard for packaging and distributing medications through institutional pharmacies to a wide range of end users including skilled nursing, assisted living and correctional facilities.

        Our customers use MTS Packaging’s machinery for dispensing medication in disposable packages by automatically placing tablets or capsules (the amount of medication required by a patient during one month) into a punch card. The use of these cards and machines provides a cost effective customized package at competitive prices. The punch card medication dispensing system can provide tamper evident packaging for products dispensed in the package.

        The retail price of MTS Packaging’s machinery ranges from $1,100 to $500,000 depending upon the degree of automation and options requested by a customer. The punch cards typically retail from approximately $155 to $225 per 1,000 cards and blisters, depending upon the size, design and volume of cards ordered by a customer. MTS Packaging has placed approximately 2,000 medication dispensing systems with pharmacy clientele since our inception. MTS Packaging also sells prescription labels and ancillary supplies designed to complement sales of disposable medication punch cards. MTS Packaging had approximately $749,000 in unshipped orders as of June 20, 2004 compared to approximately $869,000 as of June 20, 2003.

Research and Development

        We expended approximately $161,000, $172,000 and $87,000 on research and development activities for each of the fiscal years ended March 31, 2004, 2003 and 2002, respectively. In addition, we directed our product development efforts primarily towards the completion of several versions of our OnDemand machine during this fiscal year. We capitalized approximately $451,000 of product development during the fiscal year ended March 31, 2004. The majority of these expenditures were made for the OnDemand™ machine project.

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Manufacturing Processes

        MTS Packaging has developed integrated punch card manufacturing equipment that will complete the various punch card manufacturing steps in a single-line, automated process. We believes that our advanced automation gives us certain speed, cost and flexibility advantages over conventional punch card manufacturers. MTS Packaging’s equipment produces finished cards on a single in-line Flexographic press. This process takes the place of approximately five different processes using conventional offset printing methods. MTS Packaging has several machines capable of producing punch cards in this manner. In addition to the manufacturing of punch cards, MTS Packaging manufactures the machines that are sold to its customers to fill punch cards with medication. The majority of these machines are sold to customers; however, from time to time, customers are provided or rented machines in conjunction with an agreement to purchase certain quantities of punch cards over a specified period.

        MTS Packaging uses automated fabrication equipment to produce its medication packaging machinery. All essential components of the machines are designed and manufactured by us without reliance on outside vendors.

        MTS Packaging is dependent on a number of suppliers for the raw materials essential in the production of its products. We believe that relations are adequate with our existing vendors. However, there can be no assurance that such relations will be adequate in the future or that shortages of any of these raw materials will not arise, causing production delays. MTS Packaging believes it is necessary to maintain an inventory of materials and finished products that allows for customer orders to be shipped within the industry standard of two to three days. The inability to obtain raw materials on a timely basis and on acceptable terms may have a material adverse effect on our future financial performance.

Markets and Customers

         MTS Packaging’s products are sold primarily throughout the United States through its sales organization and independent sales representatives. In addition, MTS Packaging Systems International distributes product in the United Kingdom. MTS Packaging also participates in trade shows and training seminars. Sales to countries outside the United States represent less than 10% of the total revenue in fiscal 2004. Sales to our two largest customers represented approximately 14% and 13%, respectively, of MTS Packaging’s revenue in the fiscal year ended March 31, 2004.

        The primary customers for MTS Packaging’s proprietary packaging machinery and the related disposable punch cards, labels and ancillary supplies are pharmacies that supply prescription medication to nursing homes. These pharmacies serve from 50 to 45,000 nursing home beds per location and many serve the sub-acute care, assisted living, correctional and home health care markets as well.

Competition

        The pharmacy customers of MTS Packaging supply prescribed medications to nursing homes and assisted living facilities, which are the primary market for MTS Packaging’s products. This market is highly competitive. There are several competitors that have developed machines that automate the packaging and sealing of solid medications into punch cards. We believe that products developed by our competitors are not as efficient as our systems because they are not as automated. Our method of dispensing medication replaces more traditional dispensing methods, such as prescription vials. The principal methods of competition in supplying medication dispensing systems to prescription service providers are product innovation, price, customization and product performance. Many of our competitors have been in business longer and have substantially greater resources than us. There is no assurance that we will be able to compete effectively with competitive methods of dispensing medication or other punch card systems.

         Our primary competitors for punch card dispensing systems in the United States are Drug Package, Inc., AutoMed® Technologies and RX Systems, Inc. We believe that our automated proprietary packaging machinery distinguishes MTS Packaging from its competitors’ less automated systems. Our automated packaging machine with the highest throughput can fill and seal up to 900 disposable medication cards per hour. We believe that our production rates for the prepackaging of prescriptions and our “just-in-time” OnDemand system will meet the needs of our customers who are consolidating and require higher productivity to meet their growing market share.

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Proprietary Technology

        In June 2003, we purchased the rights to certain proprietary technology that had previously been available through a license agreement with the Siegel Family Trust. The proprietary technology is supported by certain patents, which expire at various times during calendar years 2004 through 2008.

        There are numerous patent applications and patent license agreements for products that have been sold and that have been in development within MTS Packaging. However, its business is not materially dependent upon the issuing or its ownership of any one patent that has been submitted to the United States Patent and Trademark Office.

        There is no assurance that any additional patents will be granted with respect to our medication dispensing or information systems and products or that any patent issued, now or in the future, will provide meaningful protection from competition.

Government Regulations

        MTS Packaging’s products are governed by federal regulations concerning components of packaging materials that are in contact with food and drugs. We have obtained assurances from our vendors that the packaging materials used by MTS Packaging are in conformity with such regulations. However, there is no assurance that significant changes in the regulations applicable to our products will not occur in the foreseeable future. Any such changes could have a material adverse effect on us.

        We cannot predict the extent to which our operations will be effected under the laws and regulations described above or any new regulations that may be adopted by regulatory agencies.

Employees

        As of June 20, 2004, we employed 170 persons full time. None of our employees are covered by a collective bargaining agreement. We consider our relationship with our employees to be good.

Risk Factors

        You should be aware that the risks and uncertainties described below are not the only ones affecting us or that could affect us in the future. Any of the risks and uncertainties described below could have a material adverse effect on our business, results of operation and financial conditions, and could result in a partial or complete loss of your investment.

We have many competitors and expect new competitors to enter our market, which could adversely affect our ability to increase revenue,
maintain our margins or grow our market share.

        The market for our services is extremely competitive and the barriers to entry in our market are relatively low. We cannot be sure that we will have the resources or expertise to compete successfully in the future. Our competitors may be able to:

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Our operating results may fluctuate due to a number of factors, many of which are beyond our control.

