---

# 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, 2003
| | ------------------------------------

# 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

| |                                                        | 
| | ------------------------------------------------------ | 
| | MEDICAL TECHNOLOGY SYSTEMS, INC.                       | 
| |                                                        | 
| | (Exact Name of Registrant as Sepcified in Its Charter) | 

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

| |                                                        
| | -------------------------------------------------------
| | 12920 Automobile Boulevard,
        Clearwater, Florida
| |                                                        
| | (Adress 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

Approximate aggregate market value of
voting Common Stock held by non-affiliates was $8,500,000 as of September 30, 2002.

The number of shares outstanding of
the Registrants Common Stock, $.01 par value, was 4,393,623 as of June 25, 2003.

Documents Incorporated by
Reference

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

Total number of pages, including
cover page  55 (excluding exhibits)

---

# MEDICAL TECHNOLOGY SYSTEMS, INC.

# CLEARWATER, FLORIDA

# 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        | 
|                              |  |                                                                                                     | 
|PART III                      |  |                                                                                                     | 
|Item 10                       |  | Directors and Executive Compensation                                                                | 
|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                       |  | Controls and Procedures                                                                             | 
|Item 15                       |  | Principal Accountant Fees and Services                                                              | 
|                              |  |                                                                                                     | 
|PART IV                       |  |                                                                                                     | 
|Item 16                       |  | Exhibits, Financial Statement, Schedules
        and Reports on Form 8-K                            | 
|                              |  |                                                                                                     | 
|Index to Financial Statements |  |                                                                                                     | 
|                              |  |                                                                                                     | 
|Signatures                    |  |                                                                                                     | 
|                              |  |                                                                                                     | 
|Certifications                |  |                                                                                                     | 

i.

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Table of Contents

# 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 the Company from time to time, in filings with
the Securities and Exchange Commission 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 products or services of the Company, 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 the Companys Securities and Exchange Commission
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. The Company undertakes 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.

# ITEM 1.      BUSINESS

Introduction

Medical
Technology Systems, 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. (MTS Packaging) and MTS
Packaging Systems International, Ltd. (MTSPI).

In
fiscal year ending March 31, 2000, the Company sold the assets of two business segments,
Medical Technology Laboratories, Inc. (MTL) and LifeServ Technologies, Inc.
 (LifeServ). MTL provided clinical laboratory testing services including
analytical tests of blood tissues and other bodily fluids. LifeServ was a health care
information technology company that provided solutions for medication management and
point-of-care electronic documentation for hospitals and other health care facilities.

MTS
Packaging primarily manufactures and sells disposable medication punch cards, packaging
equipment and ancillary products throughout the United States. Its customers are
predominantly pharmacies that supply nursing homes, assisted living and correctional
facilities with prescription medications for their patients. MTS Packaging manufactures
its proprietary disposable punch cards and packaging equipment in its own facilities. This
manufacturing process uses integrated machinery for manufacturing the disposable
medication punch cards. The disposable medication punch cards and packaging equipment are
designed to provide a cost effective method for pharmacies to dispense medications. MTS
Packagings medication dispensing systems and products provide innovative methods for
dispensing medications in disposable packages. Medical Technology Systems International,
Ltd. distributes products for MTS Packaging in the United Kingdom.

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

1

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Table of Contents

Risk Factors

| | 1. | 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.
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 2. | Because we depend on a limited number of customers, a reduction in sales to any
               one of our customers could cause a significant decline in our revenue.
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | For the fiscal year ended March 31, 2003, our 10 largest customers accounted for approximately
50% of our net revenue and the two largest customers accounted for approximately 28% of our net revenue.
We are dependent upon the continued growth,viability and financial stability of our customers whose
industries have experienced consolidation, pricing and regulatory pressures. We expect to continue to
depend upon a relatively small number of customers for a significant percentage of our net revenue.
Consolidation among our customers may further reduce the number of customers that generate
a significant percentage of our revenues and exposes us to increased risks relating to
dependence on a small number of customers. A significant reduction in sales to any of our
customers or a customer exerting significant pricing and margin pressures on us, would
have a material adverse effect on our results of operations.
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 3 | The markets for our manufacturing and
engineering services 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 engineering and technical personnel;
| | - | --------------------------------------------------------------------------

| |  | maintain technological leadership;
| | - | ----------------------------------

| |  | develop and
                market manufacturing services 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.
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

2

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Table of Contents

| | 4. | We rely on short-term contracts with most of our clients. Because long-term
contracts are not a significant part of our business, future results cannot be
reliably predicted by considering past trends or extrapolating past results.
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 5. | We are dependent on the proper functioning of our information systems in operating our business.
               Our critical information systems used in our daily operations identify and match
               staffing resources and client assignments and perform billing and accounts
               receivable functions. Our information systems are protected through physical and
               software safeguards and we have backup remote processing capabilities. They are
               still vulnerable, however, to hurricanes, other storms, flood, fire, terrorist
               acts, earthquakes, power loss, telecommunications failures, physical or software
               break-ins, computer viruses and similar events. If our critical information
               systems fail or are otherwise unavailable, we would have to accomplish these
               functions manually, which could temporarily impact our ability to identify
               business opportunities quickly, to maintain billing and clinical records
               reliably, and to bill for services efficiently. In addition, we depend on third
               party vendors for certain functions whose future performance and reliability we
               can not warranty.
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 6. | 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 services of any key executive for any reason could have a
               material adverse effect upon us. Our success also depends upon our ability to
               identify, develop, and retain qualified operating employees, particularly
               management, client servicing, and candidate recruiting employees. We expend
               significant resources in recruiting and training our employees, and the pool of
               available applicants for these positions is limited. The loss of some of our
               operating management and client servicing and candidate recruiting employees
               could have an adverse effect on our operations, including our ability to
               establish and maintain client, candidate and professional and technical
               personnel relationships.
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 7. | 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 the Company attempts
               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.
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 8. | Our stock price may be volatile. Our common stock is traded on 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
               reach 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 the prices which they pay. The volatility also could impair
our ability in the future to offer common stock as a source of additional capital.
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 9. | We have many competitors and expect new competitors to enter our market, which
               could adversely affect our ability to increase revenues, 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.
| | - | ---------------------------------------------------------------------------

3

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Table of Contents

| |  | 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.
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Segments

The
operation of the Company is composed of one operating segment, medication packaging and
dispensing systems.

Products

MTS
Packaging manufactures proprietary medication dispensing systems and related products for
use by medication prescription service providers. 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.

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

The
retail price of MTS Packagings machinery ranges from $1,100 to $580,000 depending
upon the degree of automation and options requested by a customer. The punch cards
typically retail from approximately $155 to $225 per 1,000 cards and blisters, depending
upon the size, design and volume of cards ordered by a customer. MTS Packaging has placed
approximately 1,865 medication dispensing systems with pharmacy clientele since the
inception of the Company. MTS Packaging also sells prescription labels and ancillary
supplies designed to complement sales of disposable medication punch cards. MTS Packaging
had approximately $869,000 in unshipped orders as of June 20, 2003 compared to
approximately $915,000 as of June 20, 2002.

Research and Development

The
Company expended approximately $172,000, $87,000 and $119,000 on research and development
activities for each of the fiscal years ended March 31, 2003, 2002 and 2001, respectively.
In addition, the Company directed its product development efforts primarily towards the
completion of several versions of its OnDemand machine during this fiscal year. The
Company expended approximately $556,000 on product development during the fiscal year
ended March 31, 2003. The majority of these expenditures were made for the OnDemand
machine project.

Manufacturing Processes

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

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

4

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Table of Contents

MTS
Packaging is dependent on a number of suppliers for the raw materials essential in the
production of its products. The Company believes that relations are adequate with its
existing vendors. However, there can be no assurance that such relations will be adequate
in the future or that shortages of any of these raw materials will not arise, causing
production delays. MTS Packaging believes it is necessary to maintain an inventory of
materials and finished products that allows for customer orders to be shipped within the
industry standard of 2-3 days. The inability to obtain raw materials on a timely basis and
on acceptable terms may have a material adverse effect on the future financial performance
of the Company.

Markets and Customers

MTS
Packagings products are sold primarily throughout the United States through its
sales organization and independent sales representatives. In addition, MTS Packaging
Systems International distributes product in the United Kingdom. MTS Packaging also
participates in trade shows and training seminars. Sales to countries outside the U.S.
represent less than ten percent (10%) of the total revenue. Sales represented approximately 15% and
13%, respectively, of MTS Packagings revenue in the fiscal year ended March 31,
2003.

The
primary customers for MTS Packagings proprietary packaging machinery and the related
disposable punch cards, labels and ancillary supplies are pharmacies that supply
prescription medication to nursing homes. These pharmacies serve from 250 to 34,000
nursing home beds per location and many serve the sub-acute, assisted living, correctional
and home health care markets as well.

Competition

The
pharmacy customers of MTS Packaging supply prescribed medications to nursing homes and
assisted living facilities, which are the primary market for MTS Packagings
products. This market is highly competitive. There are several competitors that have
developed machines that automate the packaging and sealing of solid medications into punch
cards. The Company believes that products developed by the Companys competitors are
not as efficient as the Companys systems because they are not as automated. The
Companys 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 the Companys competitors have
been in business longer and have substantially greater resources than the Company. There
is no assurance that the Company will be able to compete effectively with competitive
methods of dispensing medication or other punch card systems.

The
Companys primary competitors for punch card dispensing systems in the United States are Drug Package,
Inc., AutoMed and RX Systems, Inc. The Company believes that its automated
proprietary packaging machinery distinguishes MTS Packaging from its competitors
less automated systems. The Companys new automated packaging machinery can fill and
seal over 900 disposable medication cards per hour. The Company believes that its
production rates will meet the needs of its customers who are consolidating and require
higher productivity to meet their growing market share.

Proprietary Technology

The
Siegel Family QTIP Trust (the Trust) is the holder of certain patents and
other proprietary rights for the equipment and processes that MTS Packaging uses and
sells. The Trust is the assignor of all such proprietary and patent rights used in the
Companys business that were invented or developed by Harold B. Siegel, the founder
of the Company. The Trust and the Company are parties to a license agreement whereby the
Company is granted an exclusive and perpetual license from the Trust to use the know-how
and patent rights in the manufacture and sale of the Companys medication dispensing
systems. MTS Packaging is heavily dependent upon the continued use of the proprietary
rights associated with these patents. The patents begin expiring in 2004 continuing
through 2008.

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

5

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Table of Contents

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

Government Regulations

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

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

Employees

As
of June 26, 2003, the Company employed 156 persons full time. None of the Companys
employees are covered by a collective bargaining agreement. The Company considers its
relationship with employees to be good.

# ITEM 2.      PROPERTIES

The
Company leases a 79,600 square foot plant consisting of office space and air-conditioned
manufacturing and warehousing space near the St. Petersburg/Clearwater International
Airport at 12920 Automobile Boulevard. The Companys corporate administrative offices
and the primary manufacturing facilities for MTS Packaging are at this location. The lease
expires on June 30, 2005. The Companys current monthly lease payments are
approximately $36,950 including tax. The premises are generally suited for light
manufacturing and/or distribution.

