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# UNITED STATES
SECURITIES AND EXCHANGE COMMISSIONWASHINGTON, D.C. 20549

FORM 10-K

||X| | Annual
Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1930
|--- | ------------------------------------------------------------------------------------

| | For fiscal year ended March 31, 2005
| | ------------------------------------

# OR

|[ ] | Transition Report Pursuant to Section 13 or
        15(d) of the Securities Exchange Act of 1934
|--- | ------------------------------------------------------------------------------------------------

| | For transition period from ____________________ to
| | --------------------------------------------------

Commission File Number:   
0-16594

| |                                                        | 
| | ------------------------------------------------------ | 
| | MTS MEDICATION TECHNOLOGIES, INC.                      | 
| |                                                        | 
| | (Exact Name of Registrant as Specified in Its Charter) | 

| | Delaware                        |  | 59-2740462          | 
| | ------------------------------- |  | ------------------- | 
| |                                 |  |                     | 
| | (State or Other Jurisdiction of |  | (I.R.S. Employer    | 
| | Incorporation or Organization)  |  | Identification No.) | 

| |                                                                       
| | ----------------------------------------------------------------------
| | 2003 Gandy Boulevard North, Suite 800,
        St. Petersburg, Florida
| |                                                                       
| | (Address of Principal Executive Offices)                              

| |                                                      | 
| | ---------------------------------------------------- | 
| | 727-576-6311                                         | 
| |                                                      | 
| | (Registrant's Telephone Number, Including Area Code) | 

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

| |                             
| | ----------------------------
| | Title of Each Class         
| |                             
| | COMMON STOCK, $.01 PAR VALUE

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

| |                  | 
| | ---------------- | 
| | NONE             | 
| |                  | 
| | (Title of Class) | 

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

|                              |  | Page                                                                                                | 
|----------------------------- |  | --------------------------------------------------------------------------------------------------- | 
|
|PART I                        |  |                                                                                                     | 
|                              |  |                                                                                                     | 
|Item 1.                       |  | Business                                                                                            | 
|Item 2.                       |  | Properties                                                                                          | 
|Item 3.                       |  | Legal Proceedings                                                                                   | 
|Item 4.                       |  | Submission of Matters to a Vote of Security Holders                                                 | 
|                              |  |                                                                                                     | 
|PART II                       |  |                                                                                                     | 
|                              |  |                                                                                                     | 
|Item 5.                       |  | Market for Registrant's Common Equity and
        Related Stockholder Matters                       | 
|Item 6.                       |  | Selected Financial Data                                                                             | 
|Item 7.                       |  | Management's Discussion and Analysis
        of Financial Condition and Results of Operations       | 
|Item 7A.                      |  | Quantitative and Qualitative Disclosure About Market Risk                                           | 
|Item 8.                       |  | Financial Statements and Supplementary Data                                                         | 
|Item 9.                       |  | Changes in and Disagreements With
        Accountants on Accounting and Financial Disclosure        | 
|Item 9A.                      |  | Controls and Procedures                                                                             | 
|                              |  |                                                                                                     | 
|PART III                      |  |                                                                                                     | 
|                              |  |                                                                                                     | 
|Item 10.                      |  | Directors and Executive Officers of the Registrant                                                  | 
|Item 11.                      |  | Executive Compensation                                                                              | 
|Item 12.                      |  | Security Ownership of Certain Beneficial
        Owners, Management and Related Stockholder Matters | 
|Item 13.                      |  | Certain Relationships and Related Transactions                                                      | 
|Item 14.                      |  | Principal Accountant Fees and Services                                                              | 
|                              |  |                                                                                                     | 
|PART IV                       |  |                                                                                                     | 
|                              |  |                                                                                                     | 
|Item 15.                      |  | Exhibits, Financial Statements, Schedules
        and Reports on Form 8-K                           | 
|                              |  |                                                                                                     | 
|Index to Financial Statements |  |                                                                                                     | 
|                              |  |                                                                                                     | 
|Signatures                    |  |                                                                                                     | 
|                              |  |                                                                                                     | 
|Certifications                |  |                                                                                                     | 

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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.

8

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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.

9

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Table of Contents

# 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.

|2006 Fiscal
      Year                      |  | High |   | Low  
|------------------------------------------- |  | ---- | - | -----
|                                            |  |      |   |      
|First
      Quarter (through June 20, 2005) |  |      | $ | 6.65 
|                                            |  |      |   |      
|
|                                            |  |      |   |      
|                                            |  |      |   |      
|First
      Quarter                         |  |      | $ | 14.95
|Second
      Quarter                        |  |      | $ | 7.40 
|Third
      Quarter                         |  |      | $ | 8.34 
|Fourth
      Quarter                        |  |      | $ | 8.10 
|                                            |  |      |   |      
|
|                                            |  |      |   |      
|                                            |  |      |   |      
|First
      Quarter                         |  |      | $ | 4.55 
|Second
      Quarter                        |  |      | $ | 4.78 
|Third
      Quarter                         |  |      | $ | 6.90 
|Fourth
      Quarter                        |  |      | $ | 14.84

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.

10

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Table of Contents

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.

11

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Table of Contents

# 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."

|                                                                                                            | YEARS ENDED MARCH 31,                            
|----------------------------------------------------------------------------------------------------------- | -------------------------------------------------
|
|                                                                                                            | (In Thousands, Except Earnings Per Share Amounts)
|                                                                                                            |                                                  
|
|
|
|Income Statement Data:                                                                                      |                                                  
|Net Sales                                                                                                   |                                                  
|Cost of Sales and Other Expenses (1) (2)                                                                    |                                                  
|
|Income from Continuing Operations Before Income Taxes, Discontinued Operations and Extraordinary Gain       |                                                  
|Income Tax (Expense) Benefit                                                                                |                                                  
|(Loss) from Discontinued Operations                                                                         |                                                  
|Non-Cash Constructive Dividend Related to
     Beneficial Conversion Feature of Convertible Preferred Stock |                                                  
|Convertible Preferred Stock Dividends                                                                       |                                                  
|
|Net Income Available to Common Stockholders                                                                 |                                                  
|
|Net Earnings (Loss) Per Basic and Diluted
        Common Share: (Retroactively adjusted for the 1 for 2.5   |                                                  
|reverse stock split in December 2000):                                                                      |                                                  
|Net Earnings Per Basic Common Share                                                                         |                                                  
|From
     Continuing Operations                                                                             |                                                  
|Income (Loss)
        from Discontinued Operations                                                          |                                                  
|
|Net Earnings Per Basic Common Share                                                                         |                                                  
|
|Net Earnings Per Diluted Common Share                                                                       |                                                  
|From Continuing
      Operations                                                                            |                                                  
|Income (Loss) from
        Discontinued Operations                                                          |                                                  
|
|Net Earnings Per Diluted Common Share                                                                       |                                                  
|

|                               | AT MARCH 31,  
|------------------------------ | --------------
|
|                               | (In Thousands)
|                               |               
|
|
|
|Balance Sheet Data:            |               
|Cash                           |               
|Net Working Capital            |               
|Assets                         |               
|Debt                           |               
|Stockholders' Equity (Deficit) |               

---

(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).

12

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Table of Contents

# 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.

|                                                   | Fiscal Year Ended March 31, 2005                 
|-------------------------------------------------- | -------------------------------------------------
|
|
|
|                                                   | (In Thousands, Except Earnings Per Share Amounts)
|                                                   |                                                  
|
|
|
|Income Statement Data:                             |                                                  
|                                                   |                                                  
|Net Sales                                          |                                                  
|                                                   |                                                  
|Gross Profit (1) (2)                               |                                                  
|                                                   |                                                  
|Net (Loss) Income Available to Common Stockholders |                                                  
|                                                   |                                                  
|Net (Loss) Earnings Per
        Basic Common Share |                                                  
|
|Net (Loss) Earnings Per Diluted Common Share       |                                                  
|

|                                            | Fiscal Year Ended March 31, 2004                 
|------------------------------------------- | -------------------------------------------------
|
|
|
|                                            | (In Thousands, Except Earnings Per Share Amounts)
|                                            |                                                  
|
|
|
|Income Statement Data:                      |                                                  
|                                            |                                                  
|Net Sales                                   |                                                  
|                                            |                                                  
|Gross Profit                                |                                                  
|                                            |                                                  
|Net Income Available to Common Stockholders |                                                  
|                                            |                                                  
|Net Earnings Per
        Basic Common Share |                                                  
|
|Net Earnings Per Diluted Common Share       |                                                  
|

---

(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).

13

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Table of Contents

# 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%.

14

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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.

15

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Table of Contents

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%).

17

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Table of Contents

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.

17

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Table of Contents

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.

18

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Table of Contents

# CONTRACTUAL OBLIGATIONS

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

|                 |                |  |   | Less Than |  | 1  3 |     | 4  5 |   | More Than
|---------------- | -------------- |  | - | --------- |  | ----- | --- | ----- | - | ---------
|
|
|                 | (In Thousands)
|
|Long-Term Debt   |                |  | $ | 6,810     |  | $     | 677 |       | $ | 6,133    
|Capital Leases   |                |  | $ | 145       |  | $     | 44  |       | $ | 101      
|Operating Leases |                |  | $ | 9,369     |  | $     | 819 |       | $ | 2,408    

# 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.

19

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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.

20

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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.

21

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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.

