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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

Aggregate market value of voting Common Stock held by non-affiliates was approximately $25,570,000 as of September 30, 2004.

The number of shares outstanding of the Registrant’s Common Stock, $.01 par value, was 5,897,005 as of June 20, 2005.

MTS MEDICATION TECHNOLOGIES, INC.

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”, “MTSP”, “MTS Limited” and “Med Tech” refer to MTS Medication Technologies™, Inc. (“MTS”), 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.™ (“MTSP”) and MTS Medication Technologies International™, Ltd. (“MTS Limited”). MTS primarily manufactures and sells disposable medication punch cards, packaging equipment and ancillary products throughout the United States. Its customers are predominantly institutional pharmacies that supply nursing homes, assisted living and correctional facilities with prescription medications for their patients. MTS manufactures its proprietary disposable punch cards and packaging equipment in its own facilities. This manufacturing process uses integrated equipment 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’s medication dispensing systems and products provide innovative methods for dispensing medications in disposable packages. MTS Limited distributes products for MTS 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.

        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 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.

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        During fiscal 2002, we introduced the OnDemand system, which we believe is the industry’s first automated system capable of dispensing prescription medications into punch card compliance packaging, thereby, 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’s equipment 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’s equipment ranges from $1,100 to $600,000 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 has placed approximately 3,000 medication-dispensing systems with pharmacy clientele since our inception. MTS also sells prescription labels and ancillary supplies designed to complement sales of disposable medication punch cards.

Research and Development

        We expended approximately $139,000, $161,000 and $172,000 on research and development activities for each of the fiscal years ended March 31, 2005, 2004 and 2003, respectively. In addition, we directed our product development efforts primarily towards the completion of several versions of our OnDemand machine during the fiscal year ended March 31, 2005. We capitalized approximately $606,000 of product development during the fiscal year ended March 31, 2005. The majority of these expenditures were made for the OnDemand system and MedLocker™ project.

Manufacturing Processes

        MTS has developed integrated punch card manufacturing equipment that will complete the various punch card manufacturing steps in a single-line, automated process. We believe that our advanced automation gives us certain speed, cost and flexibility advantages over conventional punch card manufacturers. MTS’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 has several machines capable of producing punch cards in this manner. In addition to the manufacturing of punch cards, MTS 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 uses automated fabrication equipment to produce its medication packaging equipment. All essential components of the machines are designed and manufactured by us without reliance on outside vendors.

        MTS 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 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.

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Markets and Customers

        MTS’s products are sold primarily throughout the United States through its sales organization and independent sales representatives. In addition, MTS Limited distributes product in the United Kingdom. MTS 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 2005. In the fiscal year ended March 31, 2005, sales to our three largest customers, Omnicare®, PharMerica and McKesson represented approximately 13%, 10%, and 10%, respectively, of the Company’s total net sales.

        The primary customers for MTS’s proprietary packaging equipment 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 supply prescribed medications to nursing homes and assisted living facilities, which are the primary market for MTS’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 in the United States are Drug Package, Inc., AutoMed® Technologies and RX Systems, Inc. We believe that our automated proprietary packaging equipment distinguishes MTS 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.

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 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. However, our business is not materially dependent upon the issuing or our 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’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 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.

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        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 March 31, 2005, we employed 181 persons. 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 operations and financial condition, 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 net sales, 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:

•   develop and expand their product and service offerings more quickly;
•   adapt to new or emerging technologies and changing customer needs more quickly;
•   negotiate more favorable purchases agreements with suppliers;
•   devote greater resources to the marketing and sale of their products; and
•   address customers’ service-related issues more effectively.

        Some of our competitors may also be able to provide customers with additional benefits at lower overall costs or to reduce their charges aggressively in an effort to increase market share. We cannot be sure that we will be able to match cost reductions by our competitors.

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:

•   adverse changes in general economic conditions;
•   the level and timing of customer orders;
•   the composition of the costs of revenue between materials, labor and manufacturing overhead;
•   our level of experience in manufacturing a particular product;
•   fluctuations in materials costs and availability of materials; and
•   the timing of expenditures in anticipation of increased sales and customer product delivery requirements.