MTS
Packaging also leases approximately 5,200 square feet at approximately $3,200 per month
for office and warehouse space at 21530 Drake Road, Cleveland, Ohio. The lease expires on
March 31, 2004.

MTS Packaging Systems International, Ltd. rents office and warehouse space on a month-to-month basis at 17 Bury Lane, Withnell,
Chorley, Lancashire, United Kingdom, PR6 8RX.

# ITEM 3.      LEGAL PROCEEDINGS

The
Company is involved in certain claims and legal actions arising in the ordinary course of
business. There can be no assurances that these matters will be resolved on terms
acceptable to 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.

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.

6

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Table of Contents

# PART II

# ITEM 5.      MARKET FOR
REGISTRANTS COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

Price Range of the
Companys Securities

The
Companys common stock began trading on the American Stock Exchange
(AMEX) on December 26, 2002. The common stock previously traded on the
over-the-counter market. The table below sets forth the range of high and low bid
information for the Companys common stock for the periods indicated, as reported by
the AMEX and NASD OTC Bulletin Board. Over-the-counter market quotations reflect
inter-dealer prices, without retail markup, markdown or commission and may not necessarily
represent actual transactions.

|2004 Fiscal
      Year |  | High |   | Low  | 
|---------------------- |  | ---- | - | ---- | 
|                       |  |      |   |      | 
|First
      Quarter    |  |      | $ | 4.32 | 
|                       |  |      |   |      | 
|
|                       |  |      |   |      | 
|                       |  |      |   |      | 
|First
      Quarter    |  |      | $ | 2.92 | 
|Second
      Quarter   |  |      | $ | 2.60 | 
|Third
      Quarter    |  |      | $ | 2.38 | 
|Fourth
      Quarter   |  |      | $ | 3.45 | 
|                       |  |      |   |      | 
|
|                       |  |      |   |      | 
|                       |  |      |   |      | 
|First
      Quarter    |  |      | $ | 2.85 | 
|Second
      Quarter   |  |      | $ | 2.55 | 
|Third
      Quarter    |  |      | $ | 2.95 | 
|Fourth
      Quarter   |  |      | $ | 3.00 | 

As
of June 20, 2003, there were approximately 2,500 holders of record of the Companys
common stock.

The
Company has not declared a dividend on its common stock and does not currently intend to
declare a dividend. Furthermore, the Company is restricted from paying dividends on its
common stock pursuant to the terms of its loan agreements. The Company intends to reinvest
its future earnings, if any, into the operations of its business.

The
Companys Series A Convertible Participating Preferred Stock is not a publicly traded
security.

In
June 2002, the Company issued 2,000 shares of convertible participating preferred stock to
an accredited investor for an aggregate consideration of approximately $2,000,000. 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 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. 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.

7

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Table of Contents

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 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.

The
following table provides information about the Companys equity compensation plans as
of March 31, 2003 and including (1) the Medical Technology Systems, Inc. 1997 Stock Option
Plan and (2) the Medical Technology Systems, Inc. 1994 Stock Option Plan.

# Equity Compensation
Plan Information

|                                                                   |  |           |  |       |  | Number of Securities | 
|------------------------------------------------------------------ |  | --------- |  | ----- |  | -------------------- | 
|
|
|
|
|
|                                                                   |  |           |  |       |  |                      | 
|
|
|Equity Compensation Plans
        Approved By Security Holders     |  | 1,521,806 |  | $2.10 |  | 173,101              | 
|                                                                   |  |           |  |       |  |                      | 
|Equity Compensation Plans Not
        Approved By Security Holders |  | 0         |  | 0     |  | 0                    | 
|                                                                   |  |           |  |       |  |                     
|                                                                   |  |           |  |       |  |                      | 
|Total                                                              |  | 1,521,806 |  |       |  | 173,101              | 
|                                                                   |  |           |  |       |  |                     

8

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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,
|-------------------------------------------------- | ---------------------
|                                                  
|
|
|
|
|Income Statement Data:                             |                      
|
|Net Sales                                          |                      
|Cost of Sales and Other Expenses                   |                      
|                                                   |                      
|Income from Continuing Operations                  |                      
|Before Income Taxes, Discontinued Operations       |                      
|and Extraordinary Gain                             |                      
|Income Tax Benefit (Expense)                       |                      
|(Loss) from Discontinued Operations                |                      
|Gain on Forgiveness of Debt of Discontinued        |                      
|Operations                                         |                      
|Gain (Loss) on Disposal of 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 (Loss) Per Basic Common Share         |                      
|                                                   |                      
|Net Earnings Per Diluted Common Share              |                      
|From Continuing Operations                         |                      
|Income (Loss) from Discontinued Operations         |                      
|                                                   |                      
|Net Earnings (Loss) Per Diluted Common Share       |                      
|                                                   |                      
|
|
|                                                  
|
|
|
|
|Income Statement Data:                             |                      
|Balance Sheet Data:                                |                      
|Net Working Capital                                |                      
|Assets                                             |                      
|Short-Term Debt                                    |                      
|Long-Term Debt                                     |                      
|Stockholders' Equity (Deficit)                     |                      

9

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

# Overview

The
Companys core business, MTS Packaging, experienced profitable growth in fiscal 2003.
Revenue increased by 18.6%, and earnings before interest, taxes depreciation and
amortization (EBITDA) increased 4.6%. The Company continued to reinvest
significant portions of its earnings in new capital equipment to meet production demands
resulting from increased revenue and also made a substantial investment in the development
of its new OnDemand packaging machine, as well as additional disposable products for
new markets. Net income available to common stockholders declined 32% primarily due to
costs associated with the refinance of the Companys long-term debt in June 2002.

# Fiscal Year 2003
Compared to Fiscal Year 2002

# Results of Operation

Net Sales

Net
sales for the fiscal year ended March 31, 2003 increased 18.6% to $29.4 million from $24.8
million the prior year. Net sales increased in fiscal 2003 primarily as a result of an
increase in disposable punch cards sold to existing and new customers in the U.S., an
increase in disposable punch cards and machines sold in the UK and the sale of three (3)
OnDemand machines in the U.S. Selling prices for disposable punch cards were stable during
fiscal 2003.

The
Company expects that selling prices for disposable punch cards may decrease in the next
fiscal year depending on competitive factors. The number of punch cards sold is expected
to increase in the next fiscal year as a result of the addition of new customers in the
U.S. and the UK and a general increase in the number of nursing home and assisted living
facility residents served by the Companys customers. Additional sales of the
OnDemand machine in the next fiscal year are also expected to contribute to an overall
growth in net sales.

Cost of Sales

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

During
the fiscal year ended March 31, 2003, the Company wrote off approximately $106,000 in
obsolete inventory primarily related to packaging equipment. In addition, the Company
determined that its estimate of the inventory valuation allowance, related to obsolescence
and slow moving inventory, should be increased by $143,000 primarily because during the
fiscal year ended March 31, 2003, several new packaging machines were introduced into the
product line. As a result, the Company believes that the likelihood has increased that
certain machines and machine parts related to earlier versions of packaging machines may
become obsolete. The Company will continue to evaluate its inventory valuation
allowance and adjust it if deemed necessary.

The
Company expects that raw material costs may increase in the next fiscal year and that
direct labor costs should remain stable. Overhead expenses may continue to rise. However,
it is expected 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, 2003.

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Selling, General and
Administrative Expenses (SG&A)

SG&A
expenses for the year ended March 31, 2003 increased 18.9% to $6.3 million compared to
$5.3 million the prior year. The increase resulted primarily from the costs associated
with additional personnel, training and benefit costs for employees that were added to
support the overall growth of the company, costs associated with the Companys UK
operations and higher research and development activities. In addition, during the
previous fiscal year, the Company reduced its estimated bad debt reserve by $180,000. The
Company regularly reviews the adequacy of its bad debt reserve by specific customer
account analysis as well a review of historical trends. During the current fiscal year,
the Company reviewed its bad debt reserve and did not make a reduction in the reserve.
Also, the Company periodically reviews the status of its development projects. During
fiscal 2003, the Company determined that certain development projects were not going to be
completed, and therefore, wrote off approximately $115,000 in costs that had been
previously capitalized.

The
Company expects SG&A expenses to 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, 2003.

Depreciation and
Amortization Expense

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

Interest Expense

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

Amortization of Financing
Costs and Original Issue Discount

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

Income Tax Expense

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

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

The
equity component of the June 2002 refinancing was comprised, in part, by 2,000 shares of
convertible preferred stock, which were issued at $1,000 per share. The preferred stock is
convertible into 847,457 shares of the Companys common stock at $2.36 per share. On
the date the convertible preferred stock was issued, the fair market value of the Companys common stock was $2.77 per share.
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.

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Convertible Preferred
Stock Dividends

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

# Fiscal Year 2002
Compared to Fiscal Year 2001

# Results of Operations

Net Sales

Net
sales for the fiscal year ended March 31, 2002 increased 15.3% to $24.8 million from $21.5
million the prior fiscal year. Net sales increased in fiscal 2002 primarily as a result of
an increase in disposable punch cards sold to existing customers and increases in the
sales of packaging machinery. In addition, the Company added new customers during the year
as a result of it marketing efforts that were directed towards smaller independent
pharmacies throughout the United States and the United Kingdom. Selling prices for
disposable products increased slightly compared to the prior year.

The
Company expected that the volume of disposable products, as well as packaging machinery,
would increase as the Company obtained new customers in the U.S., successfully penetrated
new markets, such as in the United Kingdom, and sold more products to its existing
customer base. In addition, the Company expected that the completion of a beta site
testing of its new OnDemand machine would result in additional revenue from the sale of
OnDemand machines to existing customers.

Cost of Sales

Cost
of sales for the fiscal year ended March 31, 2002 increased 15.2% to $14.4 million from
$12.5 million the prior year. Cost of sales as a percentage of net sales increased
slightly to 58.2% from 58.1% for the prior year. The increase in cost of sales resulted
from the costs associated with increased net sales. The slight increase in the cost of
sales percentage resulted primarily from increases in raw material costs. Increased labor
costs were generally offset by improvements in labor efficiencies.

The
Company expected that its raw material costs would increase throughout the next year.
However, depending on competitive factors, the Company anticipated that its selling prices
to customers could be increased in order to offset the increase in raw material costs.
During the last two fiscal years, the Company made significant investments in new
production machinery, which was anticipated to result in manufacturing efficiencies that
would generally offset increases in labor costs.

Selling, General and
Administrative Expenses (SG&A)

SG&A
expenses for the fiscal year ended March 31, 2002 increased 4.0% to $5.2 million compared
to $5.0 million the prior year. The increase resulted primarily from increases in sales
and marketing expenses associated with increased net sales. In addition, administration
expenses increased compared to the prior year primarily due to expenditures for investor
relations, stockholder communications and investment banking services. The increase in
SG&A expenses was partially offset by an adjustment of $180,000 in the Company reserve
for bad debts. The Company expected SG&A expenses to increase during fiscal 2003 as a
result of increased sales and marketing efforts, as well as the addition of several
administrative personnel to accommodate the increased business activity.