22

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# PART IV

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

|    |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|--- | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(a) |    | The following documents are filed as part of this report:                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|    |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|    | 1. | Financial Statements.The consolidated financial statements, and related
notes thereto, of MTS with the independent auditors' report thereon are included in Part IV of this Report on the pages
indicated by the Index to Financial Statements and Schedule beginning on page 29 of this report.                                                                                                                                                                                                                
|    |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|    | 2. | Consolidated Financial Statement Schedule. The consolidated financial
statement schedule of MTS is included in Part IV of this report on the page indicated by the Index to Financial
Statements as beginning on page 53 of this report. The independent auditor's report as presented on page 52 of this
report applies to the consolidated financial statement schedule. This financial statement schedule should be read in conjunction
with the consolidated financial statements and related notes thereto.
|    |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|    |    | Schedules not listed in the Index to Financial
        Statements have been omitted because they are not applicable, not required, or the information required
         to be set forth therein is included in the consolidated financial statements or notes thereto.                                                                                                                                                                                                                                          
|    |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|    | 3. | For Exhibits, see Item 16(c) below.
        Each management contract or compensatory plan or arrangement required to be filed as an Exhibit
        hereto is listed in Exhibit Nos. 10.3, 10.4, 10.9 and 10.10 of Item 15(c) below.                                                                                                                                                                                                                                                                            
|    |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|b.  |    | Reports on Form 8-K.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|    |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|    |    | On February 25, 2005, we
        filed a Current Report in which we disclosed, under Item 1, the
        Compensation Committee of the Companys Board of Directors approval on February
        24, 2005 of 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.                                                                                            
|    |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|    |    | On February 2, 2005, we filed a
        Current Report on Form 8-K in which we disclosed under Items 7 and 9, a press release
        regarding its financial results for the fiscal quarter ended December 31, 2004.                                                                                                                                                                                                                                                                                           
|    |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|    |    | On February 16, 2005, we filed a Current
        Report on Form 8-K in which we announced under Item 5, a press release regarding the election
        of Mr. Allen Braswell, Jr. effective January 31, 2005, to serve as a member of the MTS board of
        directors.                                                                                                                                                                                                                                       
|    |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|    |    | On January 10, 2005, we filed a Current Report
        on Form 8-K in which we submitted, under Items 1 and 9, an Employment Agreement Termination and
        Retirement Agreement between Michael P. Conroy and MTS dated December 29, 2004.                                                                                                                                                                                                                                                                  
|    |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|c.  |    | List of Exhibits.
        The exhibits listed on the Exhibits Index set forth below are filed as part of,
        or incorporated by reference into this report.                                                                                                                                                                                                                                                                                                                                                
|    |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|d.  |    | Financial Statement Schedules.
        See Item 15(a) above.                                                                                                                                                                                                                                                                                                                                                                                                                                                    

23

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# MTS MEDICATION
TECHNOLOGIES, INC.

# INDEX TO FINANCIAL STATEMENTS

|                                                                                                                     | Page |        
|-------------------------------------------------------------------------------------------------------------------- | ---- | -------
|
|REPORT OF INDEPENDENT REGISTERED
        PUBLIC ACCOUNTING FIRM                                                      |      | 25     
|                                                                                                                     |      |        
|CONSOLIDATED FINANCIAL STATEMENTS                                                                                    |      |        
|                                                                                                                     |      |        
|Consolidated Balance Sheets as of March 31, 2005 and 2004                                                            |      | 26     
|                                                                                                                     |      |        
|Consolidated Statement of Earnings for the Years Ended March 31, 2005, 2004 and 2003                                 |      | 27     
|                                                                                                                     |      |        
|Consolidated Statements of Changes in Stockholders' Equity for the Years
        Ended March 31, 2005, 2004 and 2003 |      | 28     
|                                                                                                                     |      |        
|Consolidated Statements of Cash Flows for the Years Ended March 31, 2005, 2004 and 2003                              |      | 29     
|                                                                                                                     |      |        
|Notes to Consolidated Financial Statements                                                                           |      | 30 - 47
|                                                                                                                     |      |        
|REPORT OF INDEPENDENT REGISTERED
        PUBLIC ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULE                          |      | 48     
|                                                                                                                     |      |        
|FINANCIAL STATEMENT SCHEDULE                                                                                         |      |        
|                                                                                                                     |      |        
|Schedule II - Valuation and Qualifying Accounts                                                                      |      | 49     

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.

24

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REPORT OF INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM

Board of DirectorsMTS Medication
Technologies, Inc. and SubsidiariesSt. 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.

|                        |  | 
|----------------------- |  | 
|/s/ GRANT THRONTON, LLP |  | 
|Tampa, Florida          |  | 
|                        |  | 
|May 18, 2005            |  | 

25

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# MTS MEDICATION
TECHNOLOGIES, INC. AND SUBSIDIARIESCONSOLIDATED BALANCE SHEETSMARCH 31, 2005 AND 2004

(In Thousands)

# ASSETS

|                                 | 2005 |  | 2004
|-------------------------------- | ---- |  | ----
|
|
|Current Assets:                  |      |  |     
|Cash                             |      |  | $   
|Accounts Receivable,
        Net |      |  |     
|Inventories, Net                 |      |  |     
|Prepaids and Other               |      |  |     
|Deferred Tax Benefits            |      |  |     
|
|Total Current Assets             |      |  |     
|
|Property and Equipment, Net      |      |  |     
|Other Assets, Net                |      |  |     
|
|Total Assets                     |      |  | $   
|

# LIABILITIES AND
STOCKHOLDERS' EQUITY

|Current Liabilities:                                        |  |  |   |        |   |  |   |        |  
|----------------------------------------------------------- |  |  | - | ------ | - |  | - | ------ | -
|Accounts Payable and
         Accrued Liabilities           |  |  | $ | 4,021  |   |  | $ | 4,341  |  
|Current Maturities
        of Long-Term Debt                |  |  |   | 431    |   |  |   | 272    |  
|Current Maturities
        of Related Party Note Payable    |  |  |   | 290    |   |  |   | 244    |  
|
|Total Current Liabilities                                   |  |  |   | 4,742  |   |  |   | 4,857  |  
|
|Long-Term Debt, Less Current Maturities                     |  |  |   | 5,492  |   |  |   | 7,010  |  
|Related Party Note Payable, Less Current
        Maturities |  |  |   | 742    |   |  |   | 1,030  |  
|Lease Incentive                                             |  |  |   | 350    |   |  |   |       |  
|
|Total Liabilities                                           |  |  |   | 11,326 |   |  |   | 12,897 |  
|
|Stockholders' Equity:                                       |  | 
|Common Stock                                                |  |  |   | 59     |   |  |   | 49     |  
|Preferred Stock                                             |  |  |   | 2      |   |  |   | 2      |  
|Capital In Excess of Par Value                              |  |  |   | 13,786 |   |  |   | 12,426 |  
|Accumulated Deficit                                         |  |  |   | (2,931 | ) |  |   | (4,225 | )
|Treasury Stock                                              |  |  |   | (328   | ) |  |   | (328   | )
|
|Total Stockholders' Equity                                  |  |  |   | 10,588 |   |  |   | 7,924  |  
|
|Total Liabilities and Stockholders' Equity                  |  |  | $ | 21,914 |   |  | $ | 20,821 |  
|

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

26

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

(In Thousands; Except Earnings Per
Share Amounts)

|                                                                                                               | 2005 |  | 2004 |        | 2003
|-------------------------------------------------------------------------------------------------------------- | ---- |  | ---- | ------ | ----
|
|
|
|
|Net Sales                                                                                                      |      |  | $    | 40,224 |     
|
|Costs and Expenses:                                                                                            |      | 
|Cost of Sales                                                                                                  |      |  |      | 24,841 |     
|Selling, General and Administrative                                                                            |      |  |      | 9,697  |     
|Depreciation and Amortization                                                                                  |      |  |      | 1,912  |     
|
|Total Costs and Expenses                                                                                       |      |  |      | 36,450 |     
|
|Operating Profit                                                                                               |      |  |      | 3,774  |     
|
|Other (Income) Expenses                                                                                        |      | 
|Interest Expense                                                                                               |      |  |      | 613    |     
|Amortization of:                                                                                               |      | 
|Financing Costs                                                                                                |      |  |      | 500    |     
|Original Issue Discount                                                                                        |      |  |      | 803    |     
|Other (Income)                                                                                                 |      |  |      | (400   | )   
|
|Total Other Expenses                                                                                           |      |  |      | 1,516  |     
|
|Income Before Taxes                                                                                            |      |  |      | 2,258  |     
|
|Income Tax Expense                                                                                             |      |  |      | 964    |     
|
|Net Income Before Preferred Stock Dividend                                                                     |      |  |      | 1,294  |     
|
|Non-Cash Constructive Dividend
        Related to Beneficial Conversion Feature of Convertible Preferred Stock |      |  |      |       |     
|
|Convertible Preferred Stock Dividends                                                                          |      |  |      | 220    |     
|
|Net Income Available to Common Stockholders                                                                    |      |  | $    | 1,074  |     
|
|Net Income Per Basic Common Share                                                                              |      |  | $    | 0.19   |     
|
|Net Income Per Diluted Common Share                                                                            |      |  | $    | 0.18   |     
|