        Our annual and quarterly operating results are affected by a number of factors, including:

        The volume and timing of orders placed by our customers vary due to variation in demand for our products, new product introductions and consolidations among our customers. In the past, changes in customer orders have had a significant effect on our results of operations due to corresponding changes in the level of overhead absorption. Any one or a combination of these factors could adversely affect our annual and quarterly results of operations in the future.

We depend on a limited number of customers for our sales revenue, therefore, a reduction in sales to any one of our customers could cause a significant decline
in our revenue.

        For the fiscal year ended March 31, 2004, our 10 largest customers accounted for approximately 62% of our net revenue and our two largest customers accounted for approximately 27% of our net revenue. We are dependent upon the continued growth, viability and financial stability of our customers whose industries have experienced consolidation, pricing and regulatory pressures. We expect to continue to depend upon a relatively small number of customers for a significant percentage of our net revenue. Consolidation among our customers may further reduce the number of customers that generate a significant percentage of our revenues and exposes us to increased risks relating to dependence on a small number of customers. A significant reduction in sales to any of our customers or a customer exerting significant pricing and margin pressures on us, would have a material adverse effect on our results of operations.

We depend on a small number of suppliers for the raw materials used in the production of our products.

        We rely on a limited number of suppliers for the raw materials that are essential in the production of the products we produce. We cannot assure you that such suppliers will be able to meet our future demand for raw materials, or that shortages of these raw materials will not arise in the future. The failure of such suppliers to deliver such raw materials on a timely basis could have a material adverse effect on our business, financial condition and results of operations.

The markets for our products are characterized by rapidly changing technology and evolving process development.

        The continued success of our business will depend upon our ability to:

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        Although we believe that our operations use the assembly and testing technologies, equipment and processes that are currently required by our customers, we cannot be certain that we will develop the capabilities required by our customers in the future. The emergence of new technology industry standards or customer requirements may render our equipment, inventory or processes obsolete or noncompetitive. In addition, we may have to acquire new assembly and testing technologies and equipment to remain competitive. The acquisition and implementation of new technologies and equipment may require significant expense or capital investment, which could reduce our operating margins and our operating results. Our failure to anticipate and adapt to our customers’ changing technological needs and requirements could have an adverse effect on our business.

We manufacture substantially all of our products from a single facility.

        We manufacture substantially of the products we sell. As a result, any prolonged disruption in the operations of our manufacturing facility, whether due to technical or labor difficulties, destruction of or damage to any facility or other reasons, could have a material adverse effect on our business, financial condition and results of operations. In this regard, our principal manufacturing facility is located in Clearwater, Florida and is thus exposed to the risks of damage from certain weather conditions including, without limitation: hurricanes, windstorms, and floods. If our facilities were to be out of production for an extended period, our business, financial condition and results of operation would be materially adversely affected.

We rely on short-term contracts with most of our clients.

         Long-term contracts are not a significant part of our business. Accordingly, future results cannot be reliably predicted by considering past trends or extrapolating past results.

We are dependent on the proper functioning of our information systems in operating our business.

        Our information systems are protected through physical and software safeguards and we have backup remote processing capabilities. They are still vulnerable, however, to hurricanes, other storms, flood, fire, terrorist acts, earthquakes, power loss, telecommunications failures, physical or software break-ins, computer viruses and similar events. If our critical information systems fail or are otherwise unavailable, we would have to accomplish these functions manually, which could temporarily impact our ability to identify business opportunities quickly, to maintain billing and clinical records reliably, and to bill for services efficiently. In addition, we depend on third party vendors for certain functions whose future performance and reliability we can not warranty.

Our success depends upon retaining the services of our management team.

        We are highly dependent on our management team. We expect that our continued success will largely depend upon the efforts and abilities of members of our management team. The loss of the services of any of our key executives for any reason could have a material adverse effect upon us. Our success also depends upon our ability to identify, develop, and retain qualified management, professionals and technical operating staff. We expend significant resources in recruiting and training our employees, and the pool of available applicants for these positions is limited. The loss of the services of any key executives, or our inability to continue to attract and retain qualified staff, could have a material adverse effect on our business, results of operations and financial condition.

Adverse results in tax audits could result in significant cash expenditures or exposure to unforeseen liabilities.

        We are subject to periodic federal, state and local income tax audits for various tax years. Although we attempt to comply with all taxing authority regulations, adverse findings or assessments made by the taxing authorities as the result of an audit could materially adversely affect us.

We are a holding company and we depend on receiving distributions from our subsidiaries, and we could be harmed if such distributions
could not be made in the future.

        We are a holding company with essentially no operations of our own and conduct all of our business through our subsidiaries. Our only significant asset is the outstanding capital stock of our subsidiaries. We are wholly dependent on the cash flow of our subsidiaries and dividends and distributions to us from our subsidiaries in order to service any current and future indebtedness obligations we may have.

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We are prohibited from paying dividends on our common stock.

        We have not paid any dividends on our common stock and do not anticipate declaring or paying any dividends in the foreseeable future. The terms of our loan agreements prohibit us from paying dividends on our common stock.

The issuance of additional shares of our common stock as a result of the conversion or exercise of currently outstanding derivative securities
may cause our stock price to decline.

         As of June 21, 2004, we had 5,601,937 shares of common stock outstanding as of March 31, 2004. In addition, the following shares of our common stock are issuable upon exercise or conversion of currently outstanding securities:

If we must make certain payments of certain amounts to Eureka I, L.P., such payments could have a material effect on our financial condition
and could cause our stock price to decline.

        The terms of our Series A Preferred Stock issued to Eureka I, L.P., contain certain anti-dilution provisions and a make-whole provision that obligates us to pay certain amounts to the holder of the Series A Preferred Stock if such holder does not ultimately receive an amount equal to the price per share of the common stock on the date they exercise their right to purchase the common shares that underlie the Series A Preferred Stock. In the event that we are required to make payments to the holders of the Series A Preferred Stock, we may elect to issue additional preferred stock in lieu of a cash payment. The make-whole provision and other provisions of the convertible preferred stock agreement provide for a maximum of 12,500,000 shares that may be issued pursuant to those provisions.

We may be adversely affected by governmental regulation of our business.

        Our business is subject to federal regulation concerning components of packaging materials that are in contact with food and drugs. While we have had no material difficulty complying with such regulations in the past, there can be no assurance that we will be able to continue to obtain all necessary approvals or that the cost of compliance will not prove to be material. Additionally, we cannot assure you that significant changes in such regulations will not occur in the foreseeable future. Our inability to comply with the current regulations and any future changes to such regulations could have a material adverse effect on our business, results of operations and financial condition.

We face an inherent risk of exposure to product liability claims in the event that the use of the products we manufacture and sell results
in personal injury.