Depreciation and
Amortization

Depreciation
and amortization expenses for the fiscal year ended March 31, 2002 increased 14.8% to
$926,000 compared to $807,000 the prior year. The increase results primarily from the
depreciation of manufacturing equipment that was placed in service during the second half
of the prior fiscal year and throughout the fiscal year ended March 31, 2002.

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Interest Expense

Interest
expense for the fiscal year ended March 31, 2002 decreased 6.3% to $919,000 from $981,000
the prior year. The decrease in interest expense resulted from the decrease in long-term
debt outstanding that resulted from principal payments made throughout the year.

Income Tax Expense

Income
tax expense for the fiscal year ended March 31, 2002 was $1,234,000 compared to an income
tax benefit of $5,570,000 the prior year. Income tax expense for the fiscal year ended
March 31, 2002 represents taxes at the statutory federal and state rates. During the prior
fiscal year, the Company recorded an income tax benefit of $5,719,000 resulting from the
recognition of tax benefits, primarily net operating loss carryforwards, that had not
previously been recognized.

# Liquidity and Capital
Resources

The
operations of the Company provided $3.2 million in the fiscal year ended March 31, 2003
compared to $3.1 million the prior year. The increase resulted primarily from an increase
in EBITDA, which was partially offset by increases in accounts receivable and inventory.

Investing
activities used $1.7 million during the fiscal year ended March 31, 2003, approximately
the same as the prior year.

Financing
activities used $1.5 million during the fiscal year ended March 31, 2003 compared to $1.0
million the prior year. The increase results primarily from the fact that the Company
incurred certain costs in order to refinance its long-term debt in June 2002.

The
Company had working capital of $4.5 million at March 31, 2003.

In
June 2002, the Company repaid the entire amount, $11,310,000, of its bank term loan with
the proceeds of a new revolving line of credit, term loans, a subordinated note and
convertible preferred stock. The revolving line of credit allows for borrowing of up to
$5,000,000 based upon advance rates that are applied to the Companys eligible
accounts receivable and inventory. Interest is payable on the revolving line of credit
monthly based on the average unpaid balance at the prime rate plus 1.0%. At March 31,
2003, the outstanding balance of the revolving line of credit was $3,465,000. The total
amount available on the revolving line of credit was $4,117,000 at March 31, 2003 based
upon eligible accounts receivable and inventory. At June 25, 2003, the outstanding balance
on the revolving line of credit was $3,029,000.

One
term loan in the amount of $700,000 is repayable in equal monthly installments over a five
(5) year term, plus interest at the prime rate plus 1.25%. Another term loan in the amount
of $2,000,000 is repayable in equal monthly installments over two (2) years plus interest
at the prime rate plus 2.25% and includes an excess cash flow payment provision. The
excess cash flow payment that is due July 31, 2003 is $673,000, however, the Company expects that the
lender and the Company will agree to modify the loan agreement to provide for the repayment
of the amount over an extended period of time.

The
revolving line of credit and the term loans are secured by the Companys accounts
receivable, inventory, machinery and equipment and all other assets of the Company.

The
subordinated note in the amount of $4,000,000 is repayable in five (5) years with interest
only, at 14%, payable monthly until the maturity of the note. The subordinated note is
secured by a second lien on all of the assets of the Company. In addition, the
subordinated note holders were issued 566,517 warrants to purchase common stock
exercisable for ten (10) years at $.01 per share. (Subject to certain antidilution
provisions.)

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. The preferred stock is
convertible into 846,000 shares of the Companys common stock at $2.36 per share.

13

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The
warrant agreement and the terms of the convertible preferred stock contain certain
anti-dilution provisions and a make-whole provision that obligates the Company to pay
certain amounts to the holders of the warrants and convertible 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 purchase the common shares that underlie the warrants
and the convertible preferred stock. The warrant agreement also contains a provision that
may obligate the Company to pay certain amounts to the holders of the warrants in the
event that there is a change in control of the voting common stock of the Company, or if
there is a sale of the Company or a public offering of the Companys common stock.

In
the event that the Company is required to make payments to the holders of the warrants
and/or preferred stock, it may elect to issue additional warrants and/or preferred stock
in lieu of a cash payment. Although the make-whole provision and other provisions of the
warrant agreement and 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.

The
revolving line of credit, the term loans and the subordinated notes each contain certain
financial covenants that, among other things, requires the maintenance of certain
financial ratios, limits the amount of capital expenditures and requires the Company to
obtain the lenders approval for certain matters. The Company was in compliance with all
provisions of the loan agreements at March 31, 2003 and May 31, 2003.

The
Companys short-term and long-term liquidity is primarily dependent on its ability to
generate cash flow from operations. Inventory levels may change based upon the
Companys success in selling its OnDemand machine. 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.

The
Company has several new product development projects underway that are expected to be
funded by cash flow from operations. These projects are monitored on a regular basis to
attempt to ensure that the anticipated costs associated with them do not exceed the
Companys ability to fund them from cash flow from operations. In addition, the
Company has a $1,000,000 capital equipment line of credit available to fund purchases of
machinery and equipment. To date, this line of credit has not been utilized.

The
Company believes that the cash generated from operations during the next fiscal year and
its available line of credit will be sufficient to meet its capital expenditures, product
development, working capital needs and the principal payments required by its loan
agreements.

# Off-Balance Sheet
Arrangements and Aggregate Contractual Obligations

Off-Balance
Sheet Arrangements. In accordance with the definition under new Securities and Exchange
Commission rules, the following qualify as off-balance sheet arrangements:

- any obligation under certain guarantees or 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 under certain derivative instruments;
- any obligation under a material variable interest held by the registrant in an
unconsolidated entity that 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.

The
Company does not have any off-balance sheet arrangements as defined above.

14

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# Estimates and Critical
Accounting Policies

The
preparation of the Companys consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities as of the date of
the financial statements and revenues and expenses for the respective period-ended for
such statements. The determination of estimates requires the use of judgment since future
events and their affect on the Companys 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 the Companys financial statements.
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 the Companys actual results are subject to the
risk factors listed above under Item 1. Business. Nevertheless, management of
the Company believes the following items involve a higher degree of complexity and,
judgment and therefore, has commented on these items below.

1.        
          Valuation of Accounts Receivable at March 31, 2003 and 2002, respectively.

| | The Companys allowance for doubtful accounts of $138,000 and $101,000 at March 31, 2003
and 2002, respectively, is based on managements estimates of the credit-worthiness
of its customers, current economic conditions and historical information. In the opinion
of management, the Companys 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 the Companys
financial statements. Should business conditions deteriorate or any large customer default
on its obligations to the Company, this allowance may need to be significantly increased,
which would have a negative impact upon the Companys operations.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

2.            
          Inventory Obsolescence Valuation Allowance.

| | The Companys allowance for inventory obsolescence and slow moving inventory is reviewed
on a regular basis. The Company reviews various information related to the age and
turnover of specific inventory items to assist in its 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 $183,000 and $40,000 at March 31, 2003 and 2002, respectively.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

3.            
          Self Insurance Plan Reserve

| | The Company established a reserve for unpaid medical claims of $84,000 and $102,000 at March
31, 2003 and 2002, 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.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

4.            
          Deferred Tax Asset Valuation Allowance

| | The Companys deferred tax asset is comprised primarily of a tax loss carryforward. The
Company believes 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 its 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 its deferred tax asset.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

5.     
                Impairment Valuations

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

15

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| | The Company evaluates the recoverability of its 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 the Companys 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 of the Company believes no impairment existed for any of the periods presented.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

6.     
               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,
the Company reviews the viability and recoverability of these project costs.  During fiscal 2003,
approximately $115,000 of these costs associated with discontinued projects were written off.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

7.     
               Estimated Liabilities

| | The
Company makes a number of estimates in the ordinary course of business. Historically, past
changes to these estimates have not had a material impact on the Companys financial
condition. However, circumstances could change, which would alter future financial
information based upon a change in estimated-vs.-actual results.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The Company is 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, the Company has not had to pay any legal
settlements in excess of existing insurance coverage.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

8.     
               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. To date,
warranty costs have not been material.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

# ITEM 7A.      QUANTITATIVE
AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

The
Company does not have any material market risk sensitive financial instruments.

# ITEM 8.     FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA

The
financial statements required by this item are contained at the end of this report.

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

None

16

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Table of Contents

# 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 the Companys definitive proxy statement, which will be filed by the
Company within 120 days after the end of the Companys 2003 fiscal year.

Code of Ethics and
Business Conduct

The
Companys commitment to ethical business conduct is a fundamental shared value of our
Board of Directors, management and employees and critical to the Companys success.
On June 26, 2003, the Company adopted a Code of Business Conduct and Ethics applicable to
all employees, consultants, agents and representatives of the Company. The Code provides
that our representatives will uphold the Companys ethical standards as vigorously as
they pursue its financial objectives and that honesty and integrity will not be
compromised by the Companys people anywhere at any time. A copy of the Code of
Ethics and Business Conduct will be posted on the Companys web site and is
available, upon request by contacting Michael P. Conroy, Chief Financial Officer, at
michaelc@mtsp.com

# ITEM 11.      EXECUTIVE
COMPENSATION

The
information required by this item is incorporated herein by reference to the information
included in the Companys definitive proxy statement, which will be filed by the
Company within 120 days after the end of the Companys 2003 fiscal year.

# ITEM 12.       SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

The
information required by this item is incorporated herein by reference to the information
included in the Companys definitive proxy statement, which will be filed by the
Company within 120 days after the end of the Companys 2003 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 the Companys definitive proxy statement, which will be filed by the
Company within 120 days after the end of the Companys 2003 fiscal year.

# ITEM 14.      CONTROLS AND
PROCEDURES

A.         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 Exchange Act is recorded, processed,
summarized and reported, within the time periods specified in the SECs rules and
forms. Disclosure controls and procedures include, without limitation, controls and
procedures designed to ensure that information required to be disclosed in 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. Within the 90 days prior to the filing
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

17

---

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| | of this report, the Company carried out an evaluation, under the supervision and with the
participation of the Companys management, including the Companys Chief
Executive Officer and Chief Financial Officer, of the effectiveness of the design and
operation of the Companys disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14(c) and 15d-14(c)).  Based upon and as of the date
of that evaluation, Chief Executive Officer and Chief Financial Officer concluded that the
Companys disclosure controls and procedures are effective to ensure that information
required to be disclosed in the reports the Company files and submits under the Exchange
Act is recorded, processed summarized and reported as and when required.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

B.    
      Changes in Internal Controls

| | There were no significant changes in the Companys internal controls or other factors that
could significantly affect those controls subsequent to the date of the Companys
most recent evaluation including any corrective actions with regard to significant
deficiencies and material weaknesses.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

# ITEM 15.     PRINCIPAL
ACCOUNTANT FEES AND SERVICES

Information
concerning principal accountant fees and services appears in the proxy statement under the
heading Independent Auditors  Audit Fees, Audit Related
Fees, Tax Fees and All Other Fees and is incorporated herein
by reference.