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

27

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

(In Thousands)

|                                                                     | Preferred Stock |       | Common Stock |   |   |  |           |  |   |    | 
|-------------------------------------------------------------------- | --------------- | ----- | ------------ | - | - |  | --------- |  | - | -- | 
|
|
|
|
|
|Balance March 31, 2002                                               |                 | 0     |              | $ | 0 |  | 4,331,161 |  | $ | 43 | 
|Stock Options and Warrants Exercised                                 |                 |       |              |   |   |  | 62,462    |  |   | 1  | 
|Warrants Issued                                                      |                 |       |              |   |   |  |           |  |   |    | 
|Preferred Stock Issued                                               |                 | 2,000 |              |   | 2 |  |           |  |   |    | 
|Costs Related to Equity Issued                                       |                 |       |              |   |   |  |           |  |   |    | 
|Convertible Preferred Stock Dividend                                 |                 |       |              |   |   |  |           |  |   |    | 
|Non-Cash Constructive Dividend Related to Beneficial                 |                 |       |              |   |   |  |           |  |   |    | 
|Conversion Feature
        of Convertible Preferred Stock            |                 |       |              |   |   |  |           |  |   |    | 
|Amortization of Non-Cash Constructive
        Dividend Related to    |                 |       |              |   |   |  |           |  |   |    | 
|Beneficial
        Conversion Feature of Convertible Preferred Stock |                 |       |              |   |   |  |           |  |   |    | 
|Net Income                                                           |                 |       |              |   |   |  |           |  |   |    | 
|
|Balance March 31, 2003                                               |                 | 2,000 |              |   | 2 |  | 4,393,623 |  |   | 44 | 
|Stock Options and Warrants Exercised                                 |                 |       |              |   |   |  | 469,497   |  |   | 5  | 
|Tax Benefit from Stock Options Exercised                             |                 |       |              |   |   |  |           |  |   |    | 
|Convertible Preferred Stock Dividend                                 |                 |       |              |   |   |  |           |  |   |    | 
|Foreign Currency Translation Adjustment                              |                 |       |              |   |   |  |           |  |   |    | 
|Net Income                                                           |                 |       |              |   |   |  |           |  |   |    | 
|
|Balance March 31, 2004                                               |                 | 2,000 |              |   | 2 |  | 4,863,120 |  |   | 49 | 
|Stock Options and Warrants Exercised                                 |                 |       |              |   |   |  | 923,100   |  |   | 9  | 
|Stock Grant Issued                                                   |                 |       |              |   |   |  | 50,000    |  |   | 1  | 
|Acceleration of Option Vesting                                       |                 |       |              |   |   |  |           |  |   |    | 
|Tax Benefit from Stock Options Exercised                             |                 |       |              |   |   |  |           |  |   |    | 
|Convertible Preferred Stock Dividend                                 |                 |       |              |   |   |  |           |  |   |    | 
|Foreign Currency Translation Adjustment                              |                 |       |              |   |   |  |           |  |   |    | 
|Net Income                                                           |                 |       |              |   |   |  |           |  |   |    | 
|
|Balance March 31, 2005                                               |                 | 2,000 |              | $ | 2 |  | 5,836,220 |  | $ | 59 | 
|

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

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

(In Thousands)

|                                                                         | 2005 |  | 2004 |        | 2003
|------------------------------------------------------------------------ | ---- |  | ---- | ------ | ----
|
|
|Operating Activities                                                     |      |  |      |        |     
|Net Income                                                               |      |  | $    | 1,294  |     
|
|Adjustments to
        Reconcile to Net Cash                             |      | 
|Provided by Operating Activities:                                        |      | 
|Depreciation and Amortization                                            |      |  |      | 1,912  |     
|Amortization of Deferred Financing Costs                                 |      |  |      | 500    |     
|Deferred Income Tax Expense                                              |      |  |      | 964    |     
|Amortization of Original Issue Discount                                  |      |  |      | 803    |     
|Reserve for Obsolete Inventory                                           |      |  |      | 132    |     
|Development Costs Written Off                                            |      |  |      |       |     
|Restricted Stock Grant Awarded                                           |      |  |      | 352    |     
|Acceleration of Option Vesting                                           |      |  |      | 10     |     
|Lease Incentive                                                          |      |  |      | 350    |     
|(Increase) Decrease in:                                                  |      | 
|Accounts Receivable                                                      |      |  |      | (160   | )   
|Inventories                                                              |      |  |      | (1,207 | )   
|Prepaids and Other                                                       |      |  |      | 340    |     
|Increase (Decrease) in:                                                  |      | 
|Accounts Payable and Other Accrued Liabilities                           |      |  |      | (317   | )   
|
|Total Adjustments                                                        |      |  |      | 3,679  |     
|
|Net Cash Provided by
        Operating Activities                        |      |  |      | 4,973  |     
|
|Investing Activities                                                     |      | 
|Expended for
        Property and Equipment                              |      |  |      | (1,952 | )   
|Expended for Product
        Development                                 |      |  |      | (606   | )   
|Expended for Patents
        and Other Assets                            |      |  |      | (77    | )   
|
|Net Cash Used by
        Investing Activities                            |      |  |      | (2,635 | )   
|
|Financing Activities                                                     |      | 
|Payments on Notes
        Payable and Long-Term Debt                     |      |  |      | (138   | )   
|Payments on Related
        Party Note Payable                           |      |  |      | (227   | )   
|Net Advances on
        Revolving Line of Credit                         |      |  |      | 1,342  |     
|Issuance of Convertible
        Preferred Stock                          |      |  |      |       |     
|Expended for
        Financing Costs                                     |      |  |      | (106   | )   
|Dividends on Convertible
        Preferred Stock                         |      |  |      | (220   | )   
|Exercise of Stock
        Options                                        |      |  |      | 653    |     
|Proceeds from
        Borrowing on Subordinated Notes and Long-Term Debt |      |  |      |       |     
|Payments on Subordinated
        Notes                                   |      |  |      | (4,000 | )   
|Borrowing on Term Loans                                                  |      |  |      | 1,200  |     
|Payments on Term Loans                                                   |      |  |      | (583   | )   
|
|Net Cash Used by
        Financing Activities                            |      |  |      | (2,079 | )   
|
|Effect of Exchange Rate
        Changes on Cash                          |      |  |      | 55     |     
|
|Net Increase (Decrease) in Cash                                          |      |  |      | 314    |     
|Cash at Beginning of Period                                              |      |  |      | 59     |     
|
|Cash at End of Period                                                    |      |  | $    | 373    |     
|

See Note 18 for supplemental
disclosures of other cash flow information. The accompanying notes are an integral part
of these financial statements.

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# MTS MEDICATION
TECHNOLOGIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 2005, 2004
AND 2003

# NOTE 1  BACKGROUND INFORMATION

MTS
Medication Technologies, Inc., a Delaware corporation (the Company), was
incorporated in March 1984. The Company is a holding company that operates through its
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
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 primarily 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. The Company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.

# NOTE 2  SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES

Consolidation

The
consolidated financial statements include the accounts of the Company and its
subsidiaries, MTS and MTS Limited. All significant inter-company accounts and transactions
have been eliminated in consolidation.

Use of Estimates

The
preparation of financial statements in conformity with accounting principles generally
accepted in the United States of America requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities, disclosure of
contingent assets and liabilities at the date of the financial statements and the reported
amounts of revenue and expenses during the reporting period. Actual results could differ
from those estimates.

Cash

For
purposes of the statement of cash flows, the Company considers all highly liquid debt
instruments purchased with a maturity of three months or less to be cash equivalents. As
of March 31, 2005 and 2004, the Companys cash and cash equivalents include the
United States dollar equivalent of approximately $373,000 and $59,000, respectively,
maintained in a bank in the UK. There were no cash equivalents for all periods presented.

Inventories

Inventories
are stated at the lower of cost or market. Cost is determined by the first-in, first-out
(FIFO) method. As of March 31, 2005 and 2004, the Company has established an
inventory valuation allowance of approximately $205,000 and $195,000, respectively, to account for the
estimated loss in value of inventory due to obsolescence.

Warranty

The
Company establishes a reserve for warranty costs it may incur during the warranty period
that is provided for in the OnDemand® machine sales agreements with its customers. The
warranty period is generally for a six-month period. Warranty and service costs incurred
during the periods ended March 31, 2005 and 2004 totaled approximately $177,000 and $161,000,
respectively. The reserve is an estimate based on historical trends, the number of
machines under warranty, the cost of replacement parts and the expected reliability of our
products. Warranty and service costs are charged against the accrual when incurred.

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Revenue Recognition

The
Company recognizes revenue on the sale of machines, other than OnDemand machines, and all
disposables when products are shipped and title transfers. The Company recognizes revenue
related to the sale of its OnDemand Machines as prescribed in SOP 97-2 Software
Revenue Recognition because the software component of the OnDemand machine is
significant and not incidental to the value and functionality of the machine. In addition,
the sale of an OnDemand machine represents an arrangement that encompasses multiple
deliverables and therefore each deliverable represents a separate unit of accounting. The
separate deliverables are comprised of (a) the OnDemand machine installed at the customers
location (b) the user training (c) certain component parts that are sold separately,
principally cassettes that hold medications. The vendor specific fair value of the
deliverables outlined in (b-c) has been determined based upon the value of these
deliverables if they were sold separately. The fair value of the deliverable outlined in
(a) has been determined using the residual method which equals the total selling price of
the OnDemand machine, including installation, training and cassettes, less the aggregate
fair value of (b-c). The terms of the sale arrangement for an OnDemand machine is
typically FOB shipping point, at which time title and risk of loss transfers to the
customer, however, because the installation of the machine is essential to the
functionality of the machine the recognition of any of the revenue associated with the
machine is deferred until the machine is installed. For those cassettes that are provided
to the customer after the OnDemand machine is installed, the revenue associated with those
cassettes is recognized upon their delivery. When the training is performed, the Company
recognizes the revenue associated with the training. During the year the Company modified
its sales arrangements for the sale of OnDemand machines to remove any acceptance criteria
that was previously contained in the sales contract. Prior to the removal of the
acceptance criteria the Company did not recognize any revenue on the sale of an OnDemand
machine until the customer acknowledged that the machine had met the acceptance criteria
contained in the contract.

Revenue
includes certain amounts invoiced to customers for freight and handling charges. The
Company includes the actual cost of freight and handling incurred in cost of sales.

The
geographic sales of the Company are primarily in the United States. There were two
customers whose sales accounted for approximately 23%, 27% and 15% of net sales for fiscal years
2005, 2004 and 2003, respectively.

Allowance for Doubtful
Accounts

The
Company normally estimates the uncollectibility of its accounts receivable. The Company
considers many factors when making its estimates, including analyzing accounts receivable
and historical bad debts, customer concentrations, customer credit worthiness, current
economic trends and changes in its customer payment terms when evaluating the adequacy of
the reserve for uncollectible accounts. We review the status of our accounts monthly,
assessing the customers ability to pay. When a specific account is deemed
uncollectible, the account is written off against the reserve for uncollectible accounts.

Property and Equipment

Property
and equipment are recorded at cost. Additions to, and major improvements of, property and
equipment are capitalized. Maintenance and repair expenditures are charged to expense as
incurred. As property and equipment is sold or retired, the applicable cost and
accumulated depreciation is eliminated from the accounts and any gain or loss recorded.
Depreciation and amortization are calculated using the straight-line method based upon the
assets estimated useful lives as follows:

| |                                                                                       |  | Years | 
| | ------------------------------------------------------------------------------------- |  | ----- | 
| | Property and
           Equipment.................................................... |  | 3 - 7 | 
| | Leasehold
        Improvements..................................................      |  | 12    | 

The
Company uses accelerated methods of depreciation for tax purposes.