        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.

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

        For the fiscal year ended March 31, 2005, our 10 largest customers accounted for approximately 59% of our net sales and our three largest customers, Omnicare®, PharMerica and McKesson accounted for approximately 33% of our net sales. 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 sales. Consolidation among our customers may further reduce the number of customers that generate a significant percentage of our net sales 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:

•   hire, retain and expand our qualified technical personnel;
•   maintain technological leadership;
•   develop and market products that meet changing customer needs; and
•   successfully anticipate or respond to technological changes in manufacturing processes on a cost-effective and timely basis.

        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 St. Petersburg, 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, results of operations and financial condition 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.

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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 and to bill for services efficiently. In addition, we depend on third party vendors for certain functions whose future performance and reliability we cannot ensure.

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.

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 March 31, 2005, we had 5,836,220 shares of common stock outstanding. In addition, the following shares of our common stock are issuable upon exercise or conversion of currently outstanding securities:

•   1,092,800 shares of common stock are issuable upon exercise of currently outstanding common stock purchase options having exercise prices ranging from $0.48 to $15.00;
•   29,500 shares of common stock are issuable upon exercise of currently outstanding common stock purchase warrants having an exercise price of $1.88; and
•   847,457 shares of common stock are issuable upon conversion of 2,000 shares of Series A Convertible Preferred Stock (the “Series A Preferred Stock”), having an exercise price of $2.36.

        The possibility of exercise or conversion of these securities and the inclusion of the underlying shares of common stock in the issued and outstanding shares may adversely affect the market price of our common stock.

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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.

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:

•   stop or delay selling, incorporating or using products that incorporate the challenged intellectual property;
•   pay damages;
•   enter into licensing or royalty agreements, which may be unavailable under acceptable terms; and
•   redesign products and services that incorporate infringing technology.

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        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 of 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 has adopted 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.

        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.

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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 115,000 square feet consisting of office space and air-conditioned manufacturing and warehousing space at 2003 Gandy Boulevard North, Suite 800, St. Petersburg, Florida. The lease automatically expands to 132,500 square feet on October 1, 2006. The lease term is for 12 years ending September 30, 2016. Our corporate administrative offices and the primary manufacturing facilities for MTS are at this location. The monthly lease payments are $35,000 plus tax in the first six months and increase to $80,275 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). Due to the fact that the lease contains scheduled rent increases, the Company has applied the provisions of FASB Statement 13, “Accounting for Leases”. Pursuant to the terms of the lease, the Company was paid a lease incentive of $400,000, which was deferred and which will be amortized to rental expense over the term of the lease. The lease incentive has been recorded in the accompanying condensed consolidated balance sheet under the caption lease incentive with the current portion of approximately $33,000 being included in the accounts payable and accrued liabilities. In addition, the Company has accelerated the amortization of approximately $250,000 associated with the abandonment of leasehold improvements that were made to the former premises. Also, the Company incurred approximately $344,000 in cost associated with the move to the new facility and expenses associated with bringing the former premises into a condition acceptable to the landlord, which were expensed as incurred.

        MTS 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, 2006.

        MTS Medication Technologies International, Ltd. currently leases approximately 1,600 square feet of 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 approximately $3,400. The lease expires on May 20, 2006.

ITEM 3.  LEGAL PROCEEDINGS

        We are involved in certain claims and legal actions arising in the ordinary course of business. There can be no assurance 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 is trading on the American Stock Exchange (“AMEX”) under the symbol “MPP”. 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.

        As of June 20, 2005, there were approximately 936 holders of record of our common stock and the closing price of our common stock reported on the AMEX was $5.96.

        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 234,100 and 173,101 shares of common stock available for issuance under our equity compensation plans as of March 31, 2005 and March 31, 2004, respectively.

        During Fiscal Year 2005, we did not experience any changes in the exercise price of our outstanding options, through cancellation and reissuance or otherwise.