        We face an inherent risk of exposure to product liability claims in the event that the use of the products we manufacture and sell results in personal injury. Although we have not experienced any losses due to product liability claims, we cannot assure you that we will not experience such losses in the future. We maintain insurance against product liability claims, but we cannot be certain that such coverage will be adequate to cover any liabilities that we may incur, or that such insurance will continue to be available on terms acceptable to us. A successful claim brought against us in excess of available insurance coverage, or any claim that results in significant adverse publicity against us, could harm our business.

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If we are unable to protect our intellectual property rights, our business and prospects may be harmed.

        Our ability to compete effectively is dependent upon the proprietary nature of the designs, processes, technologies and materials owned by, used by or licensed to us. Although we attempt to protect our proprietary property, technologies and processes both in the United States and in foreign countries through a combination of patent law, trade secrets and non-disclosure agreements, these may be insufficient. In addition, because of the differences in foreign patent and other laws concerning proprietary rights, our products may not receive the same degree of protection in foreign countries as they would in the United States.

Intellectual property claims and litigation could subject us to significant liabilities for damages and invalidation of our proprietary rights.

        In the future we may have to resort to litigation to protect our intellectual property rights to protect our trade secrets or to develop the validity and scope of our proprietary rights of others. Any litigation, regardless of its success, would be costly and require significant time and attention of our key management and technical personnel. The litigation could also force us to:

        We may face infringement claims from third parties in the future. The medical packaging industry has seen frequent litigation over intellectual property rights, and we expect that participants in the medical packaging industry will be increasingly subject to infringement claims as the number of products, services, and competitors grow and functionality of the products and services overlap. We cannot assure you that the steps taken by us will be adequate to deter misappropriation of our proprietary rights or that third parties will not independently develop substantially similar products, services and technology. Furthermore, there can be no assurance that our products will not infringe upon the intellectual property rights of third parties. We may not be able to avoid infringement of third party intellectual property rights and may have to obtain a license, defend an infringement action, or challenge the validity of the intellectual property rights in court. Failure to obtain or maintain intellectual property rights in our products, for any reason, could have a material adverse effect on us.

Our business will suffer if we fail to comply with recent federal regulations and proposed rules of the SEC relating to corporate governance reform.

        As a public company, we are subject to certain federal regulations and the rules and regulations of the SEC. On July 30, 2002, President George W. Bush signed into law the Sarbanes-Oxley Act of 2002, effecting tighter accounting, corporate fraud and securities laws. To implement this legislation, the SEC is expected to adopt new rules pertaining to, among other things, audit committee requirements and additional disclosure and reporting requirements. Our reputation and financial results could be materially harmed by any failure by us to comply with any current or future rules or regulations relating to the Sarbanes-Oxley Act or to any other federal corporate reform measures.

Our stock price may be volatile.

        Our common stock is traded on the American Stock Exchange under the symbol “MPP”. The market price of our stock has fluctuated substantially in the past and could fluctuate substantially in the future, based on a variety of factors, including our operating results, changes in general conditions in the economy, the financial markets, or other developments affecting us, our clients, or our competitors, some of which may be unrelated to our performance. Those fluctuations and demand for our services may adversely affect the price of our stock. It is possible that the stock price may decline to a level where we lose our eligibility to remain listed on the American Stock Exchange.

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        In addition, the stock market, in general, has experienced volatility that has often been unrelated to the operating performance of public companies. These broad market fluctuations may adversely affect the market price of our common stock, regardless of our operating results.

        Among other things, volatility in our stock price could mean that investors will not be able to sell their shares at or above prices at which they are acquired. The volatility also could impair our ability in the future to offer common stock as a source of additional capital.

Our stockholders do not have cumulative voting rights.

        The holders of our capital stock do not have cumulative voting rights. Accordingly, the holders of more than 50% of our outstanding shares entitled to vote for the election of directors can elect all of our directors then being elected; the holders of the remaining shares by themselves cannot elect any directors.

Provisions of our certificate of incorporation and the applicable Delaware General Corporation law may make it more difficult to complete a contested takeover of our Company.

        Certain provisions of our certificate of incorporation and the Delaware General Corporation Law (the “DGCL”) could deter a change in our management or render more difficult an attempt to obtain control of us, even if such a proposal is favored by a majority of our stockholders. For example, we are subject to the provisions of the DGCL that prohibit a public Delaware corporation from engaging in a broad range of business combinations with a person who, together with affiliates and associates, owns 15% or more of the corporation’s outstanding voting shares (an “interested shareholder”) for three years after the person became an interested shareholder, unless the business combination is approved in a prescribed manner. Finally, our certificate of incorporation includes undesignated preferred stock, which may enable our Board of Directors to discourage an attempt to obtain control of us by means of a tender offer, proxy contest, merger or otherwise.

Terrorist attacks and other acts of violence or war may affect any market on which our shares trade, the markets in which we operate, our operations and our profitability.

        Terrorist acts or acts of war or armed conflict could negatively affect our operations in a number of ways. Primarily, any of these acts could result in increased volatility in or damage to the United States and worldwide financial markets and economy. They could also result in a continuation of the current economic uncertainty in the United States and abroad. Acts of terrorism or armed conflict, and the uncertainty caused by such conflicts, could cause an overall reduction in sales of our products and the corresponding shipments of our products. This would have a corresponding negative effect on our operations. Also, terrorist activities similar to the type experienced on September 11, 2001 could result in another halt of trading of securities on the American Stock Exchange, which could also have an adverse affect on the trading price of our shares and overall market capitalization.

ITEM 2.    PROPERTIES

        We currently lease a 79,600 square foot plant consisting of office space and air-conditioned manufacturing and warehousing space near the St. Petersburg/Clearwater International Airport at 12920 Automobile Boulevard. Our corporate administrative offices and the primary manufacturing facilities for MTS Packaging are at this location. On April 1, 2004, we provided our landlord with notice of intent to terminate the lease on September 30, 2004 and vacate the premises. Effective October 1, 2004, we will occupy a new premises at 2003 Gandy Boulevard North, St. Petersburg, Florida. The lease for the new premises will be for a term of 12 years. The premises consists of approximately 104,000 square feet, increasing to approximately 132,000 square feet, and the monthly lease payments begin at $35,000 plus tax in the first year and increase to $63,000 plus tax in the final year. In addition, we are obligated to pay annual operating expenses (i.e., insurance, property taxes and common area maintenance fees). We also have an option to lease an additional 28,000 square feet of contiguous space at any time by providing the landlord with 120 days notice. Also, we will be paid a move-in allowance of $400,000 on the commencement date of the new lease. Our current monthly lease payments are approximately $38,000 including tax. Both the current premises and the new premises are generally suited for light manufacturing and/or distribution.

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        MTS Packaging also leases approximately 5,200 square feet at approximately $3,200 per month for office and warehouse space at 21530 Drake Road, Cleveland, Ohio. The lease expires on March 31, 2005.