Research and Development and Product
Development Costs

The Company
expenses research and development costs as incurred. The Company incurred approximately
$139,000, $161,000 and $172,000 in research and development costs during fiscal years 2005, 2004
and 2003, respectively.

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All
costs incurred subsequent to the completion of research and development activities
associated with the products hardware components and the software components
achievement of technological feasibility are capitalized until the product is available for
general release to customers. The Company initially classifies the construction costs of
the first units produced for commercial use as product development costs prior to
transferring certain of these costs to inventory. The Company capitalized approximately
$606,000, $451,000 and $556,000 of product development costs during the years ended March
31, 2005, 2004 and 2003, respectively.

All
remaining product development costs are generally amortized on a straight-line basis over
a five (5) year period. Amortization expense related to product development costs was
approximately $362,000, $355,000 and $303,000 for the years ended March 31, 2005, 2004 and
2003, respectively.

At
March 31, 2005 and 2004, the Companys capitalized product development costs,
included in its OnDemand system, represented $1,843,000 and $1,720,000, respectively, of
the total capitalized product development costs. During the year ended March 31, 2005, the
Company sold ten (10) OnDemand systems.

Other Assets

Other
assets are carried at cost less accumulated amortization. Amortization is being calculated
on a straight-line basis over a three-year to seventeen-year period (see Note 6).

Valuation of Long-Lived
Assets and Certain Identifiable Intangibles

Long-lived
assets and certain identifiable intangibles that are held and used by the Company are
reviewed for impairment whenever events or changes in circumstance indicate that the
carrying amount of these assets may not be recoverable in accordance with Financial
Accounting Standards Board (FASB) Statement of Financial Accounting Standards (SFAS) No.
144, Accounting for the Impairment or Disposal of Long-Lived Assets. In
performing the review for recoverability, the Company estimates the future cash flows
expected to result from the use of the assets and their eventual disposition. If the sum
of the expected future cash flows (undiscounted and without interest charges) is less than
the carrying amount of the assets, an impairment loss is recognized. Long-lived assets and
certain identifiable intangibles to be disposed of are to be reported at the lower of the
carrying amount or the fair value less cost to sell, except for assets that are related to
discontinued operations, which are reported at the lower of carrying value or net
realizable value. There were no impairment losses in 2005, 2004 and 2003.

Earnings Per Share

Earnings
per share are computed using the basic and diluted calculations on the face of the
statement of earnings. Basic earnings per share are calculated by dividing net income
available to common shareholders by the weighted average number of shares of common stock
outstanding for the period and any warrants outstanding that are exercisable at a de
minimus amount. Diluted earnings per share is calculated by dividing net income available
to common shareholders by the weighted average number of shares of common stock
outstanding for the period, adjusted for the dilutive effect of common stock equivalents,
using the treasury stock method and the if converted method as it
relates to the convertible preferred stock outstanding (see Note 15).

Income Taxes

Income
taxes are provided for under the liability method in accordance with FASB No. 109,
Accounting for Income Taxes, whereby deferred tax assets are recognized for
deductible temporary differences and operating loss and tax credit carryforwards and
deferred tax liabilities are recognized for taxable temporary differences. Temporary
differences are the differences between the reported amounts of assets and liabilities and
their tax bases. Deferred tax assets are reduced by a valuation allowance when, in the
opinion of management, it is more likely than not that some portion or all of the deferred
tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the
effects of changes in tax laws and rates on the date of enactment.

Treasury Stock

The
Company records its treasury stock at cost.

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Stock-Based Employee
Compensation

The
Company follows only the disclosure provisions of SFAS No. 123, Accounting for
Stock-Based Compensation, as it relates to employment awards. It applies APB
Opinion No. 25, Accounting for Stock Issued to Employees, and SFAS No.
148, Accounting for Stock Based Compensation-Transition and Disclosure,and related interpretations in accounting for its plans and does not recognize
compensation expense based upon the fair value at the grant date for awards under these
plans. If the Company had followed the methodology prescribed by SFAS 123, the
Companys net income and earnings per share would be reduced to the pro forma amounts
indicated below:

|                                                                                                            | 2005 |  | 2004 |       | 2003
|----------------------------------------------------------------------------------------------------------- | ---- |  | ---- | ----- | ----
|
|
|Net Income Available to Common
        Shareholders as Reported                                             |      |  | $    | 1,074 |     
|
|Less:                                                                                                       |      | 
|
|Stock Based Employee Compensation Cost
        Under the Fair Value Based Method, Net of Related Tax Effect |      |  |      | 1,278 |     
|
|Net  (Loss) Income Pro Forma                                                                                |      |  | $    | (204  | )   
|
|Net Income Per Common Share, Basic as
        Reported                                                      |      |  | $    | 0.19  |     
|
|Net (Loss) Income Per Common Share, Basic Pro Forma                                                         |      |  | $    | (0.04 | )   
|
|Net Income Per Share  Diluted as Reported                                                                  |      |  | $    | 0.18  |     
|
|Net (Loss) Income Per Share  Diluted Pro Forma                                                             |      |  | $    | (0.04 | )   
|
|For Basic Income Per Share  Weighted Average Shares                                                        |      |  |      | 5,639 |     
|
|For Diluted Income Per Share  Weighted Average Shares                                                      |      |  |      | 7,129 |     

The
fair value of each option grant is estimated on the date of grant using the Black-Scholes
options-pricing model with the following weighted-average assumptions used for grants in fiscal years
2005, 2004 and 2003, respectively, no dividend yield for all years, expected volatility of
112, 133 and 127 percent; risk-free interest rates of 3.0, 3.0 and 4.0 percent, and
three-year expected lives for all years.

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 of 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.

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The
above pro forma disclosures may not be representative of the affects on reported net
(loss) earnings for future years, as options vest over several years, and the Company may
continue to grant options to employees. For options granted with graded vesting, the
Company amortizes compensation cost using the straight line method over the vesting
period.

Fair Value of Financial
Instruments

The
carrying amounts of cash, receivables, accounts payable and accrued liabilities
approximate fair value because of the short-term nature of the items.

The
carrying amount of current and long-term portions of long-term debt approximates fair
value since the interest rates approximate current prevailing market rates.

In
May 2003, SFAS 150, Accounting for Certain Financial Instruments with
Characteristics of Both Liabilities and Equitywas issued. This statement
establishes standards for how an issuer classifies and measures certain financial
instruments with characteristics of both liability and equity. It requires that an issuer
classify a financial instrument that is within its scope as a liability (or an asset in
some circumstances). Many of those instruments were previously classified as equity. The
Company has reviewed the effect that SFAS 150 has on certain financial instruments issued
in June 2002 (see Note 14) and has determined that these financial instruments are
properly classified in its financial statements as of March 31, 2005.

Recent Accounting
Pronouncements

In
December 2004, the Financial Accounting Standards Board (the FASB) issued
Statement on Financial Accounting Standard (SFAS) No. 123 (Revised 2004)
Share-Based Payment (No. 123R). SFAS No. 123R addresses all forms
of share-based payment (SBP) awards, including shares issued under employee
stock purchase plans, stock options, restricted stock and stock appreciation rights. SFAS
No. 123R will require the Company to expense SBP awards with compensation cost for SBP
transactions measured at fair value. The FASB originally stated a preference for a lattice
model because it believed that a lattice model more fully captures the unique
characteristics of employee stock options in the estimate of fair value, as compared to
the Black-Scholes model which the Company currently uses for its footnote disclosure. The
FASB decided to remove its explicit preference for a lattice model and not require a
single valuation methodology. SFAS No. 123R requires the Company to adopt the new
accounting provisions either prospectively or retrospectively beginning in the first quarter
of 2007. The Company has not yet determined either the method or the impact of
applying the various provisions of SFAS No. 123R.

In
November 2004, the FASB issued SFAS 151, Inventory Costs, an amendment of ARB No. 43,
which is effective for inventory costs incurred by the Company beginning fiscal year 2006.
The amendments made by SFAS 151 will improve financial reporting by clarifying that
abnormal amounts of idle facility expense, freight, handling costs, and wasted materials
(spoilage) should be recognized as current-period charges and by requiring the allocation
of fixed production overheads to inventory based on the normal capacity of the production
facilities. The Company does not believe that the adoption of SFAS 151 will have a
significant effect on its financial statements.

In
December 2004, FASB issued SFAS 153, Exchanges of Non-monetary Assets, an amendment of APB
Opinion No. 29. This Statement is effective for non-monetary asset exchanges occurring in
fiscal periods beginning after June 15, 2005. This Statement eliminates the exception to
fair value for exchanges of similar productive assets and replaces it with a general
exception for exchange transactions that do not have commercial substance  that is,
transactions that are not expected to result in significant changes in the cash flows of
the reporting entity. The Company does not believe that the adoption of Statement 153 will
have a significant effect on its financial statements.

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Accounting for the
Transfer Pricing Effect on Inventory

During
the second quarter of fiscal year 2005 ended September 30, 2004, the Company determined
that the inter-company transfer price markup on inventory sent to MTS Limited for sale into the United Kingdom
market was not eliminated from the period-end inventory values. The cumulative effect
as of the year ended March 31, 2004 would have been a reduction in pretax income of
approximately $75,000. The cumulative effect as of the quarter ended June 30, 2004 would
have been an increase in the pretax loss of approximately $134,000. The cumulative impact
was reflected in the results in the quarter ended September 30, 2004. Management does not
believe that the impact of this adjustment is material to the March 31, 2004 financial
statements from a quantitative and qualitative perspective, or to the operating results
and earnings trend for the year ending March 31, 2005.

Elimination of a Contingent
Liability

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.