18

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# PART IV

# ITEM 16.     
   EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

| |  |           
| |  | ----------
| |  | (a)       
| |  | 1. and 2. 
| |  | 3         
| |  | (c)       
| |  | **3.1     
| |  | *3.1(a)   
| |  | **3.2     
| |  | **4.2     
| |  | **10.2    
| |  | 10.2(a)(8)
| |  | 10.2(b)(8)
| |  | **10.3(a) 
| |  | **10.3(b) 
| |  | 10.18(7)  
| |  | 10.19(7)  
| |  | 10.22(7)  
| |  | 10.23(7)  
| |  | 10.24(7)  
| |  | 10.25(7)  
| |  | 10.29(10) 
| |  | 10.42(14) 
| |  | 10.43(14) 
| |  | 10.45(14) 
| |  | 10.46(14) 
| |  | 10.48(14) 
| |  | 10.49(14) 
| |  | 10.52(16) 
| |  | 10.53(16) 
| |  | 10.53(16) 
| |  | 10.59(22) 
| |  | 10.60(22) 
| |  | 10.62(23) 

19

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| |  |           |  |                                                                                                                                                                                                                                                                                                                                        | 
| |  | --------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 
| |  | 10.63(23) |  | Amendment One to Executive Stock Appreciation Rights and Non-Qualified Stock Option Agreement dated October 28, 2000 between Medical Technology Systems, Inc. and Todd E. Siegel.                                                                                                                                                      | 
| |  | 10.64(24) |  | Registration Statement regarding the Medical Technology Systems, Inc. 1997 Stock Option Plan dated February 27, 2001.                                                                                                                                                                                                                  | 
| |  | 10.65(25) |  | Employment Agreement between Medical Technology Systems, Inc. and Michael P. Conroy dated March 2, 2001.                                                                                                                                                                                                                               | 
| |  | 10.66(26) |  | Subordination Agreement between Eureka I, L.P., LaSalle Business Credit, Inc., Medical Technology Systems, Inc., MTS Packaging Systems, Inc. dated June 26, 2002.                                                                                                                                                                      | 
| |  | 10.67(26) |  | Securities Purchase Agreement between Eureka I, L.P. and Medical Technology Systems, Inc. dated June 26, 2002.                                                                                                                                                                                                                         | 
| |  | 10.66(26) |  | Senior Subordinated Note between Eureka I, L.P. and Medical Technology Systems, Inc. dated June 26, 2002.                                                                                                                                                                                                                              | 
| |  | 10.68(26) |  | Registration Rights Agreement between Eureka I, L.P. and Medical Technology Systems, Inc. dated June 26, 2002                                                                                                                                                                                                                          | 
| |  | 10.69(26) |  | Tag-Along Agreement between Eureka I, L.P., Medical Technology Systems, Inc. and JADE Partners dated June 26, 2002                                                                                                                                                                                                                     | 
| |  | 10.70(26) |  | Tag-Along Agreement between Eureka I, L.P., Medical Technology Systems, Inc. and Todd E, Siegel dated June 26, 2002.                                                                                                                                                                                                                   | 
| |  | 10.71(26) |  | Guarantor Security Agreement between Eureka I, L.P., MTS Packaging Systems, Inc., Medication Management Technology, Inc., Clearwater Medical Services, Inc., Medical Technology Laboratories, Inc., Medication Management Systems, Inc., Systems Professionals, Inc., Cart-Ware, Inc., Vangard Pharmaceutical Packaging, Inc. LifeServ | 
| |  | 10.72(26) |  | Guaranty Agreement between Eureka I, L.P. Medical Technology Systems, Inc. dated June 26, 2002.                                                                                                                                                                                                                                        | 
| |  | 10.73(26) |  | Securities Pledge Agreement between Eureka I, L.P., Medical Technology Systems, Inc. and LifeServ Technologies, Inc. dated June 26, 2002                                                                                                                                                                                               | 
| |  | 10.74(26) |  | Security Agreement between Eureka I, L.P., Medical Technology Systems, Inc. date June 26, 2002.                                                                                                                                                                                                                                        | 
| |  | 10.75(26) |  | Trademark Security Agreement between Eureka I, L.P. and Medical Technology Systems, Inc. dated June 26, 2002.                                                                                                                                                                                                                          | 
| |  | 10.76(26) |  | Trademark Security Agreement between Eureka I, L.P. and MTS Packaging Systems, Inc. dated June 26, 2002.                                                                                                                                                                                                                               | 
| |  | 10.77(26) |  | Patent Security Agreement between Eureka I, L.P. and MTS Packaging Systems, Inc. dated June 26, 2002.                                                                                                                                                                                                                                  | 
| |  | 10.78(26) |  | Patent Security Agreement between Eureka I, L.P. and The Siegel Family Revocable Trust dated June 26, 2002.                                                                                                                                                                                                                            | 
| |  | 10.79(26) |  | Patent Security Agreement between Eureka I, L.P. and Medical Technology Systems, Inc. dated June 26, 2002.                                                                                                                                                                                                                             | 
| |  | 10.80(26) |  | Warrant Agreement between Eureka I, L.P. and Medical Technology Systems, Inc. dated June 26, 2002.                                                                                                                                                                                                                                     | 
| |  | 10.81(26) |  | Warrant Agreement between Westminster Securities Corporation and Medical Technology Systems, Inc. dated June 26, 2002.                                                                                                                                                                                                                 | 
| |  | 10.82(26) |  | Loan and Security Agreement between LaSalle Business Credit, Inc. as Agent, Standard Federal Bank National Association Inc. as Lender and Medical Technology Systems, Inc. and MTS Packaging Systems, Inc. dated June 26, 2002.                                                                                                        | 
| |  | 10.83(26) |  | Term Note A between LaSalle Business Credit, Inc. as Agent, Standard Federal Bank National Association Inc. as Lender and Medical Technology Systems, Inc. and MTS Packaging Systems, Inc. dated June 26, 2002.                                                                                                                        | 
| |  | 10.84(26) |  | Term Note B between LaSalle Business Credit, Inc. as Agent, Standard Federal Bank National Association Inc. as Lender and Medical Technology Systems, Inc. and MTS Packaging Systems, Inc. dated June 26, 2002                                                                                                                         | 
| |  | 10.85(26) |  | Revolving Credit Note between LaSalle Business Credit, Inc. as Agent, Standard Federal Bank National Association Inc. as Lender and Medical Technology Systems, Inc. and MTS Packaging Systems, Inc. dated June 26, 2002                                                                                                               | 
| |  | 10.86(26) |  | Capex Note between LaSalle Business Credit, Inc. as Agent, Standard Federal Bank National Association Inc. as Lender and Medical Technology Systems, Inc. and MTS Packaging Systems, Inc. dated June 26, 2002.                                                                                                                         | 
| |  | 10.87(26) |  | Continuing Unconditional Guaranty between LaSalle Business Credit, Inc. as Agent, Standard Federal Bank National Association Inc. as Lender and Medical Technology Systems, Inc. and MTS Packaging Systems, Inc. dated June 26, 2002.                                                                                                  | 

20

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|     |  |           |  |                                                                                                                                                                                                                                                                                                                               | 
|---- |  | --------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 
|     |  | 10.88(26) |  | Securities Pledge Agreement between LaSalle Business Credit, Inc. as Agent, Standard Federal Bank National Association Inc. as Lender and Medical Technology Systems, Inc. and MTS Packaging Systems, Inc. dated June 26, 2002.                                                                                               | 
|     |  | 10.89(26) |  | Guarantor Security Agreement between LaSalle Business Credit, Inc. as Agent, Standard Federal Bank National Association Inc. as Lender, Medication Management Technologies, Inc., Clearwater Medical Services, Inc., Medical Technology Laboratories, Inc., Medication Management Systems, Inc., Systems Professionals, Inc., | 
|     |  | 10.90(26) |  | Trademark Security Agreement between LaSalle Business Credit, Inc. as Agent, Standard Federal Bank National Association Inc. as Lender and MTS Packaging Systems, Inc. dated June 26, 2002.                                                                                                                                   | 
|     |  | 10.91(26) |  | Trademark Security Agreement between LaSalle Business Credit, Inc. as Agent, Standard Federal Bank National Association Inc. as Lender and Medical Technology Systems, Inc. dated June 26, 2002.                                                                                                                              | 
|     |  | 10.92(26) |  | Patent Security Agreement between LaSalle Business Credit, Inc. as Agent, Standard Federal Bank National Association Inc. as Lender and Medical Technology Systems, Inc. dated June 26, 2002.                                                                                                                                 | 
|     |  | 10.93(26) |  | Patent Security Agreement between LaSalle Business Credit, Inc. as Agent, Standard Federal Bank National Association Inc. as Lender and The Siegel Family Revocable Trust dated June 26, 2002.                                                                                                                                | 
|     |  | 10.94(26) |  | Patent Security Agreement between LaSalle Business Credit, Inc. as Agent, Standard Federal Bank National Association Inc. as Lender and MTS Packaging Systems, Inc. dated June 26, 2002.                                                                                                                                      | 
|     |  | 10.95(27) |  | Grant Thornton, LLC Consent on Form s-8 Filed March 1, 2001                                                                                                                                                                                                                                                                   | 
|*    |  |           |  | Incorporated herein by reference to same Exhibit(s), respectively, Registration Statement No. 33-40678 filed with the Commission on May 17, 1991                                                                                                                                                                              | 
|**   |  |           |  | Incorporated herein by reference to same Exhibit(s), respectively, Registration Statement (SEC File No. 33-17852)                                                                                                                                                                                                             | 
|(10) |  |           |  | Incorporated herein by reference to Form 10-K for the year ended March 31, 1997                                                                                                                                                                                                                                               | 
|(11) |  |           |  | Incorporated herein by reference to Form 8-K dated May 2, 1997                                                                                                                                                                                                                                                                | 
|(12) |  |           |  | Incorporated herein by reference to Form 10-Q dated February 13, 1998 for the quarter ended December 31, 1997                                                                                                                                                                                                                 | 
|(13) |  |           |  | Incorporated herein by reference to Form 10-K for the year ended March 31, 1998                                                                                                                                                                                                                                               | 
|(14) |  |           |  | Incorporated herein by reference to Form 10Q filed November 12, 1998 for quarter ending September 30, 1998                                                                                                                                                                                                                    | 
|(15) |  |           |  | Incorporated herein by reference to Form 8K filed on June 9, 1999 for event dated May 25, 1999                                                                                                                                                                                                                                | 
|(16) |  |           |  | Incorporated herein by reference to Form 10-K for year ended March 31, 1999                                                                                                                                                                                                                                                   | 
|(17) |  |           |  | Incorporated herein by reference to Form 8-K filed July 16, 1999                                                                                                                                                                                                                                                              | 
|(18) |  |           |  | Incorporated herein by reference to Form 10-Q dated November 12, 1999 for the quarter ending September 30, 1999                                                                                                                                                                                                               | 
|(19) |  |           |  | Incorporated herein by reference to Form 8-K filed January 18, 1999                                                                                                                                                                                                                                                           | 
|(20) |  |           |  | Incorporated herein by reference to Form 10-K for year ending March 31, 2000                                                                                                                                                                                                                                                  | 
|(21) |  |           |  | Incorporated herein by reference to Form 8-K filed July 17, 2000                                                                                                                                                                                                                                                              | 
|(22) |  |           |  | Incorporated herein by reference to Form 10-Q filed November 7, 2000 for quarter ending September 30, 2000                                                                                                                                                                                                                    | 
|(23) |  |           |  | Incorporated herein by reference to Form 10-Q filed February 6, 2001 for quarter ending December 31, 2000                                                                                                                                                                                                                     | 
|(24) |  |           |  | Incorporated herein by reference to Form S-8 filed February 27, 2001.                                                                                                                                                                                                                                                         | 
|(25) |  |           |  | Incorporated herein by reference to Form 10-K for year ending March 31, 2001                                                                                                                                                                                                                                                  | 
|(26) |  |           |  | Incorporated herein by reference to Form 10-K for year ending March 31, 2002                                                                                                                                                                                                                                                  | 
|(27) |  |           |  | Filed herein                                                                                                                                                                                                                                                                                                                  | 

21

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MEDICAL TECHNOLOGY
SYSTEMS, INC.