        MTS Packaging Systems International, Ltd. rents office and warehouse space at Unit 6A/6B Dalton Court, Blackburn Interchange, Lower Darwen, Blackburn, Lancashire, England. The lease is for a term of one year, and the monthly lease payments are £1,642.

ITEM 3.    LEGAL PROCEEDINGS

        We are involved in certain claims and legal actions arising in the ordinary course of business. There can be no assurances that these matters will be resolved on terms acceptable to us. In the opinion of management, based upon advice of counsel and consideration of all facts available at this time, the ultimate disposition of these matters are not expected to have a material adverse effect on our financial position, results of operations or liquidity.

        In November 1998, Medical Technology Laboratories, Inc. (“MTL”), a subsidiary that was sold in fiscal 2000, received a refund request in the amount of $1.8 million from Medicare Program Safeguards (“MPS”). MTL disputed the refund request in its response to MPS in December 1998. To date, MTL has not received any further correspondence from MPS regarding this matter.

ITEM 4.     SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

      None.

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PART II

ITEM 5.     MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Price Range of Our Securities

        Our common stock began trading on the American Stock Exchange (“AMEX”) on December 26, 2002. Under the symbol “MPP”, our common stock previously traded on the OTC Bulletin Board (the “OTCBB”). The table below sets forth the range of high and low sales prices and/or bid information for our common stock for the periods indicated, as reported by the AMEX and OTCBB. OTCBB market quotations reflect inter-dealer prices, without retail markup, markdown or commission and may not necessarily represent actual transactions.

        As of June 21, 2004, there were approximately 2,500 holders of record of our common stock and the closing price of our common stock report on AMEX was $6.05.

        We have not declared a dividend on our common stock and do not currently intend to declare a dividend. Furthermore, we are restricted from paying dividends on our common stock pursuant to the terms of our loan agreements. We intend to reinvest our future earnings, if any, into the operations of our business.

        In June 2002, we issued 2,000 shares of the Series A Preferred Stock to Eureka I, L.P. for an aggregate consideration of approximately $2,000,000. The Series A Preferred Stock is not a publicly traded security. The purchase and sale was exempt pursuant to Rule 506 and under Section 4(2) of the Securities Act of 1933, as a transaction by an issuer not involving a public offering where the purchaser received or had access to adequate information about the registrant. The purchase was made for cash. The holders of the Series A Preferred Stock are entitled to receive quarterly dividends at the rate of 11% per annum. The dividends are payable in cash or shares of Series A Preferred Stock at our option and are cumulative. The Series A Preferred Stock is convertible into 847,457 shares of our common stock at $2.36 per share. The terms of the Series A Preferred Stock contain a make-whole provision that obligates us to pay certain amounts to the holders if they do not ultimately receive an amount equal to the price per share of our common stock on the date they elect to convert the Series A preferred stock into common stock. In addition, the terms of the Series A Preferred Stock agreement contains certain antidilution provisions.

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Equity Compensation Plan Information

        We had 173,101 and 20,000 shares available for issuance under our equity compensation plans as of April 1, 2003 and March 31, 2004, respectively.

        During Fiscal Year 2004, we did not experience any changes in the exercise price of our outstanding options, through cancellation and reissuance or otherwise.

Purchases of Equity Securities

        We did not repurchase any of our equity securities during fiscal 2004.

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ITEM 6.     SELECTED FINANCIAL DATA

        The following tables set forth selected financial and operating data regarding the Company. This information should be read in conjunction with “MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS” and the Company’s Financial Statements and Notes thereto. See “FINANCIAL STATEMENTS.”

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        The information set forth below represents selected quarterly results of operations for each of the quarters in fiscal years ended March 31, 2004 and 2003.

ITEM 7.     MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

OVERVIEW

        We experienced growth of 17% in net sales derived from our disposable punch card product lines primarily due to: (1) increased penetration of independent pharmacies throughout the country; and (2) the aging demographics of the United States population. Independent pharmacies are those that are not affiliated with pharmacies that are national in scope, but rather rely on the relationships they have with nursing homes and assisted living facilities in a small geographic region. In addition, we sold six OnDemand machines in fiscal 2004 compared to three machines in fiscal 2003.

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        As the population ages, the number of nursing home and assisted living facility residents grows, which benefits our entire customer base. In addition, our revenue growth has been enhanced by increased sales of the machines we manufacture and sell to our customers, including our new OnDemand machine.

        Although competitive pricing issues related to the disposable punch card products arise from time to time, we rely heavily on the relationships we build with customers, which are centered around our complete medication packaging system that includes the machines, as well as the disposables, in order to offset competitive pricing pressures.

        Although the cost of raw materials and the direct labor used to manufacture the disposable punch cards has risen during fiscal year ended March 31, 2004, compared with the previous fiscal year, we have been successful in maintaining the relationship between our selling prices and direct costs by adjusting prices where appropriate and developing efficiencies by adding new manufacturing equipment that better produces cards and blisters.

        Overhead costs incurred in manufacturing have risen approximately 19% in the fiscal year ended March 31, 2004 to approximately $4.0 million from approximately $3.4 million in the same period the prior fiscal year primarily due to costs added to properly supervise and warranty the OnDemand product line. The Company expects this trend will continue for the fiscal year ending in 2005 as the OnDemand product line generates more customer interest and subsequent revenue.

         Selling costs for the fiscal year ended March 31, 2004 compared to the same period in the prior fiscal year increased approximately 4% to $2.1 million from $2.0 million the prior year because the Company has added to its sales and customer service support staff. However, marketing costs have increased 65% over the same period in the prior fiscal year, from approximately $418,000 to approximately $691,000, as more resources are dedicated to improving product awareness in existing markets, such as skilled nursing and new markets, such as assisted living. Also, it has been necessary to add technical support personnel to assist in the installation and user training of OnDemand machines. The Company expects that selling and marketing costs, as well as OnDemand support costs, will continue to rise as it attempts to reach new markets for its disposable products and additional OnDemand machine sales are realized.

        Administrative costs have risen approximately 24% in the fiscal year ended March 31, 2004, compared to the same period in the prior fiscal year from approximately $3.7 million to approximately $4.6 million. The increase was primarily due to costs that have been added to support the operations in the United Kingdom and personnel related expenses including employee benefit costs in the United States. Currently we do not expect that our administrative costs will rise at the same percentage rate in fiscal 2005 as they did in fiscal 2004.

FISCAL YEAR 2004 COMPARED TO FISCAL YEAR 2003

Results of Operation

         Net Sales

        Net sales for the fiscal year ended March 31, 2004, increased 17.0% to $34.4 million from $29.4 million the prior year. Net sales increased in fiscal 2004 primarily as a result of an increase in disposable punch cards sold to existing and new customers in the United States, an increase in disposable punch cards and machines sold in the United Kingdom and the sale of OnDemand machines in the United States Selling prices for disposable punch cards were stable during fiscal 2004.