        On February 24, 2005, in response to the recently published accounting standard, Statement of Financial Accounting Standards No. 123 (revised 2004), Share-Based Payment (“SFAS 123R”), the Compensation Committee of the Company’s Board of Directors approved accelerating the vesting of options to acquire 205,000 shares of the Company’s stock, which accounted for all outstanding options with an exercise price of $6.50 per share or greater. All of these options are in-the-money and all are held by two executive officers and one employee. An option was considered in-the-money if the stated option exercise price was less than $6.55, the closing price of the Company’s common stock on the day the Compensation Committee approved the acceleration. The accelerated vesting was effective as of the close of business on February 24, 2005. The acceleration of these options resulted in a charge in the Company’s quarter ended March 31, 2005 of approximately $10,250 or slightly less than $.001 per share on a fully diluted basis.

        The decision to accelerate vesting of these options was made primarily to avoid recognizing compensation cost in the statement of earnings in future financial statements upon the effectiveness of SFAS 123R. It is estimated that the maximum future compensation expense that will be avoided, based on the Company’s implementation date for FAS 123R of July 1, 2005, is approximately $750,000, all of which is related to options held by two executive officers and one employee of the Company.

Purchases of Equity Securities

        We did not repurchase any of our equity securities during fiscal 2005.

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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."

⁽¹⁾   Elimination of a reserve for a contingent liability associated with a discontinued operation (see Note 2 of the Financial Statements).
⁽²⁾   Elimination of a transfer price markup on inventory (see Note 2 of the Financial Statements).

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

OVERVIEW

        We experienced growth of 17% in net sales in fiscal 2005 ended March 31, 2005. Our revenue grew due to increased sales of our disposable punch card product lines and increased sales of our machines including the OnDemand system. We believe the revenue increase in our disposable products is primarily the result of: (1) increased penetration of independent pharmacies; (2) growth in market demands due to the aging demographics of the United States population; (3) a continued shift toward punch card usage; and (4) growth in international markets. 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 ten (10) OnDemand systems in fiscal 2005 compared to six systems in fiscal 2004.

        The information set forth below represents selected quarterly results of operations for each of the quarters in fiscal years ended March 31, 2005 and 2004.

⁽¹⁾  Elimination of a contingent liability associated with a discontinued operation in the quarter ended March 31, 2005 (see Note 2 of the Financial Statements).
⁽²⁾  Elimination of a transfer price markup on inventory in the quarter ended December 31, 2004 (see Note 2 of the Financial Statements).

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FISCAL YEAR 2005 COMPARED TO FISCAL YEAR 2004

Results of Operation

        Net Sales

        Net sales for the fiscal year ended March 31, 2005, increased 17.0% to $40.2 million from $34.4 million the prior year. Net sales increased in fiscal 2005 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 10 OnDemand systems in the United States. Selling prices for disposable punch cards were stable during fiscal 2005.

        Cost of Sales

        Cost of sales for the fiscal year ended March 31, 2005, increased 18.7% to $24.8 million from $20.9 million the prior year. Cost of sales as a percentage of net sales increased to 61.8% from 60.9% for the prior year. 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, 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 and increased costs associated with the new facility occupied in October 2004.

        During the fiscal years ended March 31, 2005 and 2004, we wrote off approximately $122,000 and $100,000, respectively, in obsolete inventory primarily related to discontinued packaging and equipment. In addition, the inventory valuation allowance related to obsolete and slow moving inventory was increased by $10,000. We will continue to evaluate our inventory valuation allowance and adjust it accordingly.

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

        SG&A expenses for the year ended March 31, 2005, increased 29.8% to $9.7 million compared to $7.5 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 fiscal 2005, we also incurred $279,000 associated with the move of the Company in October 2004 and $365,000 for the stock grant given to the Company’s former CFO. During the fiscal years ended March 31, 2005 and 2004, we charged off approximately $45,000 and $103,000, respectively, in uncollectable accounts receivable and increased our estimated bad debt reserve by $12,000 and $49,000, respectively. We regularly review the adequacy of our bad debt reserve by specific customer account analysis as well a review of historical trends.

        Depreciation and Amortization Expense

        Depreciation and amortization expense for the fiscal year ended March 31, 2005, increased 42.5% to $1.9 million compared to $1.3 million in the prior year. The increase resulted primarily due to accelerating the amortization of leasehold improvements made to our previous facility as a result of terminating our lease and increases related to product development and plant, property and equipment costs.