INDEX TO FINANCIAL STATEMENTS

|                                                                                                                               | Page |        
|------------------------------------------------------------------------------------------------------------------------------ | ---- | -------
|
|REPORT OF INDEPENDENT
        CERTIFIED PUBLIC ACCOUNTANTS                                                                     |      | 23     
|                                                                                                                               |      |        
|CONSOLIDATED FINANCIAL STATEMENTS                                                                                              |      |        
|                                                                                                                               |      |        
|Consolidated Balance Sheets as of March 31, 2003 and 2002                                                                      |      | 24     
|                                                                                                                               |      |        
|Consolidated Statement of Earnings for the Years Ended March 31, 2003, 2002 and 2001                                           |      | 25     
|                                                                                                                               |      |        
|Consolidated Statements of Changes in Stockholders' Equity (Deficit) for the Years
        Ended March 31, 2003, 2002 and 2001 |      | 26     
|                                                                                                                               |      |        
|Consolidated Statements of Cash Flow for the Years Ended March 31, 2003, 2002 and 2001                                         |      | 27     
|                                                                                                                               |      |        
|Notes to Consolidated Financial Statements                                                                                     |      | 28 - 46
|                                                                                                                               |      |        
|REPORT OF INDEPENDENT CERTIFIED
        PUBLIC ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULE                                     |      | 48     
|                                                                                                                               |      |        
|FINANCIAL STATEMENT SCHEDULE                                                                                                   |      |        
|                                                                                                                               |      |        
|Schedule II - Valuation and Qualifying Accounts                                                                                |      | S-1    

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.

22

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Report of Independent
Certified Public Accountants

Board of DirectorsMedical Technology
Systems, Inc. and SubsidiariesClearwater, Florida

We have audited the accompanying consolidated balance sheets of Medical Technology Systems, Inc. and
Subsidiaries as of March 31, 2003 and 2002 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, 2003. These financial statements are the responsibility of
the Companys management. Our responsibility is to express an opinion on these
financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted in the United
States of America.  Those standards require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement. An audit
includes examining on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis for our
opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the
consolidated financial position of Medical Technology Systems, Inc. and Subsidiaries as of
March 31, 2003 and 2002, and the consolidated results of operations and cash flows for
each of the three years in the period ended March 31, 2003 in conformity with accounting
principles generally accepted in the United States of America.

|                        |  | 
|----------------------- |  | 
|/s/ Grant Thornton, LLP |  | 
|GRANT THRONTON, LLP     |  | 
|Tampa, Florida          |  | 
|                        |  | 
|June 10, 2003           |  | 

23

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# 

MEDICAL TECHNOLOGY
SYSTEMS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
MARCH 31, 2003 AND 2002(In Thousands)

# ASSETS

|                                  | 2003 |  | 2002 |       
|--------------------------------- | ---- |  | ---- | ------
|                                  |      |  |      |       
|
|
|Current
      Assets:             |      |  |      |       
|Cash                              |      |  | $    | 395   
|Accounts
      Receivable, Net    |      |  |      | 4,756 
|Inventories, Net                  |      |  |      | 3,080 
|Prepaids
      and Other          |      |  |      | 76    
|Deferred
      Tax Benefits       |      |  |      | 1,124 
|                                  |      |  |      |       
|Total
      Current Assets        |      |  |      | 9,431 
|Property
      and Equipment, Net |      |  |      | 3,023 
|Other Assets,
      Net           |      |  |      | 2,774 
|Deferred
      Tax Benefits       |      |  |      | 2,155 
|                                  |      |  |      |       
|Total Assets                      |      |  | $    | 17,383
|                                  |      |  |      |       

# 

# LIABILITIES AND STOCKHOLDERS' EQUITY

|                                                 |  | 
|------------------------------------------------ |  | 
|
|
|Current
      Liabilities:                       |  | 
|Current
      Maturities of Long-Term Debt       |  | 
|Accounts
      Payable and Accrued Liabilities   |  | 
|                                                 |  | 
|Total
      Current Liabilities                  |  | 
|Long-Term
      Debt, Less Current Maturities    |  | 
|                                                 |  | 
|Total
      Liabilities                          |  | 
|                                                 |  | 
|Stockholders'
      Equity:                      |  | 
|Common
      Stock                               |  | 
|Preferred
      Stock                            |  | 
|Capital
      In Excess of Par Value             |  | 
|Accumulated
      Deficit                        |  | 
|Treasury
      Stock                             |  | 
|                                                 |  | 
|Total
      Stockholders' Equity                 |  | 
|                                                 |  | 
|Total
      Liabilities and Stockholders' Equity |  | 
|                                                 |  | 

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

24

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---

# MEDICAL
TECHNOLOGY SYSTEMS, INC. AND SUBSIDIARIESCONSOLIDATED
STATEMENTS OF EARNINGS YEARS ENDED MARCH 31, 2003, 2002 AND 2001

(In
Thousands; Except Earnings Per Share Amounts)

|                                                            | 2003 |  | 2002 |        | 2001 |  
|----------------------------------------------------------- | ---- |  | ---- | ------ | ---- | -
|                                                            |      |  |      |        |      |  
|
|Net
      Sales                                             |      |  | $    | 29,385 |      | $
|Costs and Expenses:                                         |      | 
|Cost
      of Sales                                         |      |  |      | 17,783 |      |  
|Selling,
      General and Administrative                   |      |  |      | 6,330  |      |  
|Depreciation
      and Amortization                         |      |  |      | 964    |      |  
|                                                            |      |  |      |        |      |  
|Total Costs and Expenses                                    |      |  |      | 25,077 |      |  
|Operating Profit                                            |      |  |      | 4,308  |      |  
|Other Expenses                                              |      | 
|Interest
      Expense                                      |      |  |      | 876    |      |  
|Amortization
      of :                                     |      | 
|Financing
      Costs                                       |      |  |      | 271    |      |  
|Original
      Issue Discount                               |      |  |      | 189    |      |  
|                                                            |      |  |      |        |      |  
|Total Other Expenses                                        |      |  |      | 1,336  |      |  
|                                                            |      |  |      |        |      |  
|Income Before Taxes                                         |      |  |      | 2,972  |      |  
|Income Tax Benefit (Expense)                                |      |  |      | (1,124 | )    |  
|                                                            |      |  |      |        |      |  
|Income
      from Continuing Operations Before              |      | 
|Discontinued Operations                                     |      |  |      | 1,848  |      |  
|Loss from Operations of Discontinued Operations, Net of Tax |      |  |      | 0      |      |  
|                                                            |      |  |      |        |      |  
|Net Income                                                  |      |  | $    | 1,848  |      | $
|Non-Cash Constructive Dividend Related to Beneficial        |      | 
|Conversion
      Feature of Convertible Preferred Stock     |      |  |      | 347    |      |  
|Convertible Preferred Stock Dividends                       |      |  |      | 168    |      |  
|                                                            |      |  |      |        |      |  
|Net Income Available to Common Stockholders                 |      |  | $    | 1,333  |      | $
|                                                            |      |  |      |        |      |  
|Net Income Per Basic Common Share:                          |      | 
|Income
      from Continuing Operations                     |      |  | $    | 0.28   |      | $
|Income
      (Loss) from Discontinued Operations            |      |  |      | 0.00   |      |  
|                                                            |      |  |      |        |      |  
|Net Income Per Basic Common Share                           |      |  | $    | 0.28   |      | $
|                                                            |      |  |      |        |      |  
|Net Income Per Diluted Common Share:                        |      | 
|Income
      from Continuing Operations                     |      |  | $    | 0.23   |      | $
|Income
      (Loss) from Discontinued Operations            |      |  |      | 0.00   |      |  
|                                                            |      |  |      |        |      |  
|Net Income Pper Diluted Common Share                        |      |  | $    | 0.23   |      | $
|                                                            |      |  |      |        |      |  

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

25

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# MEDICAL TECHNOLOGY
SYSTEMS, INC. AND SUBSIDIARIESCONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS'
EQUITY (DEFICIT)YEARS ENDED MARCH 31, 2003, 2002 AND 2001(In Thousands)

|                                       | Common Stock |            | Preferred Stock |  |   |     |   |  |            |   | 
|-------------------------------------- | ------------ | ---------- | --------------- |  | - | --- | - |  | ---------- | - | 
|
|
|
|
|
|Balance,
      March 31, 2000          |              | 6,542,621  |                 |  | $ | 65  |   |  | 6,500,000  |   | 
|Issuance of Stock Options              |              |            |                 |  |   |     |   |  |            |   | 
|Exchange of Preferred Stock            |              |            |                 |  |   |     |   |  |            |   | 
|for
      Common Stock                 |              | 4,000,000  |                 |  |   | 40  |   |  | (6,500,000 | ) | 
|Reverse Stock Split                    |              | (6,325,593 | )               |  |   | (63 | ) |  |            |   | 
|Net Income                             |              |            |                 |  |   |     |   |  |            |   | 
|                                       |              |            |                 |  |   |     |   |  |            |   | 
|Balance March 31, 2001                 |              | 4,217,028  |                 |  | $ | 42  |   |  | 0          |   | 
|Issuance of Stock Options              |              |            |                 |  |   |     |   |  |            |   | 
|Warrants and Options Exercised         |              | 64,133     |                 |  |   | 1   |   |  |            |   | 
|Stock Issued                           |              | 50,000     |                 |  |   |     |   |  |            |   | 
|Net Income                             |              |            |                 |  |   |     |   |  |            |   | 
|                                       |              |            |                 |  |   |     |   |  |            |   | 
|Balance March 31, 2002                 |              | 4,331,161  |                 |  | $ | 43  |   |  | 0          |   | 
|Stock Options and Warrants             |              |            |                 |  |   |     |   |  |            |   | 
|Exercised                              |              | 62,462     |                 |  |   | 1   |   |  |            |   | 
|Warrants Issued                        |              |            |                 |  |   |     |   |  |            |   | 
|Preferred Stock Issued                 |              |            |                 |  |   |     |   |  | 2,000      |   | 
|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                 |              | 4,393,623  |                 |  | $ | 44  |   |  | 2,000      |   | 
|                                       |              |            |                 |  |   |     |   |  |            |   | 