        We expect that selling prices for disposable punch cards may decrease in the next fiscal year depending on competitive factors. We believe that the number of punch cards sold will increase in the next fiscal year as a result of the addition of new customers in the United States and the United Kingdom, and a general increase in the number of nursing home and assisted living facility residents served by our customers. Additional sales of OnDemand machines in the next fiscal year are also expected to contribute to an overall growth in net sales.

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         Cost of Sales

        Cost of sales for the fiscal year ended March 31, 2004, increased 17.4% to $20.9 million from $17.8 million the prior year. Cost of sales as a percentage of net sales increased to 60.8% from 60.5% for the prior year. The increase in cost of sales resulted primarily from the costs associated with increased net sales. The increase in the cost of sales percentage resulted primarily from the fact that OnDemand machine sales increased over the prior year, and the product margin on OnDemand machines is less than the product margin on disposable punch card products. In addition, overhead costs increased primarily due to additional personnel and benefit costs associated with employees that were added to support the increased production of disposable punch cards and the production and support of the OnDemand machines.

        During the fiscal year ended March 31, 2004, we wrote off approximately $100,000 in obsolete inventory primarily related to discontinued packaging equipment. In addition, the inventory valuation allowance related to obsolete and slow moving inventory was increased by $12,000. We will continue to evaluate our inventory valuation allowance and adjust it accordingly.

         We currently expect that raw material costs will increase in the next fiscal year and that direct labor costs should remain stable. Overhead expenses may continue to rise. At this point in time, we expect that the additional revenue associated with an increase in the volume of punch cards and machines sold should contribute to maintaining overall cost of sales, as a percentage of sales, at levels experienced during the fiscal year ended March 31, 2004.

         Selling, General and Administrative Expenses (“SG&A”)

        SG&A expenses for the year ended March 31, 2004, increased 19.1% to $7.5 million compared to $6.3 million the prior year. The increase resulted primarily from the costs associated with additional personnel and benefit costs for employees that were added to support our overall growth, costs associated with our United Kingdom operations and higher marketing expenditures. In addition, we charged off approximately $100,000 in uncollectable accounts receivable and increased our estimated bad debt reserve by $49,000. We regularly review the adequacy of our bad debt reserve by specific customer account analysis as well a review of historical trends.

        We expect SG&A expenses will increase during the next fiscal year. However, the additional revenue associated with an increase in the volume of punch cards and machines sold is expected to contribute to maintaining overall SG&A expenses, as a percentage of sales, at levels experienced during the fiscal year ended March 31, 2004.

         Depreciation and Amortization Expense

        Depreciation and amortization expense for the fiscal year ended March 31, 2004, increased 39.3% to $1,342,000 compared to $964,000 the prior year. The increase resulted primarily from the fact that we had a full year of amortization of the product development costs associated with our OnDemand machine during the fiscal year ended March 31, 2004, and began to amortize the cost of the patents acquired during the year ended March 31, 2004. In addition, newly purchased assets used in the manufacturing process that were acquired in fiscal 2004 began to be depreciated in fiscal 2004.

         Interest Expense

        Interest expense for the fiscal year ended March 31, 2004 decreased 2.9% to $851,000 compared to $876,000 the prior year. The decrease resulted from a reduction in outstanding debt resulting from the regular monthly principal payments made in accordance with the terms of our loan agreements. We expect our interest expense to decline during the next fiscal year due primarily to the prepayment in full of our $4,000,000 subordinated note in June 2004, which had an interest rate of 14%. The current interest rate payable on the funds borrowed to repay the subordinate note is the prime rate plus 1% (currently 5%).

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         Amortization of Financing Costs and Original Issue Discount

        We refinanced our long-term debt in June 2002 and incurred approximately $1,478,000 in financing costs. The financing costs were allocated between components of the financing that represented debt and equity. $1,110,000 of costs that were allocated to the debt component of the financing began to be amortized over the term of the various loans and notes during fiscal year 2003. Amortization expense related to the financing costs was $364,000 and $271,000 for the fiscal years ended March 31, 2004 and 2003, respectively. In addition, the relative value of certain warrants and imbedded features of the warrants, which were issued in conjunction with the subordinated debt portion of the debt component, were recorded as part of the stockholders equity and reduced the carrying amount of the subordinated note as an original issue discount (“OID”). The OID of approximately $1,240,000 began to be amortized using the effective interest method over the term of the subordinated note during fiscal year 2003. Amortization expense related to the OID was $248,000 and $189,000 for the fiscal years ended March 31, 2004 and 2003, respectively. We expect our OID expense to decline during the next fiscal year due primarily to the prepayment in full of our $4,000,000 subordinated note in June 2004.

         Income Tax Expense

        Income tax expense for the fiscal year ended March 31, 2004, increased 5.9% to $1,190,000 compared to $1,124,000 the prior year. The increase resulted from higher pretax net income in fiscal 2004 compared to the prior year.

         Series A Preferred Stock Dividends

        The terms of the Series A Preferred Stock include the payment of quarterly dividends at the rate of 11% per annum. The amount of preferred stock dividends that accrued during fiscal 2004 was $220,000. The dividends are payable in cash or shares of Series A Preferred Stock at our option and are cumulative. All dividends accrued in the fiscal years ended March 31, 2004 and 2003 were paid in cash. In the fiscal year ended March 31, 2003, the accrued dividends were $168,000. The increase in fiscal 2004 over 2003 resulted from the Series A Preferred Stock having been outstanding for the entire year in fiscal 2004 compared to nine months in fiscal 2003.

FISCAL YEAR 2003 COMPARED TO FISCAL YEAR 2002

Results of Operations

         Net Sales

        Net sales for the fiscal year ended March 31, 2003, increased 18.6% to $29.4 million from $24.8 million the prior year. Net sales increased in fiscal 2003 primarily as a result of an increase in disposable punch cards sold to existing and new customers in the United States, an increase in disposable punch cards and machines sold in the United Kingdom and the sale of three OnDemand machines in the United States Selling prices for disposable punch cards were stable during fiscal 2003.

         Cost of Sales

        Cost of sales for the fiscal year ended March 31, 2003, increased 23.6% to $17.8 million from $14.4 million the prior year. Cost of sales as a percentage of net sales increased to 60.5% from 58.2% for the prior year. The increase in cost of sales resulted primarily from the costs associated with increased net sales. The increase in the cost of sales percentage resulted from increased raw material costs, as well as increased overhead expenses related to the manufacturing departments. Overhead increases were primarily due to additional personnel and benefit costs associated with employees that were added to support the increased production of disposable punch cards and the production and support of the OnDemand machines.