        Interest Expense

        Interest expense for the fiscal year ended March 31, 2005 decreased 28.0% to $613,000 compared to $851,000 the prior year. The decrease resulted from lower interest rates due to the repayment of the $4,000,000 subordinated note in June 2004 and lower debt levels as a result of positive cash flow in fiscal 2005. The $4,000,000 subordinated note had an interest rate of 14% and the current interest rate payable on the funds borrowed to repay the subordinate note is the London InterBank Offering Rate (“LIBOR”) (currently 3.16%) plus 3.25%.

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        Amortization of Financing Costs and Original Issue Discount

        Amortization of financing costs and original issue discount for fiscal year ended March 31, 2005 increased to $1,303,000 compared to $612,000 in the prior year. This increase resulted primarily from the repayment of the $4,000,000 subordinated note in June 2004. At that time, the remaining original issue discount ($741,000) and financing costs associated with that note ($420,000) were completely written off.

        Other Income

        Medical Technology Laboratories, Inc. (MTL), formerly a wholly owned subsidiary of MTS (MTL’s assets were sold to a third party in 2000), accrued approximately $400,000 for unpaid taxes assessed by the Agency for Health Care Administration (AHCA) on clinical laboratories in the state of Florida. The tax was disputed and the Company received no further notification from the state. The statue of limitations on the collection of the AHCA tax has expired. Accordingly, the reserve was reversed to other income in the fiscal year ending March 31, 2005.

        Income Tax Expense

        Income tax expense for the fiscal year ended March 31, 2005, decreased 19.0% to $964,000 compared to $1,190,000 the prior year. The decrease resulted from lower pretax net income in fiscal 2005 compared to the prior year. The increase in the effective tax rate for fiscal 2005 compared with fiscal 2004 resulted from the non-deductible expenses related to the permanent difference between the carrying value of the subordinated debt for book and tax purposes due to the repayment of the subordinated debt in June 2004.

        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 each of the fiscal years 2005 and 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, 2005 and 2004 were paid in cash.

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 17.7% to $20.9 million from $17.8 million the prior year. Cost of sales as a percentage of net sales increased to 60.9% 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 18.1% 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 $103,000 in uncollectible 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 as 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 39.2% 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 embedded 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.

LIQUIDITY AND CAPITAL RESOURCES

        Our operations provided cash of $5.0 million in the fiscal year ended March 31, 2005, compared to $2.6 million the prior year. The increase in cash provided by operations resulted primarily from net income and increases in depreciation and amortization expenses offset in part by increases in accounts receivable and inventory. These increases resulted primarily from increases in revenue.

        Investing activities used cash of $2.6 million during the fiscal year ended March 31, 2005, compared to $2.0 million the prior year. The increase resulted primarily from the fact that we purchased equipment, supplies and furniture for the new facility in fiscal 2005.

        Financing activities used cash of $2.1 million during the fiscal year ended March 31, 2005 compared to $0.9 million the prior year. The increase in cash required for financing activities resulted primarily from repayment of our $4.0 million subordinated note in June 2004, which was partially offset by borrowings and advances, net of payments on term loans, of $2.0 million on our new term loan and revolving line of credit.

        We had working capital of $9.4 million at March 31, 2005, compared to $8.6 million at March 31, 2004. The increase in working capital resulted primarily from increases in accounts receivable and inventory associated with the expansion of our business.

        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, 2005, we had approximately $3.4 million available on our revolving line of credit.

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        In June 2004, the Company consummated a debt refinancing and repaid the entire amount, $4,000,000, of its subordinated note and term loan with a bank with the proceeds of an additional senior term loan and advances on its revolving line of credit. In April 2004, the subordinated note holders exercised their rights to acquire 566,517 shares of common stock under the terms of the warrant agreements and sold the common stock. All of our obligations under the warrant agreement were extinguished at the time the investor sold the common stock and the debt was repaid. Upon the repayment of the subordinated note, the Company incurred a prepayment penalty of $120,000. As part of the refinancing, the Company extended the maturity date of the revolving loan to June 2007, increased the maximum revolving loan limit from $5.0 million to $8.5 million, entered into a new secured equipment loan for $1.2 million and obtained a new $300,000 line of credit to fund future purchases of equipment. At the time the subordinated note was repaid, the Company recorded a one-time non-cash expense to extinguish the unamortized original issue discount of approximately $741,000 and wrote-off the deferred financing costs of approximately $420,000 that were incurred when the subordinated debt was acquired.