Reclassification of
Certain Amounts

Certain
amounts on the consolidated balance sheet as of March 31, 2004 have been reclassified to
conform to the March 31, 2005 presentation. As of September 30, 2004, the Company refined
its classification of outstanding accounts payable disbursements in the accompanying
condensed consolidated balance sheets. This refinement resulted in a reclassification of
March 31, 2004 amounts of approximately $640,000 from long-term debt to a component of
accounts payable and accrued liabilities. In addition, the Company refined its
classification of certain machinery on rent with customers in the accompanying condensed
consolidated balance sheets, which resulted in a reclassification of March 31, 2004
amounts of approximately $114,000 from inventories, net, to a component of property and
equipment, net. The Company does not believe that the reclassifications have a material
effect on the March 31, 2004 financial statements, both from a quantitative and
qualitative perspective.

# NOTE 3  ACCOUNTS
RECEIVABLE

Accounts
Receivable is shown net of allowance for doubtful accounts of $199,000 and $187,000 at
March 31, 2005 and 2004, respectively. The changes in the allowance for doubtful accounts
are summarized as follows:

|                                | March 31,      |  | March 31,
|------------------------------- | -------------- |  | ---------
|
|
|                                | (In Thousands)
|
|Beginning Balance               |                |  | $        
|Provision for Doubtful Accounts |                |  |          
|Charge-Offs                     |                |  |          
|
|Ending Balance                  |                |  | $        
|

All
of the Companys accounts receivable are pledged as collateral on bank notes.

Concentration
of Credit Risk  The Company extends credit to customers on terms of payment
generally ranging from net 30 to 60 days without collateral or other forms of security.
The credit worthiness of each customer is routinely assessed and credit is extended based
upon a review of various information that is available. At March 31, 2005 and 2004, three
customers comprised approximately 32% and 31%, respectively, of the total outstanding
accounts receivable, and one of those customers represented 15% and 13%, respectively, of
the total accounts receivable on that date.

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# NOTE 4  INVENTORIES

Inventories
consist of the following:

|                                     | March 31,      |  | March 31,
|------------------------------------ | -------------- |  | ---------
|
|
|                                     | (In Thousands)
|
|Raw Material                         |                |  | $        
|Finished Goods and Work In Progress  |                |  |          
|Less:  Inventory Valuation Allowance |                |  |          
|
|                                     |                |  | $        
|

The
changes in the inventory valuation allowance are summarized as follows:

|                           | March 31,      |  | March 31,
|-------------------------- | -------------- |  | ---------
|
|
|                           | (In Thousands)
|
|Beginning Balance          |                |  | $        
|Provision for Obsolescence |                |  |          
|Charge-Offs                |                |  |          
|
|Ending Balance             |                |  | $        
|

All
of the Companys inventories are pledged as collateral on bank notes.

# NOTE 5  PROPERTY
AND EQUIPMENT

Property
and equipment consists of the following:

|                                                        | March 31,      |  | March 31,
|------------------------------------------------------- | -------------- |  | ---------
|
|
|                                                        | (In Thousands)
|
|Property and Equipment                                  |                |  | $        
|Leasehold Improvements                                  |                |  |          
|
|                                                        |                |  |          
|Less  Accumulated Depreciation
        and Amortization |                |  |          
|
|                                                        |                |  | $        
|

All
of the Companys property and equipment are pledged as collateral on bank notes.

Depreciation
of property and equipment and amortization of leasehold improvements was approximately
$1,242,000, $767,000 and $577,000 for fiscal years ending March 31, 2005, 2004 and 2003,
respectively.

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# NOTE 6  OTHER
ASSETS

Other
assets consists of the following:

|                                           | Amortization Period |        | March 31, |   | March 31,
|------------------------------------------ | ------------------- | ------ | --------- | - | ---------
|
|
|                                           | (In Thousands)     
|
|Product Development (see Note 2)           |                     | 3  5  |           | $ | 2,902    
|Less:  Accumulated
         Amortization   |                     |        |           |   | (1,235   
|
|                                           |                     |        |           | $ | 1,667    
|
|
|Patents                                    |                     | 5  17 |           | $ | 2,423    
|Less:  
        Accumulated Amortization   |                     |        |           |   | (1,313   
|
|                                           |                     |        |           | $ | 1,110    
|
|
|Financing Costs (see Note 8)               |                     | 3  5  |           | $ | 106      
|Less:  
          Accumulated Amortization |                     |        |           |   | (26      
|
|                                           |                     |        |           | $ | 80       
|
|
|Other                                      |                     | 5      |           | $ | 222      
|Less:  
          Accumulated Amortization |                     |        |           |   | (180     
|
|                                           |                     |        |           | $ | 42       
|
|Total Other Assets, Net                    |                     |        |           | $ | 2,899    
|

All
of the Companys intangible assets are pledged as collateral on bank notes.

The
following is a schedule by year for the amortization of patents:

| |                                                                                    |  | (In Thousands)
| | ---------------------------------------------------------------------------------- |  | --------------
| |                                                                                    |  |               
| | 2006
        ..................................................................... |  | $             
| | 2007
        ..................................................................... |  | $             
| | 2008
        ..................................................................... |  | $             
| | 2009
        ..................................................................... |  | $             
| | 2010
        ..................................................................... |  | $             

Patent
amortization expense was approximately $288,000, $196,000 and $82,000 for the fiscal years
ended March 31, 2005, 2004 and 2003, respectively.

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# NOTE 7  ACCOUNTS
PAYABLE AND ACCRUED LIABILITIES

Accounts
payable and accrued liabilities are comprised of the following:

|                                            | March 31,      |  | March 31,
|------------------------------------------- | -------------- |  | ---------
|
|
|                                            | (In Thousands)
|
|Accounts Payable/Trade                      |                |  | $        
|Accrued Liabilities:                        |                | 
|Salaries, Commissions and Employee Benefits |                |  |          
|Deferred Revenue                            |                |  |          
|Medical Claims                              |                |  |          
|Taxes                                       |                |  |          
|Other                                       |                |  |          
|                                            |                |  |          
|                                            |                |  | $        
|                                            |                |  |          

# NOTE 8  LONG-TERM
DEBT

Long-term
debt consists of the following:

|                                                                                                                                                   | March 31,      |  | March 31,
|-------------------------------------------------------------------------------------------------------------------------------------------------- | -------------- |  | ---------
|
|
|                                                                                                                                                   | (In Thousands)
|
|
|Revolving line of credit due June
        2007 plus interest payable monthly at 1% above the prime rate (5.75% at March 31, 2005)                  |                |  | $        
|
|Bank term loan payable in graduated monthly
        installments of $16,000$52,000 plus interest at 0.50% above the prime rate at March 31, 2005) |                |  |          
|through June 2007.
        The interest rate prior to the June 2004 refinancing was 1.25% above the prime rate                                     |                |  |          
|
|Note payable to related party (see Note 12)
        payable in monthly installments of $28,785 including interest at 6.25% through July 2008       |                |  |          
|
|Subordinated Note  Face amount of $4,000,000,
        less unamortized original issue discount of $803,000 at March 31,2004, due June 26, 2007    |                |  |          
|plus interest payable monthly at 14%                                                                                                               |                |  |          
|
|Other Notes and Agreements                                                                                                                         |                |  |          
|
|Total Long-Term Debt                                                                                                                               |                |  |          
|
|Less Current Portion (including $290,000
        and $244,000, respectively due to a related party)                                                |                |  |          
|
|Long-Term Debt Due After One Year                                                                                                                  |                |  | $        
|

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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, which is included as a component of
interest expense. 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. As of March 31, 2005, we had approximately
$3.4 million available on our revolving line of credit.

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 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 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.

The
following is a schedule by year of the regularly scheduled principal payments required on
the notes payable and long-term debts as of March 31, 2005:

|                                                                  |  | (In Thousands)
|----------------------------------------------------------------- |  | --------------
|                                                                  |  |               
|2006
        .................................................... |  | $             
|2007
        .................................................... |  | $             
|2008
        .................................................... |  | $             
|2009
        .................................................... |  | $             
|2010
        .................................................... |  | $             
|Thereafter
        ..........................................     |  | $             

Interest
expense for the years 2005, 2004 and 2003 amounted to approximately $613,000, $851,000 and $876,000,
respectively.

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 0.75%. 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.

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# NOTE 9  LEASE
COMMITMENTS

The following
is a schedule by year of future minimum rental payments required under operating leases,
primarily facility leases that have an initial or remaining non-cancelable lease term in
excess of one year as of March 31, 2005.

|                                                                  |  | (In Thousands)
|----------------------------------------------------------------- |  | --------------
|                                                                  |  |               
|2006
        .................................................... |  | $             
|2007
        .................................................... |  | $             
|2008
        .................................................... |  | $             
|2009
        .................................................... |  | $             
|Thereafter
        ..........................................     |  | $             

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 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.

The
Company 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.

Rent
expense amounted to approximately $788,000, $533,000 and $439,000 for the years ended March 31, 2005,
2004 and 2003, respectively.

# NOTE 10  401(K)
PROFIT SHARING PLAN

The
Company has a 401(K) Profit Sharing Plan. The Plan covers substantially all of its
employees. Contributions are at the employees discretion and may be matched by the
Company up to certain limits. For the years ended March 31, 2005, 2004 and 2003, the
Company contributed approximately $42,000, $38,000 and $43,000, respectively, to the plan.

40

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# NOTE 11  SELF
INSURANCE PLAN

The
Company has a medical health benefit self-insurance plan, which covers substantially all
of its employees. During the year ended March 31, 2005, the Company was reinsured for
claims that exceed $50,000 per participant and an annual maximum aggregate limit of
approximately $665,000. Reinsurance limits for subsequent fiscal years may change. Future
claims experience may affect the reinsurance limits that may be available to the Company
in subsequent fiscal years. The Company has established a reserve of approximately $49,000 and $101,000
at March 31, 2005 and 2004, respectively, for all unpaid claims incurred and reported
during fiscal year 2005 and an estimate of claims incurred during fiscal year 2005 that
have not been reported as of March 31, 2005.