        During the fiscal year ended March 31, 2003, we wrote off approximately $106,000 in obsolete inventory primarily related to discontinued packaging equipment. In addition, we determined that our estimate of the inventory valuation allowance, related to obsolescence and slow moving inventory, should be increased by $143,000 primarily because during the fiscal year ended March 31, 2003, several new packaging machines were introduced into the product line.

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         Selling, General and Administrative Expenses (“SG&A”)

        SG&A expenses for the year ended March 31, 2003, increased 18.9% to $6.3 million compared to $5.3 million the prior year. The increase resulted primarily from the costs associated with additional personnel, training and benefit costs for employees that were added to support our overall growth, costs associated with our United Kingdom operations and higher research and development activities. In addition, during the previous fiscal year, we reduced our estimated bad debt reserve by $180,000. Also, during fiscal 2003, we determined that certain development projects were not going to be completed, and therefore, wrote off approximately $115,000 in costs that had been previously capitalized.

         Depreciation and Amortization Expense

        Depreciation and amortization expense for the fiscal year ended March 31, 2003, increased 4.1% to $964,000 compared to $926,000 the prior year. The increase resulted primarily from the fact that we began to amortize the product development costs associated with our OnDemand machine during the fiscal year ended March 31, 2003.

         Interest Expense

        Interest expense for the fiscal year ended March 31, 2003 decreased 4.7% to $876,000 compared to $919,000 the prior year. The decrease resulted from a reduction in outstanding debt resulting from the regular monthly principal payments made in accordance with the terms of our loan agreements, as well as a reduction in total outstanding debt that resulted from the June 2002 refinancing of our existing debt.

         Amortization of Financing Costs and Original Issue Discount (“OID”)

        We refinanced our long-term debt in June 2002 and incurred certain costs totaling approximately $1,478,000 during the fiscal year ended March 31, 2003 to complete the financing. The financing costs were allocated between components of the financing that represented debt and equity. $1,110,000 of costs that were allocated to the debt component of the financing began to be amortized over the term of the various loans and notes during fiscal year 2003. Amortization expense related to the financing costs was $271,000 for the fiscal year ended March 31, 2003. In addition, the relative value of certain warrants and imbedded features of the warrants, which were issued in conjunction with the subordinated debt portion of the debt component, were recorded as part of the stockholders equity and reduced the carrying amount of the subordinated note as an OID. The OID of approximately $1,240,000 began to be amortized using the effective interest method over the term of the subordinated note during fiscal year 2003. Amortization expense related to the OID was $189,000 for the fiscal year ended March 31, 2003.

         Income Tax Expense

        Income tax expense for the fiscal year ended March 31, 2003, decreased 8.9% to $1,124,000 compared to $1,234,000 the prior year. The decrease resulted from lower pretax net income in fiscal 2003 compared to the prior year.

         Non-Cash Constructive Dividend Related to Beneficial Conversion Feature of Series A Preferred Stock

        The equity component of the June 2002 refinancing was comprised, in part, by 2,000 shares of Series A Preferred Stock, which were issued at $1,000 per share. The Series A Preferred Stock is convertible into 847,457 shares of our common stock at $2.36 per share. On the date the convertible preferred stock was issued, the fair market value of our common stock was $2.77 per share. The difference between the fair market value of the shares and the conversion price of the Series A Preferred Stock represented a constructive dividend to the holders of the Series A Preferred Stock in the amount of $347,000.

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         Series A Preferred Stock Dividends

        The terms of the Series A Preferred Stock include the payment of quarterly dividends at the rate of 11% per annum. The amount of preferred stock dividends that accrued during fiscal 2003 was $168,000. The dividends are payable in cash or shares of Series A Preferred Stock at our option and are cumulative. All dividends accrued in the fiscal year ended March 31, 2003 were paid in cash.

LIQUIDITY AND CAPITAL RESOURCES

        Our operations provided $2.6 million in the fiscal year ended March 31, 2004, compared to $3.2 million the prior year. The decrease in cash provided by operations resulted primarily from an increase in accounts receivable and inventory. These increases resulted primarily from increases in revenue.

        Investing activities used $2.0 million during the fiscal year ended March 31, 2004, compared to $1.7 million the prior year. The increase resulted primarily from the fact that we purchased a new machine for manufacturing punch cards in fiscal 2004.

        Financing activities used $.9 million during the fiscal year ended March 31, 2004 compared to $1.5 million the prior year. The decrease in cash required for financing activities resulted primarily from our receipt of approximately $500,000 during this fiscal year from the proceeds of the exercise of employee stock options. In addition, we increased our borrowings on our revolving line of credit during fiscal 2004.

        We had working capital of $9.3 million at March 31, 2004, compared to $4.5 at March 31, 2003. The increase in working capital resulted primarily from an increase in earnings before interest, taxes, depreciation and amortization, which was used primarily to support increases in accounts receivable and inventory.

        We do not maintain significant cash balances because all available cash is used to pay down our revolving line of credit. We view the excess availability on our line of credit as our cash reserve. At March 31, 2004, we had approximately $1.1 million available on our revolving line of credit.

        In June 2002, we repaid the entire amount, $11,310,000, of our bank term loan with the proceeds of a new revolving line of credit, term loans, a subordinated note and the Series A Preferred Stock. The revolving line of credit allowed for borrowings of up to $5,000,000 (the “Revolving Line of Credit”) based upon advance rates that are applied to our eligible accounts receivable and inventory. Interest was payable on the Revolving Line of Credit monthly based on the average unpaid balance at the prime rate plus 1.0%.

        As part of the June 2002 refinancing, we entered into certain term loans. One term loan in the amount of $700,000 is repayable in equal monthly installments over a five year term, plus interest at the prime rate plus 1.25%. The second term loan in the amount of $2,000,000 was repayable in equal monthly installments over two years plus interest at the prime rate plus 2.25% and included an excess cash flow payment provision. The second term loan was entirely repaid in January 2004.

        The Revolving Line of Credit and the term loan(s) are secured by our accounts receivable, inventory, machinery and equipment and all of our other assets.

        We executed a subordinated note in the amount of $4,000,000 (the “Subordinated Note”) as part of the June 2002 refinance, which was repayable over five years with interest only, at 14%, payable monthly until the maturity of the Subordinated Note. The Subordinated Note is secured by a second lien on all of our assets. In addition, the Subordinated Note holders were issued 566,517 warrants to purchase shares of our common stock exercisable for ten years at $.01 per share. In June 2004 we repaid the Subordinated Note in full.

        In June 2002, we issued 2,000 shares of Series A Preferred Stock at $1,000 per share. The holders of the Series A Preferred Stock are entitled to receive quarterly dividends at the rate of 11% per annum. The dividends are payable in cash or shares of Series A Preferred Stock, at our option, and are cumulative. The Series A Preferred Stock is convertible into 847,457 shares of our common stock at $2.36 per share.