26

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# MEDICAL TECHNOLOGY SYSTEMS, INC.
AND SUBSIDIARIESCONSOLIDATEDSTATEMENTS OF CASH FLOWSYEARS ENDED MARCH 31, 2003, 2002 AND 2001

|                                                                         | 2003 |  | 2002 |         | 2001 |  
|------------------------------------------------------------------------ | ---- |  | ---- | ------- | ---- | -
|                                                                         |      |  |      |         |      |  
|Operating
      Activities                                               |      |  |      |         |      |  
|Net
      Income                                                         |      |  | $    | 1,848   |      | $
|                                                                         |      |  |      |         |      |  
|Adjustments
      to Reconcile to Net Cash                               |      | 
|Provided
      by Operating Activities:                                  |      | 
|Depreciation
      and Amortization                                      |      |  |      | 964     |      |  
|Amortization
      of Deferred Financing Costs                           |      |  |      | 271     |      |  
|Deferred
      Income Tax Expense (Benefit)                              |      |  |      | 1,062   |      |  
|Amortization
      of Original Issue Discount                            |      |  |      | 189     |      |  
|Inventory
      Valuation Provision                                      |      |  |      | 249     |      |  
|Development
      Costs Written Off                                      |      |  |      | 115     |      |  
|Issuance
      of Stock for Services                                     |      |  |      | 0       |      |  
|Deferred
      Compensation                                              |      |  |      | 0       |      |  
|(Increase)
      Decrease in:                                            |      | 
|Accounts
      Receivable                                                |      |  |      | (1,300  | )    |  
|Inventories                                                              |      |  |      | (594    | )    |  
|Prepaids
      and Other                                                 |      |  |      | 123     |      |  
|Increase
      (Decrease) in:                                            |      | 
|Accounts
      Payable and Other Accrued Liabilities                     |      |  |      | 302     |      |  
|                                                                         |      |  |      |         |      |  
|Total
      Adjustments                                                  |      |  |      | 1,381   |      |  
|                                                                         |      |  |      |         |      |  
|Net
      Cash Provided by Operating Activities of Continuing Operations |      |  |      | 3,229   |      |  
|                                                                         |      |  |      |         |      |  
|Investing
      Activities                                               |      | 
|Expended
      for Property and Equipment                                |      |  |      | (1,140  | )    |  
|Expended
      for Product Development                                   |      |  |      | (556    | )    |  
|Expended
      for Patents and Other Assets                              |      |  |      | (33     | )    |  
|                                                                         |      |  |      |         |      |  
|Net
      Cash Used by Investing Activities of Continuing Operations     |      |  |      | (1,729  | )    |  
|                                                                         |      |  |      |         |      |  
|Financing
      Activities                                               |      | 
|Payments
      on Notes Payable and Long-Term Debt                       |      |  |      | (12,410 | )    |  
|Net
      Advances on Revolving Line of Credit                           |      |  |      | 3,465   |      |  
|Issuance
      of Convertible Preferred Stock                            |      |  |      | 2,000   |      |  
|Expended
      for Financing Costs                                       |      |  |      | (1,151  | )    |  
|Dividends
      on Convertible Preferred Stock                           |      |  |      | (168    | )    |  
|Advances
      from (to) Affiliates - Discontinued Operations            |      |  |      | 0       |      |  
|Exercise
      of Stock Options                                          |      |  |      | 49      |      |  
|Proceeds
      from Borrowing on Subordinated Notes and Long-Term Debt   |      |  |      | 6,700   |      |  
|                                                                         |      |  |      |         |      |  
|Net
      Cash Used by Financing Activities of Continuing Operations     |      |  |      | (1,515  | )    |  
|                                                                         |      |  |      |         |      |  
|Net (Decrease) Increase in
        Cash                                  |      |  |      | (15     | )    |  
|Cash at Beginning of Period                                              |      |  |      | 410     |      |  
|                                                                         |      |  |      |         |      |  
|Cash at End of Period                                                    |      |  | $    | 395     |      | $
|                                                                         |      |  |      |         |      |  

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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# MEDICAL TECHNOLOGY
SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 2003 2002
AND 2001

# NOTE 1  BACKGROUND
INFORMATION

Medical
Technology Systems, 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. (MTS Packaging) and MTS
Packaging Systems International, Ltd. (MTSPI).

MTS
Packaging primarily manufactures and sells disposable medication punch cards, packaging
equipment and ancillary products throughout the United States. Its customers are
predominantly pharmacies that supply nursing homes, assisted living and correctional
facilities with prescription medications for their patients. MTS Packaging manufactures
its proprietary disposable punch cards and packaging equipment in its own facilities. This
manufacturing process uses integrated machinery for manufacturing the disposable
medication punch cards. The disposable medication punch cards and packaging equipment are
designed to provide a cost effective method for pharmacies to dispense medications. The
Companys medication dispensing systems and products provide innovative methods for
dispensing medications in disposable packages. MTSPI distributes products for MTS
Packaging in the United Kingdom.

The
Company sold the assets of two subsidiaries in fiscal 2000 and treated the operations
of these subsidiaries as discontinued operations in fiscal 2001. The Companys
continuing operations have been conducted through one business segment since fiscal 1999.

# NOTE 2  SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES

Consolidation

The
consolidated financial statements include the accounts of the Company and its
subsidiaries, MTS Packaging and MTSPI. The results of operations of discontinued segments
for 2001 have been excluded from the components of Income from Continuing
Operations and shown under the caption Loss from Operations of Discontinued
Operations in the Statements of Operations. 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.

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, 2003, the Companys cash and cash equivalents include the United States
dollar equivalent of approximately $393,746 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, 2003 and 2002, the Company has established an
inventory valuation allowance of $183,000 and $40,000, 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. To date, warranty costs have not been material.

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Revenue Recognition

The
Company recognizes revenue when products are shipped and title transfers. However, revenue
related to the sale of OnDemand machines is recognized upon installation and acceptance of
the machine by the customer in accordance with the terms of the purchase agreement.
Revenue includes certain amounts invoiced to customers for freight and handling charges.
The Company excludes the actual cost of freight and handling incurred from net sales and
includes these costs in cost of sales.

The
geographic sales of the Company are primarily in the United States. There were two
customers whose sales exceeded 10% of revenue for 2003, 2002 and 2001.

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. 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..................................................      |  | 5     | 

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
$172,000, $87,000 and $119,000 in research and development costs during fiscal 2003, 2002
and 2001, respectively.

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 is 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 these costs to inventory. The Company capitalized approximately $556,000,
$853,000 and $798,000 of product development costs during the years ended March 31, 2003,
2002 and 2001, respectively.

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 $303,000, $79,000
and $82,000 for the years ended March 31, 2003, 2002 and 2001, respectively.

In
addition, during the fourth quarter of fiscal 2003, the Company evaluated the status of
certain development products that were underway and determined that the recovery of the
costs of these projects was doubtful, and therefore, were written off. The amount of the
development costs written off during the year ended March 31, 2003 was $115,000.

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At
March 31, 2003 and 2002, the Companys capitalized product development costs included
its new OnDemand product, which represented $1,428,000 and $1,314,000, respectively
of the total capitalized product development costs. Manufacturing costs of approximately
$441,000 were included in the OnDemand capitalized product development costs at March 31,
2002. All manufacturing costs of the OnDemand product were included in inventory at March
31, 2003.

During
the year ended March 31, 2003, the Company sold three OnDemand machines.

Other Assets

Other
assets are carried at cost less accumulated amortization. Amortization is being calculated
on a straight-line basis over a five to seventeen year period (see Notes 2 and 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 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 2003, 2002 and 2001.

The adoption
 of Financial  Accounting  Standards Board (FASB) Statement of Financial Accounting Standards (SFAS) No. 142,
 "Goodwill and Intangible  Assets" and SFAS No. 144,  "Accounting for the Impairment or Disposal of Long-Lived
  Assets" had no impact on the Company's financial statements.

Earnings Per Share

Earnings
per share are computed using the basic and diluted calculations on the face of the
statement of operations. Basic earnings per share are calculated by dividing net income by
the weighted average number of shares of common stock outstanding for the period. Diluted
earnings per share is calculated by dividing net income 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 (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 consistent with the methodology prescribed by SFAS 123, the Companys net
income and earnings per share would be reduced to the proforma amounts indicated below:

|                                                  |  | 2003 |                     | 2002 |   | 2001  | 
|------------------------------------------------- |  | ---- | ------------------- | ---- | - | ----- | 
|
|Net
      Income Available to Common Stockholders |  |      | As
      Reported   |      | $ | 1,333 | 
|                                                  |  |      | Pro Froma           |      | $ | 821   | 
|                                                  |  |      |                     |      |   |       | 
|Earnings Per Common Share                         |  |      | Basic As Reported   |      | $ | .28   | 
|                                                  |  |      | Basic Pro Forma     |      | $ | .17   | 
|                                                  |  |      |                     |      |   |       | 
|Earnings Per Common Share                         |  |      | Diluted As Reported |      | $ | .23   | 
|                                                  |  |      | Diluted Pro Forma   |      | $ | .14   | 

The
fair value of each option grant is estimated on the date of grant using the Binominal
options-pricing model with the following weighted-average assumptions used for grants in
2003, 2002 and 2001, respectively, no dividend yield for all years, expected volatility of
127,148 and 133 percent; risk-free interest rates of 3.0, 3.7 and 6.1 percent, and
three-year expected lives for all years.

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 except for the carrying
value of the subordinated note, which has a fair value of approximately $4,549,000 and a carrying value of
$2,949,000.

Reclassifications

Certain
reclassifications were made to the 2002 and 2001 financial statement amounts to conform to
2003 presentation.

Recent Accounting Pronouncements

In
December 2002, SFAS 148, Accounting for Stock Based Compensation  Transition and
Disclosure: and amendment of FASB Statement 123 (SFAS 123) was issued to provide
alternative transition methods for a voluntary change to the fair value based method of
accounting for stock-based employee compensation. In addition, SFAS 148 amends the
disclosure requirements of SFAS 123. The Company does not intend to change the fair value
based method of accounting for stock-based employee compensation and has included the
additional disclosure requirements of SFAS 148 in the accompanying financial statements.

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 is currently analyzing the effect that SFAS 150 may have on certain financial
instruments that were issued in June 2002 (see Note 14).

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SFAS 150 is effective for financial  instruments  entered into or modified  after May 31, 2003,
and otherwise is effective at the beginning of the  Companys  second  quarter or July 1, 2003.
It is to be  implemented  by reporting  the  cumulative  effect of a change in an accounting principal
for financial  instruments  created  before the issuance date of the statement and still existing at
July 1, 2003.  Restatement is not permitted.

In
November 2002, the FASB issued FASB Interpretation No. 45, Guarantors Accounting
and Disclosure Requirements for Guarantors, Including Indirect Guarantors of Indebtedness
to Others (FIN 45). FIN 45 creates new disclosure and liability recognition
requirements for certain guarantees, including obligations to stand ready to perform. The
initial recognition and measurement requirements of FIN 45 are effective prospectively for
guarantees issued or modified after December 31, 2002, and the disclosure requirements are
effective for financial statement periods ending after December 15, 2002. The Company is
not party to any non-employees indemnification agreements.