# NOTE 12  RELATED
PARTY TRANSACTIONS

On July
28, 2003, the Company entered into an Asset Purchase Agreement with the Siegel Family
Trust (the Trust) to purchase the rights to certain proprietary technology
that had previously been available to the Company through a license agreement between the
Company and the Trust. The purchase price of the rights was $1,480,000. As part of the
agreement, the Trust agreed to forgive the royalties of $348,000, that were accrued and
unpaid on July 28, 2003, and terminated the license agreement. The purchase price will be
paid to the Trust in the form of a promissory note that is payable in sixty (60) monthly
payments of $28,785, beginning on August 1, 2003, including interest at the rate of 6.25%.
In order to assist the Company in determining the appropriate value of the rights to the
proprietary technology, the Board of Directors formed a special committee comprised of
three outside independent directors. The special committee engaged an independent third
party to conduct an appraisal of the value of the rights. The Company reduced the purchase
price of the rights by the amount of the unpaid royalties and recorded the resulting
amount as patents. The patents will be amortized over a five-year period, which represents
the remaining life of the patents related to these rights.

# NOTE 13  TAXES

The
components of income tax expense is as follows:

|                                                                                    | Years Ended March 31,
|----------------------------------------------------------------------------------- | ---------------------
|
|
|
|                                                                                    | (In Thousands)       
|
|Current Income Taxes                                                                |                      
|Deferred Income Taxes (Principally related to the use of the tax loss carryforward) |                      
|
|Income Tax Expense                                                                  |                      
|

Total
income tax expense for 2005, 2004 and 2003 resulted in effective tax rates of
42.7%, 37.5%, and 37.8%, respectively. The reasons for the differences between these
effective tax rates and the United States statutory rate of 34.0% are as follows:

|                                            | Years Ended March 31,
|------------------------------------------- | ---------------------
|
|
|
|                                            | (In Thousands)       
|
|Tax Expense at United States Statutory Rate |                      
|State Income Tax, Net                       |                      
|Other                                       |                      
|
|                                            |                      
|

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Deferred
taxes consist of the following:

|                                                        | March 31, 2005 |  | March 31, 2004
|------------------------------------------------------- | -------------- |  | --------------
|
|                                                        | (In Thousands)
|Deferred Tax Assets:                                    |                |  |               
|Tax Loss Carry
        Forward                          |                |  | $             
|Reserves and
        Provisions                         |                |  |               
|Inventory Valuation
        Allowance                   |                |  |               
|Allowance for
        Doubtful Accounts                 |                |  |               
|Depreciation/Amortization
         Temporary Difference |                |  |               
|
|Deferred Income Taxes                                   |                |  | $             
|

The
Company believes that it is more likely than not that these income tax benefits will be
realized in the future based in part on (1) the historical profitable operations of its
core business; (2) expectations that its core business will continue to be profitable; (3)
growth opportunities available for its core business; and (4) the length of time that the
net operating loss carryforwards are available to offset future taxable income. The income
tax benefit is comprised primarily of net operating loss carryforwards of approximately $3.9
million that are available to offset future taxable income. The carryforward losses expire
beginning in fiscal year 2011 and ending in fiscal year 2020.

The
Company anticipates that its net income, before taxes, will fully utilize the remaining
deferred tax asset. Accordingly, the entire deferred tax asset has been classified as
current.

# NOTE 14 
STOCKHOLDERS EQUITY

Stockholders
Equity consists of the following:

|                           | March 31, |        | March 31, |        | March 31,
|-------------------------- | --------- | ------ | --------- | ------ | ---------
|
|
|
|Par Value $.001 Per Share: |           |        |           |        |          
|Authorized Shares          |           | 10,000 |           | 10,000 |          
|Issued Shares              |           | 2,000  |           | 2,000  |          
|Outstanding Shares         |           | 2,000  |           | 2,000  |          

|                          | March 31, |            | March 31, |            | March 31,
|------------------------- | --------- | ---------- | --------- | ---------- | ---------
|
|
|
|Par Value $.01 Per Share: |           |            |           |            |          
|Authorized Shares         |           | 25,000,000 |           | 25,000,000 |          
|Outstanding Shares        |           | 5,836,220  |           | 4,863,120  |          
|Issued Shares             |           | 5,836,220  |           | 4,863,120  |          

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# Series A Convertible
Participating Preferred Stock

In
June 2002, the Company issued 2,000 shares of convertible preferred stock at $1,000 per
share. The holders of the convertible preferred stock are entitled to receive quarterly
dividends at the rate of 11% per annum. The dividends are payable in cash or shares of
convertible preferred stock at the Companys option and are cumulative. Through the
period ended March 31, 2005, all dividends were paid in cash. The preferred stock is
convertible into 847,457 shares of the Companys common stock at $2.36 per share. The
terms of the preferred stock contain a make-whole provision that obligates the Company to
pay certain amounts to the holders if they do not ultimately receive an amount equal to
the price per share of the common stock on the date they elect to convert the preferred
stock into common stock. On the date the convertible preferred stock was issued, the fair
market value of the Companys common stock was $2.77 per share based upon the closing
bid on the Over The Counter Bulletin Board (OTCBB). The difference between the fair market value of the shares
and the conversion price of the convertible preferred stock represented a constructive
dividend to the holders of the preferred stock in the amount of $347,000. In addition, the
terms of the convertible preferred stock agreement contains certain antidilution
provisions and also contains a make-whole provision that obligates the Company to pay
certain amounts to the holder of the 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 preferred stock into common stock. The Company followed the
accounting prescribed in EITF 98-5 and EITF 00-27 for the recording of the
convertible preferred stock and the constructive dividend.

The
make-whole provision and certain antidilution provisions also represent a contingent
beneficial conversion feature of the convertible preferred stock. The effect of this
feature may result in the issuance of additional shares at some future date; however,
since the issuance of these shares is contingent on future events, the effect of this
feature will be recorded at the time the events occur. In addition, if the holder of the
preferred stock receives a certain multiple of its investment once the preferred shares
are converted to common stock and the common stock is sold, the make-whole provision is no
longer applicable.

In
the event that the Company is required to make payments to the holders of the preferred
stock, it may elect to issue additional preferred stock in lieu of a cash payment.
Although 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, based upon current conditions, the Company believes it is unlikely that the
maximum number of shares would be issued.

# Stock Options

MTS
Medication Technologies, Inc. Stock Incentive Plan (the Plan) provides for the
granting to employees of incentive stock options within the meaning of Section 422 of the
Internal Revenue Code. A total of 2,100,000 shares of common stock are reserved for
issuance under the Plan. As of March 31, 2005, options to purchase 1,092,800 shares were
outstanding and 234,100 options are available for issuance under the Plan.

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Activity
related to options is as follows:

|                              |  |           |   |  | Weighted Average
|----------------------------- |  | --------- | - |  | ----------------
|
|
|
|
|Outstanding at March 31, 2002 |  | 1,449,806 |   |  | $               
|Granted in Fiscal 2002:       |  |          
|Officers and Directors        |  | 43,000    |   |  | $               
|Employees                     |  | 84,000    |   |  | $               
|Options Exercised             |  | (31,600   | ) |  | $               
|Options Expired               |  | (23,400   | ) |  | $               
|
|Outstanding at March 31, 2003 |  | 1,521,806 |   |  | $               
|Granted in Fiscal 2003:       |  |          
|Officers and Directors        |  | 89,000    |   |  | $               
|Employees                     |  | 43,333    |   |  | $               
|Options Exercised             |  | (404,791  | ) |  | $               
|Options Expired               |  | (78,048   | ) |  | $               
|
|Outstanding at March 31, 2004 |  | 1,171,300 |   |  | $               
|Granted in Fiscal 2004:       |  |          
|Officers and Directors        |  | 275,000   |   |  | $               
|Employees                     |  | 160,000   |   |  | $               
|Options Exercised             |  | (356,583  | ) |  | $               
|Options Expired               |  | (156,917  | ) |  | $               
|
|Outstanding at March 31, 2005 |  | 1,092,800 |   |  | $               
|

# Outstanding Shares

|                |  |         |  | Weighted Average |  |      
|--------------- |  | ------- |  | ---------------- |  | -----
|
|
|
|$0.48 -   $2.35 |  | 315,000 |  | 5.96             |  | $1.56
|2.50 -   $5.00  |  | 322,500 |  | 5.14             |  | $3.03
|$5.65 - $15.00  |  | 444,800 |  | 9.68             |  | $6.62

# Exercisable Shares

|                |  |         |  | Weighted Average |  |      
|--------------- |  | ------- |  | ---------------- |  | -----
|
|
|
|$0.48 -   $2.35 |  | 310,000 |  | 5.93             |  | $1.54
|2.50 -   $5.00  |  | 226,500 |  | 3.78             |  | $2.80
|$6.50 - $15.00  |  | 424,800 |  | 9.70             |  | $6.67

The options outstanding at March 31,
2005 expire on various dates commencing in October 2005 and ending in March 2014.

The weighted  average grant date
fair value of options  granted during fiscal years 2005,  2004 and 2003 was $4.44,  $3.48
and $1.75, respectively.

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# Warrants

Activity related to warrants is as
follows:

|                              |  |          | Weighted Average
|----------------------------- |  | -------- | ----------------
|
|
|
|Outstanding at March 31, 2002 |  | 129,600  |                 
|Granted in Fiscal 2002        |  | 691,517  |                 
|Warrants Exercised            |  | (47,000  | )               
|Warrants Expired              |  |         |                 
|
|Outstanding at March 31, 2003 |  | 774,117  |                 
|Granted in Fiscal 2003        |  |         |                 
|Warrants Exercised            |  | (178,100 | )               
|Warrants Expired              |  |         |                 
|
|Outstanding at March 31, 2004 |  | 596,017  |                 
|Granted in Fiscal 2004        |  |         |                 
|Warrants Exercised            |  | (566,517 | )               
|Warrants Expired              |  |         |                 
|
|Outstanding at March 31, 2005 |  | 29,500   |                 
|

The
warrants expire on various dates commencing August 2008 and ending April 2009. All
warrants are 100% vested at March 31, 2005.