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        The terms of the Series A Preferred Stock agreement contains certain anti-dilution provisions and a make-whole provision that obligates us to pay certain amounts to the holders of the Series A Preferred Stock if they do not ultimately receive an amount equal to the price per share of the common stock on the date they exercise their right to convert the Series A Preferred Stock into our common stock.

        In the event that we are required to make payments to the holders of the Series A Preferred Stock, we may elect to issue additional shares of Series A Preferred Stock in lieu of a cash payment. Although the make-whole provision and other provisions of the Series A Preferred Stock agreement provide for a maximum of 12,500,000 shares that may be issued pursuant to those provisions, based upon current conditions, we believe it is unlikely that the maximum number of shares would be issued.

        In April 2004, the Subordinated Note holders exercised their rights to acquire the 566,517 shares of our common stock under the terms of the cashless exercise provisions of the warrant agreement and sold the common stock. The terms of the warrant agreement contained certain antidilution provisions. The warrant agreement also contained a make-whole provision that obligated us to pay certain amounts to the holders of the warrants if they did not ultimately receive an amount equal to the price per share of the common stock on the date they exercise their right to purchase the common shares that underlie the warrants. The warrant agreement also contained a provision that may have obligated us to pay certain amounts to the holders of the warrants in the event there was a change in control of our voting common stock, if we were sold, or if there was a public offering of our common stock.

        In June 2004, we renewed and extended the Revolving Line of Credit (the “New Revolving Line of Credit”). The New Revolving Line of Credit is for $8,500,000 and expires in June 2007. In addition, we entered into a new secured equipment term loan agreement for $1,200,000. We used the additional availability on the New Revolving Line of Credit and our term loans to completely repay the $4,000,000 Subordinated Note. At the time of the early repayment of the Subordinated Note, we incurred a prepayment penalty of $120,000. All of our obligations under the warrant agreement were extinguished at the time the investor sold the common stock and the subordinated debt was repaid.

        The New Revolving Line of Credit allows for borrowings based upon advance rates that are applied to our eligible accounts receivable and inventory at the prime rate or London InterBank Offering Rate (“LIBOR”) plus 2.25%, and requires that we maintain $750,000 of excess availability at all times. The equipment secured loan is repayable over a three-year period with interest at the prime rate plus 1% or LIBOR plus 2.75%. In addition, a $3,000,000 overadvance was borrowed at the prime rate plus 1% or LIBOR plus 3.25%. The overadvance is repayable over a 15-month period.

        The New Revolving Line of Credit and the term loans each contain certain financial covenants that, among other things, requires the maintenance of a minimum tangible net worth, and debt service coverage ratios and limits the amount of capital expenditures and requires us to obtain the lenders approval for certain matters. We were in compliance with all provisions of the applicable revolving line of credit and the term loan agreements at March 31, 2004 and May 31, 2004.

        We also have a $300,000 capital expenditure term loan available to fund future expenditures for capital equipment.

        Our short-term and long-term liquidity is primarily dependent on our ability to generate cash flow from operations. Inventory levels may change based upon our success in selling our OnDemand machines. Increases in net sales may result in corresponding increases in accounts receivable. Cash flow from operations and borrowing availability on the revolving line of credit is anticipated to support an increase in accounts receivable and inventory.

        We believe that the cash generated from operations during the next fiscal year and our available lines of credit will be sufficient to meet our capital expenditures, product development, working capital needs and the principal payments required by our loan agreements.

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OFF-BALANCE SHEET ARRANGEMENTS

        In accordance with the definition under the new SEC rules, the following qualify as off-balance sheet arrangements:

        We currently do not have any off-balance sheet arrangements as defined above.

CONTRACTUAL OBLIGATIONS

        Summarized below are our obligations and commitments to make future payments under certain contractual obligations as of March 31, 2004:

ESTIMATES AND CRITICAL ACCOUNTING POLICIES

        The preparation of our consolidated financial statements in conformity with generally accepted accounting principles in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the financial statements and revenues and expenses for the respective period-ended for such statements. The determination of estimates requires the use of judgment since future events and their affect on our operations cannot be determined with absolute certainty. Actual results typically differ from these estimates in some fashion, and at times, these variances may be material to our financial statements. Our management continually evaluates its estimates and assumptions, which are based on historical experience and other factors that are believed to be reasonable under these circumstances. These estimates and our actual results are subject to the risk factors listed above under “Item 1. Business”. Nevertheless, our management believes the following items involve a higher degree of complexity and, judgment and therefore, has commented on these items below.

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Valuation of Accounts Receivable at March 31, 2004 and 2003, respectively

        Our allowance for doubtful accounts of $187,000 and $138,000 at March 31, 2004 and 2003, respectively, is based on management’s estimates of the credit-worthiness of our customers, current economic conditions and historical information. In the opinion of management, our allowance for doubtful accounts is believed to be an amount sufficient to respond to normal business conditions. Historically, the levels of recorded bad debt expense and write-offs have not been material to our financial statements. Should business conditions deteriorate or any large customer default on its obligations to us, this allowance may need to be significantly increased, which would have a negative impact upon our operations.

Inventory Obsolescence Valuation Allowance

        Our allowance for inventory obsolescence and slow moving inventory is reviewed on a regular basis. We review various information related to the age and turnover of specific inventory items to assist in our assessment. In the opinion of management, the valuation allowance is believed to be sufficient to absorb the ultimate obsolescence of certain inventory as they may occur. The inventory obsolescence valuation allowance was $195,000 and $183,000 at March 31, 2004 and 2003, respectively.

Self Insurance Plan Reserve

        We established a reserve for unpaid medical claims of $101,000 and $86,000 at March 31, 2004 and 2003, respectively. Management reviews claims history information provided to it by the third-party administrator of the self insured plan on a regular basis and believes that the reserve is sufficient to respond to the claims that may be incurred by the participants in the plan.

Deferred Tax Asset Valuation Allowance

        Our deferred tax asset is comprised primarily of a tax loss carryforward. We believe that it is more likely than not that the income tax benefits associated with the tax loss carryforward will be realized in the future. Management bases its belief, in part, on the historical profitability of our operations and its expectations that profitable operations will continue in the future. Based upon these expectations regarding the realization of the tax benefits, management has not established a valuation allowance for our deferred tax asset.

Impairment Valuations

        On a quarterly basis, management assesses the composition of our assets and liabilities, as well as the events that have occurred and the circumstances that have changed since the most recent fair value determination. If events occur or circumstances change that would more likely than not reduce the fair value of the related asset or liability below its carrying amount, the related asset or liability would be tested for impairment.