# NOTE 3  ACCOUNTS
RECEIVABLE

The
Company maintains an allowance for potential losses on individual and commercial accounts
receivable, which are unsecured. Management performs periodic collectibility reviews of
its accounts receivable that considers aging and other factors.

Accounts
Receivable consist of the following:

|                                      | March 31, |   | March 31, |  
|------------------------------------- | --------- | - | --------- | -
|
|
|
|
|Accounts
      Receivable             |           | $ | 4,894     |  
|Less: Allowance for Doubtful Accounts |           |   | (138      | )
|
|                                      |           | $ | 4,756     |  
|

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

# NOTE 4  INVENTORIES

Inventories
consist of the following:

|                                          | March 31, |   | March 31, |  
|----------------------------------------- | --------- | - | --------- | -
|
|
|                                         
|
|Raw
      Material                        |           | $ | 1,547     |  
|Finished
      Goods and Work in Process  |           |   | 1,716     |  
|Less:
      Inventory Valuation Allowance |           |   | (183      | )
|
|                                          |           | $ | 3,080     |  
|

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

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# NOTE 5  PROPERTY
AND EQUIPMENT

Property
and equipment consists of the following:

|                                               | March 31, |   | March 31, |  
|---------------------------------------------- | --------- | - | --------- | -
|
|
|                                              
|
|Property and Equipment                         |           | $ | 9,014     |  
|Leasehold Improvements                         |           |   | 713       |  
|
|                                               |           |   | 9,727     |  
|Less: Accumulated Depreciation and Amorization |           |   | (6,704    | )
|
|                                               |           | $ | 3,023     |  
|

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
$577,000, $732,000 and $617,000 for fiscal years ending March 31, 2003, 2002 and 2001,
respectively.

# NOTE 6  OTHER
ASSETS

Other
assets consists of the following:

|                                       | Amorization |  |       |  |   |      
|-------------------------------------- | ----------- |  | ----- |  | - | -----
|
|
|
|
|
|Product
      Development (see Note 2) |             |  | 5     |  | $ | 1,941
|Less
      Accumulated Amortization    |             |  |       |  |   | (518 
|                                       |             |  |       | 
|                                       |             |  |       |  | $ | 1,423
|                                       |             |  |       | 
|
|Patents                                |             |  | 17    |  | $ | 1,229
|Less
      Accumulated Amortization    |             |  |       |  |   | (808 
|                                       |             |  |       | 
|                                       |             |  |       |  | $ | 421  
|                                       |             |  |       | 
|
|Financing
      Costs (see Note 8)     |             |  | 3 - 5 |  | $ | 1,110
|Less
      Accumulated Amortization    |             |  |       |  |   | (271 
|                                       |             |  |       | 
|                                       |             |  |       |  | $ | 839  
|                                       |             |  |       | 
|
|Other                                  |             |  | 5     |  | $ | 201  
|Less
      Accumulated                 |             |  |       |  |   | (110 
|                                       |             |  |       | 
|                                       |             |  |       |  | $ | 91   
|                                       |             |  |       | 
|Total
      Other Assets, Net          |             |  |       |  | $ | 2,774
|                                       |             |  |       | 

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

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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, | 
|------------------------------------------- | -------- | - | --------- | 
|
|                                            |          |   |           | 
|
|
|Accounts Payable/Trade                      |          | $ | 2,100     | 
|Accrued Liabilities:                        |          |   |           | 
|Salaries, Commissions and Employee Benefits |          |   | 758       | 
|Medical Claims                              |          |   | 86        | 
|Interest                                    |          |   | 34        | 
|Federal Tax                                 |          |   | 62        | 
|State Taxes                                 |          |   | 29        | 
|Royalties                                   |          |   | 437       | 
|                                            |          |   |           | 
|                                            |          | $ | 3,506     | 
|                                            |          |   |           | 

# NOTE 8  LONG-TERM
DEBT

Long-term
debt consists of the following:

|                                                                                 | March 31, |  | March 31, |       
|-------------------------------------------------------------------------------- | --------- |  | --------- | ------
|
|                                                                                 |           |  |           |       
|
|
|Bank Term Loan payable in
        installments of interest at 7.5% and principal |           |  |           |       
|monthly for ten years ending September 1, 2006, with a lump sum                  |           |  |           |       
|payment of approximately $7.1 million on that date secured by all                |           |  |           |       
|tangible and intangible assets of the Company.                                   |           |  | $         | 0     
|                                                                                 |           |  |           |       
|Revolving Line of Credit due June 26,
        2005 plus interest payable at 1%   |           |  |           |       
|above the prime rate (5.25% at March 31, 2003).                                  |           |  |           | 3,465 
|                                                                                 |           |  |           |       
|Bank Term Loan payable in
         monthly installments of $83,333 plus interest |           |  |           |       
|at 2.25% above the prime rate (6.5% at March 31, 2003)through June 2004.         |           |  |           | 1,250 
|                                                                                 |           |  |           |       
|Bank Term Loan payable in monthly
        installments of $11,667 plus interest  |           |  |           |       
|at 1.25% above the prime rate (5.5% at March 31, 2003) through June 2007.        |           |  |           | 595   
|                                                                                 |           |  |           |       
|Subordinated Note - Face
        amount of $4,000,000, less unamortized original |           |  |           |       
|issue discount of $1,051,000, due June 26, 2007 plus interest payable            |           |  |           |       
|monthly at 14%.                                                                  |           |  |           | 2,949 
|                                                                                 |           |  |           |       
|Other Notes and Agreements                                                       |           |  |           | 226   
|                                                                                 |           |  |           |       
|Total Long - Term Debt                                                           |           |  |           | 8,484 
|Less Current Portion                                                             |           |  |           | (1,461
|                                                                                 |           |  |           |       
|LONG-TERM DEBT DUE AFTER 1 YEAR                                                  |           |  | $         | 7,023 
|                                                                                 |           |  |           |       

The
bank notes payable are collateralized by the Companys accounts receivable,
inventory, equipment and intangibles.

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In
June 2002, the Company repaid the entire amount, $11,310,000, of its bank term loan with
the proceeds of a new revolving line of credit, term loans, a subordinated note and
convertible preferred stock. The revolving line of credit allows for borrowing of up to
$5,000,000 based upon advance rates that are applied to the Companys eligible
accounts receivable and inventory. There was $4,117,000 available at March 31, 2003 on the
revolving line of credit based upon eligible accounts receivable and inventory. Interest
is payable on the revolving line of credit monthly based on the average unpaid balance at
the prime rate plus 1.0%.

One
term loan in the amount of $700,000 is repayable in equal monthly installments over a five
(5) year term, plus interest at the prime rate plus 1.25%. Another term loan in the amount
of $2,000,000 is repayable in equal monthly installments over two (2) years plus interest
at the prime rate plus 2.25% and includes an excess cash flow payment provision. The
excess cash flow payment that is due July 31, 2003 is $673,000.

The
subordinated note in the amount of $4,000,000 is repayable in five (5) years with interest
only, at 14%, payable monthly until the maturity of the note. The subordinated note is
secured by a second lien on all of the assets of the Company. In addition, the
subordinated note holders were issued 566,517 warrants to purchase common stock
exercisable for ten (10) years at $.01 per share. (Subject to certain antidilution
provisions.) (See note 14.) The relative value of the warrants, and certain imbedded
features of the warrants, were recorded as part of the stockholders equity and
reduced the carrying amount of the subordinated note as an original issue discount. The
original issue discount is being amortized over the five (5) year term of the subordinated
note. Amortization expense related to the original issue discount was $189,000 for the
year ended March 31, 2003.

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
bank term loans also contain provisions that require the Company to make additional
principal payments based upon its excess cash flow and also requires the Company to
maintain certain financial ratios and minimum stockholders equity levels of
$4,600,000 at March 31, 2003 and the greater of $4,600,000 and 95% of the stockholders
equity at the end of the previous year thereafter. In addition, certain provisions limit
the amount of capital expenditures that the Company can make each year. The Company was in
compliance with all provisions of the loan agreements of March 31, 2003

The
following is a schedule by year of the regularly scheduled principal payments required on
these notes payable and long-term debts as of March 31, 2003:

|                                                                                   |  |   | (In Thousands) | 
|---------------------------------------------------------------------------------- |  | - | -------------- | 
|2004
        ..................................................................... |  | $ | 1,461          | 
|2005
        ..................................................................... |  | $ | 210            | 
|2006
        ..................................................................... |  | $ | 3,850          | 
|2007
        ..................................................................... |  | $ | 14             | 
|2008
        ..................................................................... |  | $ | 4,000          | 
|Thereafter
        ...........................................................     |  | $ | 0              | 

Interest
expense for the years 2003, 2002 and 2001 amounted to $876,000, $919,000 and $981,000,
respectively.

The
Company also had a $1,000,000 line of credit available for purchases of equipment at an
interest rate of prime plus 1.25%. Advances on the line of credit may be made in $250,000
increments and are repayable over a five-year term. There were no amounts outstanding on
this line of credit at March 31, 2003.

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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, 2003.

|                                                                                   |  |   | (In Thousands) | 
|---------------------------------------------------------------------------------- |  | - | -------------- | 
|2004
        ..................................................................... |  | $ | 534            | 
|2005
        ..................................................................... |  | $ | 508            | 
|2006
        ..................................................................... |  | $ | 130            | 
|2007
        ..................................................................... |  | $ | 9              | 
|2008
        ..................................................................... |  | $ | 9              | 
|Thereafter
        ...........................................................     |  | $ | 5              | 

The Company's  primary  facility lease expires in fiscal 2006.  Prior to the  expiration,  the Company will determine if it is
appropriate to renew its lease or move its operations to another suitable location.

Rent
expense amounted to $439,000, $393,000 and $350,000 for the years ended March 31, 2003,
2002 and 2001, 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, 2003, 2002 and 2001, the
Company contributed $43,000, $30,000 and $16,000, respectively, to the plan.

# 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, 2003, the Company was reinsured for
claims that exceed $50,000 per participant and an annual maximum aggregate limit of
approximately $500,000. 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 $86,000 at March 31,
2003 for all unpaid claims incurred and reported during fiscal year 2003 and an estimate
of claims incurred during fiscal year 2003 that have not been reported as of March 31,
2003.

# NOTE 12  RELATED
PARTY TRANSACTIONS

Todd
E. Siegel (Siegel) is the Trustee of the Siegel Family QTIP Trust (the
Trust), which is the general partner in JADE Partners, a significant
stockholder of the Company. The Trust has entered into an exclusive Technology and Patent
Licensing Agreement with the Company for certain technologies and patents on machine and
product designs.

Under
the terms of the agreement, the Company is required to pay to the Trust royalties of one
percent of sales on licensed products. In addition, the agreement states that there are no
minimum royalty payments due and the agreement would expire if the Company abandons or
ceases to use the technologies. Royalty payments were $281,000, $62,400 and $50,000 in the
years ended March 31, 2003, 2002 and 2001, respectively. Accrued royalty payments due as
of March 31, 2003, 2002 and 2001 total approximately $437,000, $494,000 and $382,000,
respectively.