        The revolving line of credit and bank term loans are collateralized by a first security interest in all of the assets of the Company.

        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, currently 6%, or 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 0.5% 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. As of March 31, 2005, we had approximately $4.6 million outstanding and approximately $3.4 million available on our revolving line of credit.

        The new revolving line of credit and bank term loans contain provisions that require the Company to maintain certain financial covenants that, among other things, require the maintenance of minimum tangible net worth and debt service coverage ratios, limit the amount of capital expenditures and require lender approval for certain matters. The Company was in compliance with all provisions of the loan agreements as of March 31, 2005.

        At March 31, 2005, the Company had a $300,000 line of credit available for purchases of equipment at an interest rate of prime plus .75%. Advances on the line of credit are repayable over a three-year term. There were no amounts outstanding on this line of credit at March 31, 2005.

        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 systems. 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 liquidity requirements.

OFF-BALANCE SHEET ARRANGEMENTS

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

• any obligation under certain guarantee contracts;
  
  
• a retained or contingent interest in assets transferred to an unconsolidated entity or similar entity or similar arrangement that serves as credit, liquidity or market risk support to that entity for such assets;
  
  
• any obligation, including a contingent obligation, under a contract that would be accounted for as derivative instruments; and
  
  
• any obligation, arising out of a variable interest in an unconsolidated entity that is held by, and material to, the registrant, where such entity provides financing, liquidity, market risk or credit risk support to the registrant, or engages in leasing, hedging or research and development services with the registrant.

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

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CONTRACTUAL OBLIGATIONS

        Summarized below are our obligations and commitments to make future payments under certain contractual obligations as of March 31, 2005:

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 revenue 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.

Valuation of Accounts Receivable

        Our allowance for doubtful accounts was approximately $199,000 and $187,000 at March 31, 2005 and 2004, respectively, and 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 approximately $205,000 and $195,000 at March 31, 2005 and 2004, respectively.

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Self-Insurance Plan Reserve

        We established a reserve for unpaid medical claims of approximately $49,000 and $101,000 at March 31, 2005 and 2004, 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 it’s 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.

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 (generally six months) with our customers. Warranty and service costs incurred during the periods ended March 31, 2005 and 2004, totaled approximately $177,000 and $161,000, respectively.

ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

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

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ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

        Our consolidated financial statements, notes thereto and the report of Grant Thornton LLP, our independent registered public accountants, 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.

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, 2005, 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 2005 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 the Company at ir@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 2005 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 2005 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 2005 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 2005 fiscal year.

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PART IV

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

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MTS MEDICATION TECHNOLOGIES, 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 REGISTERED PUBLIC ACCOUNTING FIRM

Board of Directors
MTS Medication Technologies, Inc. and Subsidiaries
St. Petersburg, Florida 33702

        We have audited the accompanying consolidated balance sheets of MTS Medication Technologies, Inc. and Subsidiaries as of March 31, 2005 and 2004 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, 2005. 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 the 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 consolidated financial position of MTS Medication Technologies, Inc. and Subsidiaries as of March 31, 2005 and 2004, and the consolidated results of operations and cash flows for each of the three years in the period ended March 31, 2005 in conformity with accounting principles generally accepted in the United States of America.

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MTS MEDICATION TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
MARCH 31, 2005 AND 2004

(In Thousands)

ASSETS

LIABILITIES AND STOCKHOLDERS' EQUITY

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

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MTS MEDICATION TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
YEARS ENDED MARCH 31, 2005, 2004 AND 2003

(In Thousands; Except Earnings Per Share Amounts)

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

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MTS MEDICATION TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
YEARS ENDED MARCH 31, 2005, 2004 AND 2003

(In Thousands)

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

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MTS MEDICATION TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED MARCH 31, 2005, 2004 AND 2003

(In Thousands)