        We evaluate the recoverability of our long-lived assets whenever circumstances indicate that the carrying amount of an asset may not be recoverable. Factors considered include current operating results, trends and anticipated undiscounted future cash flows. An impairment loss is recognized to the extent the sum of discounted (using our incremental borrowing rate) estimated future cash flows (over a period ranging from generally four to ten years) expected to result from the use of the asset is less than the carrying value. Management believes no impairment existed for any of the periods presented.

Product Development

        All costs incurred subsequent to the completion of research and development activities associated with a product’s hardware components and the software components achievement of technological feasibility are capitalized until the product is available for general release to customers. Product development costs are generally amortized over a five-year period beginning on the date the product is released for sale to customers. On a quarterly basis, we review the viability and recoverability of these project costs.

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Estimated Liabilities

        We make a number of estimates in the ordinary course of business. Historically, past changes to these estimates have not had a material impact on our financial condition. However, circumstances could change, which would alter future financial information based upon a change in estimated versus actual results.

        We are subject to various matters of litigation in the ordinary course of business. As the outcome of any litigation is unknown, management estimates the potential amount of liability, if any, in excess of any applicable insurance coverage, based on historical experience and/or the best estimate of the matter at hand. Significant changes in estimated amounts could occur. To date, we have not had to pay any legal settlements in excess of existing insurance coverage.

Warranty

        We establish a reserve for warranty costs we may incur during the warranty period that is provided for in the OnDemand machine sales agreements with our customers. Warranty expense incurred during the period ended March 31, 2004, totaled $161,000.

ITEM 7A.    QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

        We do not have any material market risk sensitive financial instruments.

ITEM 8.     FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

        Our consolidated financial statements, notes thereto and the report of Grant Thornton LLP, our independent auditors, are set forth on the pages indicated at Item 15 and are incorporated into this item by reference.

ITEM 9.     CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

      None

ITEM 9A.     CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

        Disclosure controls and procedures are designed to ensure that information required to be disclosed in the reports filed or submitted under the Securities Exchange Act of 1934 (the “Exchange Act”) is recorded, processed, summarized and reported, within the time periods specified in the SEC rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in the reports filed under the Exchange Act is accumulated and communicated to management, including the chief executive officer and chief financial officer, as appropriate, to allow timely decisions regarding required disclosure. We carried out an evaluation required by Rules 13a-15 and 15d-15 of the Exchange Act (the “Evaluation”), under the supervision and with the participation of our management, including our chief executive officer (“CEO”) and chief financial officer (“CFO”), of the effectiveness of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15 and 15d-15).  Based upon and as of the date of the Evaluation, our CEO and CFO concluded that our disclosure controls and procedures are effective to ensure that information required to be disclosed in the reports we file and submit under the Exchange Act is recorded, processed, summarized and reported as and when required.

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Changes in Internal Controls

        There has not been any change in our internal control over financial reporting identified in connection with the Evaluation that occurred during the fiscal quarter ended March 31, 2004, that has materially affected, or is reasonably likely to materially affect, those controls.

Limitations on the Effectiveness of Controls

        Our management, including our CEO and CFO, does not expect that our disclosure controls and internal controls will prevent all error and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within our organization have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control.

        The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, a control may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.

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PART III

ITEM 10.     DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

        The information required by this item is incorporated herein by reference to the information included in our definitive proxy statement, which will be filed by us within 120 days after the end of our 2004 fiscal year.

Code of Ethics and Business Conduct

        Our commitment to ethical business conduct is a fundamental shared value of our board of directors, management and employees and critical to our success. On June 26, 2003, we adopted a Code of Business Conduct and Ethics (the “Code”) applicable to all of our employees, consultants, agents and representatives. The Code provides that our representatives will uphold our ethical standards as vigorously as they pursue our financial objectives, and that honesty and integrity will not be compromised by our representatives anywhere at any time. A copy of the Code is posted on our web site www.mts-mt.com, and is available, free of charge upon request by contacting Michael P. Conroy, Chief Financial Officer, at michaelc@mts-mt.com.

        We intend to satisfy the disclosure requirement under Item 10 of Form 8-K regarding an amendment to, or waiver from, a provision of this code of ethics, as it relates to our CEO, CFO or controller by posting such information on our website, at the address specified above. Information contained in our website, whether currently posted or posted in the future, is not part of this document or the documents incorporated by reference in this document.

ITEM 11.     EXECUTIVE COMPENSATION

        The information required by this item is incorporated herein by reference to the information included in our definitive proxy statement, which will be filed within 120 days after the end of our 2004 fiscal year.

ITEM 12.     SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

        The information required by this item is incorporated herein by reference to the information included in our definitive proxy statement, which will be filed within 120 days after the end of our 2004 fiscal year.

        Information regarding equity compensation plans required by this item is included in Item 5 of Part II of this report and is incorporated into this item by reference.

ITEM 13.     CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

        The information required by this item is incorporated herein by reference to the information included in our definitive proxy statement, which will be filed within 120 days after the end of our 2004 fiscal year.

ITEM 14.     PRINCIPAL ACCOUNTANT FEES AND SERVICES

        The information required by this item is incorporated herein by reference to the information included in our definitive proxy statement, which will be filed within 120 days after the end of our 2004 fiscal year.

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PART IV

ITEM 15.     EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K

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MEDICAL TECHNOLOGY SYSTEMS, INC.

INDEX TO FINANCIAL STATEMENTS

        All other schedules are omitted since the required information is not present in amount sufficient to require submission of the schedule or because the information required is included in the financial statements and notes thereto.

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REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

Board of Directors
Medical Technology Systems, Inc. and Subsidiaries
Clearwater, Florida  33762

          We have audited the accompanying consolidated balance sheets of Medical Technology Systems, Inc. and Subsidiaries as of March 31, 2004 and 2003 and the related consolidated statements of earnings, changes in stockholders’ equity and cash flows for each of the three years in the period ended March 31, 2004. 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 auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

          In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Medical Technology Systems, Inc. and Subsidiaries as of March 31, 2004 and 2003, and the consolidated results of operations and cash flows for each of the three years in the period ended March 31, 2004 in conformity with accounting principles generally accepted in the United States of America.

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MEDICAL TECHNOLOGY SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
MARCH 31, 2004 AND 2003

(In Thousands)

ASSETS

LIABILITIES AND STOCKHOLDERS' EQUITY

The accompanying notes are an integral part of these financial statements.

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MEDICAL TECHNOLOGY SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
YEARS ENDED MARCH 31, 2004, 2003 AND 2002
(In Thousands; Except Earnings Per Share Amounts)

The accompanying notes are an integral part of these financial statements.

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MEDICAL TECHNOLOGY SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
YEARS ENDED MARCH 31, 2004, 2003 AND 2002
(In Thousands)

The accompanying notes are an integral part of these financial statements.

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MEDICAL TECHNOLOGY SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED MARCH 31, 2003, 2002 AND 2001
(In Thousands)