The
weighted average grant date fair value of warrants granted during fiscal years 2005, 2004
and 2003 was $0, $0 and $2.72, respectively.

In
April 2004, the investors exercised their rights to acquire 566,517 shares of common stock
under the terms of the warrant agreement and sold the common stock.

# Stock Appreciation
Rights and Other Stock Based Compensation

The
Company entered into a stock appreciation rights agreement (SAR) with its
Chief Executive Officer (CEO) in 1995. The agreement, which was for a term of
10 years, called for additional compensation payable annually equal to 3.25% of the total
of the incremental increase in the value of the Companys outstanding common stock.
The CEO may elect to receive shares of restricted stock, valued at 50%, in lieu of cash
compensation earned pursuant to the terms of the SAR. The CEO historically elected to
receive additional compensation in cash. Additional compensation expense for the years
ended March 31, 2003 and 2002 totaled $7,000 and $143,000, respectively based upon the
presumption that the CEO would continue to elect to receive the additional compensation in
cash instead of restricted stock. The Company and the CEO terminated the SAR during the
first part of fiscal 2004 and entered into another long-term incentive compensation
agreement that does not provide the CEO with the right to elect to receive compensation in
the form of common stock.

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# NOTE 15  EARNINGS
PER SHARE

Net income
per common share basic is computed by dividing net income available to common stockholders
by the basic weighted average number of shares of common stock outstanding and any
warrants outstanding that are exercisable at a de minimus amount. For diluted weighted
average shares outstanding, the Company used the treasury stock method to calculate the
Common Stock equivalents that the stock options would represent.

The
net earnings per common share diluted calculation for the fiscal years ended March 31,
2005, 2004 and 2003 included the dilutive effect of 2,000 shares of convertible preferred
stock which assumes conversion of the preferred stock using the if converted
method. Under that method the convertible preferred shares are assumed to be converted to
common shares (weighted for the number of days assumed to be outstanding during the
period) and dividends associated with the preferred shares are added back to net income
available to common stockholders. For purposes of the if converted
calculation, 847,457, 847,457 shares and 645,000 shares of common stock was assumed to be
converted for the twelve months ended March 31, 2005, 2004 and 2003 respectively.
Additionally, dividends of $220,000, $220,000 and $168,000 for the twelve months ended
March 31, 2005, 2004 and 2003, respectively, were added back to net income available to
common stockholders for purposes of calculating diluted earnings per share using this
method. The diluted earnings per share calculation for the fiscal year ended March 31,
2003 was conformed to the calculation used for the fiscal years ended March 31, 2005 and
2004.

The
following table sets forth the computation of income from continuing operations per basic
and diluted common share:

|                                                                      | Year Ended                                        |  | Year Ended |       | Year Ended
|--------------------------------------------------------------------- | ------------------------------------------------- |  | ---------- | ----- | ----------
|
|
|                                                                      | (In Thousands, Except Earnings Per Share Amounts)
|Numerator:                                                            |                                                   |  |            |       |           
|
|Net Income Available to Common Stockholders                           |                                                   |  | $          | 1,074 |           
|                                                                      |                                                   |  |            |       |           
|Denominator:                                                          |                                                   | 
|
|Weighted Average Shares Outstanding  Basic                           |                                                   |  |            | 5,639 |           
|
|Add:  Effect of Dilutive Options and Warrants                         |                                                   |  |            | 643   |           
|
|Effect of Conversion of Convertible Preferred Stock into Common Stock |                                                   |  |            | 847   |           
|                                                                      |                                                   |  |            |       |           
|Weighted Average Shares Outstanding  Diluted                         |                                                   |  |            | 7,129 |           
|                                                                      |                                                   |  |            |       |           
|Net Income Per Common Share  Basic                                   |                                                   |  | $          | 0.19  |           
|                                                                      |                                                   |  |            |       |           
|Net Income Per Common Share  Diluted                                 |                                                   |  | $          | 0.18  |           
|                                                                      |                                                   |  |            |       |           

The
effect of 9,800 and 11,400 options were not included in the calculation of net income per
diluted common share for fiscal years 2005 and 2004, respectively, as the effect would have been
anti-dilutive.

Certain
provisions of the convertible preferred stock issued in June 2002 may result in the
issuance of additional shares at some future date if certain events occur. Since these
events have not yet occurred, and therefore the number of additional shares is not known,
no additional shares have been included in the earnings per share calculation (see Note
14).

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# NOTE 16  FINANCING
COSTS

The
Company incurred approximately $1,478,000 of financing costs during the fiscal year ended
March 31, 2003, including the value of the warrants issued to the Companys financial
advisors related to obtaining certain financing in June 2002. The financing costs were
allocated between the components of the financing that represented debt and equity. The
financing costs that were allocated to the debt proceeds, $1,110,000, have been recorded
as another asset and will be amortized over the repayment term of the various loans and
notes. The financing costs that were allocated to the equity proceeds, $368,000, have been
recorded as a reduction of the equity proceeds. These financing costs were written off as
part of the June 2004 debt refinancing. We incurred $105,000 in new financing costs in
June 2004. Amortization expense related to the financing costs was $501,000 and $364,000
for the fiscal years ended March 31, 2005 and 2004, respectively.

# NOTE 17 
CONTINGENCIES

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.

The
Company is involved in certain claims and legal actions arising in the ordinary course of
business including the matter referred to above. There can be no assurances that these
matters will be resolved on terms acceptable to the Company. 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 the financial position, results of operations or liquidity of the Company.

# NOTE 18 
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION

|                                                  | 2005 |   | 2004 |  | 2003
|------------------------------------------------- | ---- | - | ---- |  | ----
|
|Supplemental Disclosure of Cash Flow Information:
|                                                 
|Cash Paid for Interest                            |      | $ | 622  |  | $   
|
|Cash Paid for Taxes                               |      | $ | 61   |  | $   
|

2005  Non-Cash
Activities

During
the fiscal year ended March 31, 2005, the company:

1. Reclassified approximately $134,000 in machine rentals from inventory to equipment.
2. Reclassified approximately $47,000 in tax overpayments from deferred tax asset to receivable.
3. Transferred approximately $87,000 in product development costs to inventory.
4. Transferred approximately $25,000 in product development costs to equipment.

47

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# REPORT OF INDEPENDENT
REGISTERED PUBLIC ACCOUNTANTS ONFINANCIAL STATEMENT SCHEDULE

Board of Directors MTS Medication
Technologies, Inc.

In
connection with our audit of the consolidated financial statements of MTS Medication
Technologies, Inc. and Subsidiaries referred to in our report dated May 18, 2005, which is
included in the Companys Annual Report on SEC Form 10-K as of and for the year ended
March 31, 2005, we have also audited Schedule II for the years ended March 31, 2005, 2004
and 2003. In our opinion, this schedule presents fairly in all material respects, the
information required to be set forth herein.

|                                | 
|------------------------------- | 
|/s/ GRANT
        THORNTON, LLP | 
|Tampa, Florida                  | 
|                                | 
|May 18, 2005                    | 

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SCHEDULE II

# MEDICAL TECHNOLOGY
SYSTEMS, INC. AND SUBSIDIARIES

# VALUATION AND
QUALIFYING ACCOUNTSFOR THE YEARS ENDED MARCH 31, 2003, 2004 AND 2005

|Column A                             |  | Column B |   | Column C |  | Column D |     | Column E
|------------------------------------ |  | -------- | - | -------- |  | -------- | --- | --------
|
|
|
|
|
|Inventory Valuation Allowance:       |  |          |   |          |  |          |     |         
|
|Year Ended March 31, 2003            |  |          | $ | 40       |  | $        | 250 |         
|Year Ended March 31, 2004            |  |          | $ | 183      |  | $        | 112 |         
|Year Ended March 31, 2005            |  |          | $ | 195      |  | $        | 132 |         
|
|Self Insured Medical Claims Reserve: |  |         
|
|Year Ended March 31, 2003            |  |          | $ | 102      |  | $        | 285 |         
|Year Ended March 31, 2004            |  |          | $ | 86       |  | $        | 480 |         
|Year Ended March 31, 2005            |  |          | $ | 101      |  | $        | 591 |         
|
|Allowance for Doubtful Accounts:     |  |         
|
|Year Ended March 31, 2003            |  |          | $ | 101      |  | $        | 50  |         
|Year Ended March 31, 2004            |  |          | $ | 138      |  | $        | 152 |         
|Year Ended March 31, 2005            |  |          | $ | 187      |  | $        | 57  |         

49

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# SIGNATURES

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

|Dated:  June 28, 2005 |  |  | Medical Technology Systems, Inc. | 
|--------------------- |  |  | -------------------------------- | 
|
|                      |  |  |                                  | 
|                      |  |  |                                  | 

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

|Signature            |  | Title                                                                             |  | Date          | 
|-------------------- |  | --------------------------------------------------------------------------------- |  | ------------- | 
|
|
|/s/Todd E. Siegel    |  | Chairman of
        the Board of Directors, President and Chief Executive Officer |  | June 28, 2005 | 
|Todd E. Siegel       |  | (principal executive officer)                                                     |  |               | 
|
|/s/Michael Branca    |  | Chief Financial
        Officer and Vice President                                |  | June 28, 2005 | 
|Michael Branca       |  | (principal financial officer)                                                     |  |               | 
|
|/s/Michael Stevenson |  | Chief Operating
        Officer                                                   |  | June 28, 2005 | 
|Michael Stevenson    |  |                                                                                   |  |               | 
|
|/s/Teresa Dunbar     |  | Principal Accounting
         Officer and Controller                              |  | June 28, 2005 | 
|Dunbar               |  |                                                                                   |  |               | 
|
|/s/John Stanton      |  | Director and Vice
        Chairman of the Board of Directors                      |  | June 28, 2005 | 
|John Stanton         |  |                                                                                   |  |               | 
|
|/s/David W. Kazarian |  | Director                                                                          |  | June 28, 2005 | 
|David W. Kazarian    |  |                                                                                   |  |               | 
|
|/s/Frank A. Newman   |  | Director                                                                          |  | June 28, 2005 | 
|Frank A. Newman      |  |                                                                                   |  |               | 
|
|/s/Allen Braswell    |  | Director                                                                          |  | June 28, 2005 | 
|Allen Braswell       |  |                                                                                   |  |               | 

50

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EXHIBIT INDEX

|Exhibit No. |       | Description
|----------- | ----- | -----------
|
|
|            | 3.1   |            
|            | 3.2   |            
|            | 3.3   |            
|            | 3.4   |            
|            | 3.5   |            
|            | 4.1   |            
|            | 4.2   |            
|            | 10.1  |            
|            | 10.2  |            
|            | 10.3  |            
|            | 10.4  |            
|            | 10.5  |            
|            | 10.6  |            
|            | 10.7  |            
|            | 10.8  |            
|            | 10.9  |            
|            | 10.10 |            
|            | 10.11 |            
|            | 10.12 |            
|            | 10.13 |            
|            | 10.14 |            
|            | 10.15 |            
|            | 10.16 |            
|            | 10.17 |            
|            | 10.18 |            
|            | 10.19 |            
|            | 10.20 |            
|            | 10.21 |            
|            | 10.22 |            
|            | 10.23 |            
|            | 10.24 |            

51

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|Exhibit No. |       | Description
|----------- | ----- | -----------
|
|            |       |            
|            | 10.25 |            
|            | 10.26 |            
|            | 10.27 |            
|            | 10.28 |            
|            | 10.29 |            
|            | 10.30 |            
|            | 10.31 |            
|            | 10.32 |            
|            | 10.33 |            
|            | 10.34 |            
|            | 10.35 |            
|            | 10.36 |            
|            | 10.37 |            
|            | 10.38 |            
|            | 10.39 |            
|            | 10.40 |            
|            | 10.41 |            
|            | 10.42 |            
|            | 10.43 |            
|            | 10.44 |            

52

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|Exhibit No. |       | Description
|----------- | ----- | -----------
|
|            |       |            
|            | 10.45 |            
|            | 10.46 |            
|            | 10.47 |            
|            | 23    |            
|            | 31.1  |            
|            | 31.2  |            
|            | 32.1  |            
|            | 32.2  |            
|            |       |            
|(1)         |       |            
|(2)         |       |            
|(3)         |       |            
|(4)         |       |            
|(5)         |       |            
|(6)         |       |            
|(7)         |       |            
|(8)         |       |            
|(9)         |       |            
|(10)        |       |            
|(11)        |       |            
|(12)        |       |            
|(13)        |       |            
|(14)        |       |            
|(15)        |       |            
|(*)         |       |            

53

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EXHIBIT 23

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTANTS

We
have issued our reports dated May 18, 2005 accompanying the consolidated financial
statements and schedule included in the Annual Report of MTS Medication Technologies, Inc.
on Form 10-K for the year ended March 31, 2005. We hereby consent to the incorporation by
reference of said reports in the Registration Statement of MTS Medication Technologies,
Inc. on Forms S-8 (File No. 333-56384 effective March 1, 2001) and Form S-3 (File No.
333-112212, effective February 6, 2004).

|                        |  | 
|----------------------- |  | 
|/s/ GRANT THRONTON, LLP |  | 
|Tampa, Florida          |  | 
|                        |  | 
|May 18, 2005            |  | 

54

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# CERTIFICATIONS

EXHIBIT 31.1

I, Todd E. Siegel, certify that:

| | 1. | I have reviewed this annual report on Form 10-K of Medical Technology Systems,
               Inc.;
| | -- | ---------------------------------------------------------------------------------------------------

| | 2. | Based on my knowledge, this annual report does not contain any untrue statement
               of a material fact or omit to state a material fact necessary to make the
               statements made, in light of the circumstances under which such statements were
               made, not misleading with respect to the period covered by this annual report;
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 3. | Based on my knowledge, the financial statements, and other financial information
               included in this annual report, fairly present in all material respects the
               financial condition, results of operations and cash flows of the registrant as
               of, and for, the periods presented in this annual report;
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 4. | The registrants other certifying officer(s) and I are responsible for
               establishing and maintaining disclosure controls and procedures (as defined in
               Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | a) | Designed such disclosure controls and procedures, or caused such disclosure
               controls and procedures to be designed under our supervision, to ensure that
               material information relating to the registrant, including its consolidated
               subsidiaries, is made known to us by others within those entities, particularly
               during the period in which this annual report is being prepared;
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | b) | Evaluated the effectiveness of the registrants disclosure controls and
               procedures presently in this annual report our conclusions about the
               effectiveness of the disclosure controls and procedures, as of the end of the
               period covered by this annual report based on such evaluation; and
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | c) | Disclosed in this annual report any change in the registrants internal
               control over financial reporting that occurred during the registrants most
               recent fiscal quarter (the registrants fourth fiscal quarter in the case
               of an annual report) that has materially affected, or is reasonably likely to
               materially affect, the registrants internal control over financial reporting; and
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 5. | The registrants other certifying officer(s) and I have disclosed, based on
               our most recent evaluation of internal control over financial reporting, to the
               registrants auditors and the audit committee of the registrants
               board of directors (or persons performing the equivalent function):
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | a) | All significant deficiencies and material weaknesses in the design or operation
               of internal controls over financial reporting which are reasonably likely to
               adversely affect the registrants ability to record, process, summarize and
               report financial information; and
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | b) | Any fraud, whether or not material, that involves management or other employees
               who have a significant role in the registrants internal controls over
               financial reporting.
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                      |  |  |  | 
|--------------------- |  |  |  | 
|Date:   June 28, 2005 |  |  |  | 
|                      |  |  |  | 
|                      |  |  |  | 

55

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EXHIBIT 31.2

I, Michael Branca, certify that:

| | 1. | I have reviewed this annual report on Form 10-K of Medical Technology Systems,
               Inc.;
| | -- | ---------------------------------------------------------------------------------------------------

| | 2. | Based on my knowledge, this annual report does not contain any untrue statement
               of a material fact or omit to state a material fact necessary to make the
               statements made, in light of the circumstances under which such statements were
               made, not misleading with respect to the period covered by this annual report;
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 3. | Based on my knowledge, the financial statements, and other financial information
               included in this annual report, fairly present in all material respects the
               financial condition, results of operations and cash flows of the registrant as
               of, and for, the periods presented in this annual report;
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 4. | The registrants other certifying officer(s) and I are responsible for
               establishing and maintaining disclosure controls and procedures (as defined in
               Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | a) | Designed such disclosure controls and procedures, or caused such disclosure
               controls and procedures to be designed under our supervision, to ensure that
               material information relating to the registrant, including its consolidated
               subsidiaries, is made known to us by others within those entities, particularly
               during the period in which this annual report is being prepared;
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | b) | Evaluated the effectiveness of the registrants disclosure controls and
               procedures presently in this annual report our conclusions about the
               effectiveness of the disclosure controls and procedures, as of the end of the
               period covered by this annual report based on such evaluation; and
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | c) | Disclosed in this annual report any change in the registrants internal
               control over financial reporting that occurred during the registrants most
               recent fiscal quarter (the registrants fourth fiscal quarter in the case
               of an annual report) that has materially affected, or is reasonably likely to
               materially affect, the registrants internal control over financial
               reporting; and
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 5. | The registrants other certifying officer(s) and I have disclosed, based on
               our most recent evaluation over internal controls of financial reporting, to the
               registrants auditors and the audit committee of the registrants
               board of directors (or persons performing the equivalent function):
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | a) | All significant deficiencies and material weaknesses in the design or operation
               of internal control over financial reporting which are reasonably likely to
               adversely affect the registrants ability to record, process, summarize and
               report financial information; and
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | b) | Any fraud, whether or not material, that involves management or other employees
               who have a significant role in the registrants internal controls over
               financial reporting.
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                      |  |  |  | 
|--------------------- |  |  |  | 
|Date:   June 28, 2005 |  |  |  | 
|                      |  |  |  | 
|                      |  |  |  | 

56

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Exhibit 32.1

CERTIFICATION PURSUANT TO 18 U.S.C.
SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Annual Report
of Medical Technology Systems, Inc. (the Company) on Form 10-K for the year
ended March 31, 2005 as filed with the Securities and Exchange Commission on the date
hereof (the Form 10-K), I, Todd E. Siegel, President and Chief Executive
Officer of the Company, certify, pursuant to 18 U.S.C. §1350, as adopted pursuant to
§906 of the Sarbanes-Oxley Act of 2002, that:

| | (1) | The Form 10-K fully complies with the requirements of Section 13(a) or 15(d) of
               the Securities Exchange Act of 1934 (15 U.S.C. 78m or 78o(d)); and
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (2) | The information contained in the Form 10-K fairly presents, in all material
               respects, the financial condition and results of operations of the Company.
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                      | 
|------------------------------------- | 
|Dated:  June 28, 2005                 | 
|                                      | 
|/s/Todd E. Siegel                     | 
|Todd E. Siegel                        | 
|President and Chief Executive Officer | 
|                                      | 
|                                      | 

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Exhibit 32.2

CERTIFICATION PURSUANT TO 18 U.S.C.
SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Annual Report
of Medical Technology Systems, Inc. (the Company) on Form 10-K for the year
ended March 31, 2005 as filed with the Securities and Exchange Commission on the date
hereof (the Form 10-K), I, Michael Branca, Vice President and Chief
Financial Officer of the Company, certify, pursuant to 18 U.S.C. §1350, as adopted
pursuant to §906 of the Sarbanes-Oxley Act of 2002, that:

| | (1) | The Form 10-K fully complies with the requirements of Section 13(a) or 15(d) of
               the Securities Exchange Act of 1934 (15 U.S.C. 78m or 78o(d)); and
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (2) | The information contained in the Form 10-K fairly presents, in all material
               respects, the financial condition and results of operations of the Company.
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                           | 
|------------------------------------------ | 
|Dated:  
        June 28, 2005             | 
|                                           | 
|/s/Michael Branca                          | 
|Michael Branca                             | 
|Vice President and Chief Financial Officer | 
|                                           | 
|                                           | 

58