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Siegel,
through his beneficial interest in the Trust, owns approximately 42% of the outstanding
Common Stock of the Company.

# NOTE 13  TAXES

The
components of income tax expense (benefit) is as follows:

|                                                           | Years Ended March 31,
|---------------------------------------------------------- | ---------------------
|                                                           |                      
|
|                                                           |                      
|
|
|Current Income Taxes                                       |                      
|Deferred Income Taxes  (Principally
        related to the |                      
|use of the tax loss
        carryforward)                  |                      
|Change in Deferred Tax Valuation
         Allowance        |                      
|                                                           |                      
|Income Tax Expense (Benefit)                               |                      
|                                                           |                      

Total
income tax (benefit) expense for 2003, 2002 and 2001 resulted in effective tax rates of
37.8%, 38.5% and (271.6%), respectively. The reasons for the differences between these
effective tax rates and the U.S. statutory rate of 34.0%  35.0% are as follows:

|                                   | Years Ended March 31,
|---------------------------------- | ---------------------
|                                   |                      
|
|                                   |                      
|
|
|Tax Expense at U.S. Statutory Rate |                      
|State Income Tax, Net              |                      
|Other                              |                      
|Net Operating Loss Carryforward    |                      
|Net Deferred Tax Asset Recognized  |                      
|                                   |                      
|                                   |                      
|                                   |                      

Deferred
taxes consist of the following:

|                                               | March 31, 2003 |   | March 31, 2002
|---------------------------------------------- | -------------- | - | --------------
|                                               |                |   |               
|
|Deferred Tax Assets:                           |                |   |               
|Tax Loss Carry Forward                         |                | $ | 2,891         
|Reserves and Provisions                        |                |   | 380           
|Inventory Valuation Allowance                  |                |   | 69            
|Allowance for Doubtful Accounts                |                |   | 52            
|Depreciation/Amortization Temporary Difference |                |   | (113          
|                                               |                |   |               
|Deferred Income Taxes                          |                | $ | 3,279         
|                                               |                |   |               

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The
Companys deferred tax asset at March 31, 2003 is broken down to its current and
long-term portions as follows:

|Current   |  | $ | 1,124,000
|--------- |  | - | ---------
|Long-Term |  |   | 2,155,000
|
|          |  | $ | 3,279,000
|

Prior
to fiscal year ended 2001, the Company had provided a 100% valuation allowance on its net
deferred tax asset, as it was not more likely than not that the related income tax benefit
would be realized in the future. During fiscal year ended 2001, the Company removed its
valuation allowance, thereby recording an income tax benefit of $5,719,000 because the
Company believed 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 that are available
to offset future taxable income. The carryforward losses expire beginning in fiscal year
2011 and ending in fiscal year 2020.

In
order for the Company to fully utilize the benefits of its net operating loss
carryforwards in the future, its average future annual taxable income beginning with
fiscal year 2004 and ending with fiscal year 2020 would have to be approximately $425,000.

# NOTE 14 
STOCKHOLDERS EQUITY (DEFICIT)

Stockholders
Equity consists of the following:

|                                                           | March 31, |            | March 31, |            | March 31, |           
|---------------------------------------------------------- | --------- | ---------- | --------- | ---------- | --------- | ----------
|
|
|Series A Convertible
        Participating Preferred Stock |           |            |           |            |           |           
|                                                           |           |            |           |            |           |           
|Par Value $.001 Per Share:                                 |           |            |           |            |           |           
|Authorized Shares                                          |           | 10,000     |           | 0          |           | 0         
|Issued Shares                                              |           | 2,000      |           | 0          |           | 0         
|Outstanding Shares                                         |           | 2,000      |           | 0          |           | 0         
|                                                           |           |            |           |            |           |           
|Common Stock                                               |           |            |           |            |           |           
|                                                           |           |            |           |            |           |           
|Par Value $.01 Per Share:                                  |           |            |           |            |           |           
|Authorized Shares                                          |           | 25,000,000 |           | 25,000,000 |           | 25,000,000
|Outstanding Shares                                         |           | 4,393,623  |           | 4,312,281  |           | 4,198,148 
|Issued Shares                                              |           | 4,393,623  |           | 4,331,161  |           | 4,217,028 

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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, 2003, all dividends due in the amount of approximately $168,000
were paid in cash or accrued. 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 OTC
Bulletin Board. 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
the event 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 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.

# Voting Preferred Stock

JADE
Partners (Partnership) was the holder of 6,500,000 shares of Voting Preferred
Stock. The Siegel Family QTIP Trust, established pursuant to the terms of the Siegel
Family Revocable Trust (the Trust), which originally acquired the shares of
Voting Preferred Stock in 1986 for the aggregate par value of the shares ($650.00),
transferred the shares to the Siegel Family Limited Partnership in 1993. The Siegel Family
Limited Partnership transferred the shares to the Partnership in 1994. The Companys
CEO is the trustee of the Trust, which is the managing general partner of the Partnership,
and accordingly, controls the shares held by the Partnership.

The
Voting Preferred Stock had two votes per share on all matters submitted to a vote of other
holders of Common Stock. In addition to preferential voting rights, the Voting Preferred
Stock was entitled to receive upon dissolution or liquidation of the Company, the first
$10,000 of proceeds distributed to stockholders of the Company upon such events.
Thereafter, the Voting Preferred Stock was entitled to no additional amounts upon
dissolution or liquidation of the Company. The Voting Preferred Stock had no dividend
rights, redemption provisions, sinking fund provisions or conversion, preemptive or
exchange rights. The Voting Preferred Stock was not subject to further calls or
assessments by the Company.

During
fiscal 2001, the board of directors of the Company determined that it was in the best
interest of its stockholders to exchange all outstanding shares of its voting preferred
stock for a certain number of the Companys common shares. The board of directors
engaged counsel to advise them in relation to this matter. In addition, the board of
directors engaged an independent third party familiar with transactions of this nature to
evaluate the relative values of the shares of voting preferred stock and common shares.
Upon receipt of the independent third partys valuation, the board of directors met
to discuss the exchange of the shares of voting preferred stock for common shares. Once
the board of directors

39

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determined the exchange ratio between the shares of voting
preferred stock and common shares that it believed was appropriate, they engaged another
independent third party to determine if the exchange ratio was fair. Upon receipt of an
opinion as to the fairness of the exchange ratio, the board of directors solicited the
approval of the Companys common stockholders. The common stockholders approved the
exchange. The measurement date for purposes of valuing the transaction was March 31, 2000.

Based
upon the exchange ratio, the Company accounted for the exchange of voting preferred shares
for common shares by recording the issuance of 4,000,000 shares of common stock at par
value ($40,000), the retirement of 6,500,000 shares of voting preferred stock at par value
($650) and reduced its capital in excess of par value by $39,350.

# Stock Options

Activity
related to options is as follows:

|                              | Number of |           | Range of Exercise |  | Weighted Average | 
|----------------------------- | --------- | --------- | ----------------- |  | ---------------- | 
|
|
|                              |           |           |                   |  |                  | 
|
|Outstanding at March 31, 2000 |           | 436,507   |                   |  | $.48 - $25.00    | 
|Granted in Fiscal 2001:       |           |           |                   |  |                  | 
|Officers and Directors        |           | 120,000   |                   |  | 1.50 - 2.66      | 
|Employees                     |           | 0         |                   |  |                  | 
|Options Expired               |           | (53,301   | )                 |  | 2.84             | 
|                              |           |           |                   |  |                  | 
|Outstanding at March 31, 2001 |           | 503,206   |                   |  | .48 - 25.00      | 
|Granted in Fiscal 2002:       |          
|Officers and Directors        |           | 591,000   |                   |  | .48 - 2.55       | 
|Employees                     |           | 376,500   |                   |  | 1.40 - 2.66      | 
|Options Exercised             |           | (9,000    | )                 |  | 1.50             | 
|Options Expired               |           | (11,900   | )                 |  | 2.00             | 
|                              |           |           |                   |  |                  | 
|Outstanding at March 31, 2002 |           | 1,449,806 |                   |  | .48 - 25.00      | 
|Granted in Fiscal 2003        |           |           |                   |  |                  | 
|Officers and Directors        |           | 43,000    |                   |  | 2.30 - 2.67      | 
|Employees                     |           | 84,000    |                   |  | 2.30 - 2.80      | 
|Options Exercised             |           | (31,600   | )                 |  | 1.50 - 2.50      | 
|Options Expired               |           | (23,400   | )                 |  | 1.45 - 2.66      | 
|                              |           |           |                   |  |                  | 
|Outstanding at March 31, 2003 |           | 1,521,806 |                   |  | $.48 - $25.00    | 
|                              |           |           |                   |  |                  | 

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Outstanding Shares

|Range of        |  | Number    |  | Weighted Average |  | Weighted Average | 
|--------------- |  | --------- |  | ---------------- |  | ---------------- | 
|
|
|
|
|$0.48 - $2.35   |  | 1,005,000 |  | 8.0              |  | $1.59            | 
|2.50 - $5.00    |  | 506,158   |  | 4.6              |  | $2.64            | 
|$15.00 - $25.00 |  | 10,648    |  | 1.0              |  | $18.93           | 

Exercisable Shares

|Range of        |  | Number  |  | Weighted Average |  | Weighted Average | 
|--------------- |  | ------- |  | ---------------- |  | ---------------- | 
|
|
|
|
|$0.48 - $2.35   |  | 758,331 |  | 8.0              |  | $1.57            | 
|2.50 - $5.00    |  | 419,658 |  | 4.6              |  | $2.65            | 
|$15.00 - $25.00 |  | 10,648  |  | 1.0              |  | $18.93           | 

The options
outstanding at March 31, 2003 expire on various dates commencing in June 2003 and ending in March 2013.

The weighted
 average grant date fair value of option during fiscal year 2003, 2002 and 2001 was $1.75, $1.25 and $.52, respectively.

Warrants

Activity related to warrants is as follows:

|                              | Number of Shares |         | Weighted Average | 
|----------------------------- | ---------------- | ------- | ---------------- | 
|
|                              |                  |         |                  | 
|
|Outstanding at March 31, 2001 |                  | 205,600 |                  | 
|Granted in Fiscal 2002        |                  | 0       |                  | 
|Warrants Exercised            |                  | (76,000 | )                | 
|Warrants Expired              |                  | 0       |                  | 
|                              |                  |         |                  | 
|Outstanding at March 31, 2002 |                  | 129,600 |                  | 
|Granted in Fiscal 2003        |                  | 691,517 |                  | 
|Warrants Exercised            |                  | (47,000 | )                | 
|Warrants Expired              |                  | 0       |                  | 
|                              |                  |         |                  | 
|Outstanding at March 31, 2003 |                  | 774,117 |                  | 
|                              |                  |         |                  | 

The
warrants expire on various dates commencing June 2007 and ending June 2012. All warrants
are 100% vested at March 31, 2003.

The
weighted average grant date fair value of warrants during fiscal 2003 and 2002 was $2.72
and $.90, respectively.

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In
June 2002, the Company issued subordinated notes to an investor (see Note 8). As
part of the consideration for the notes, the investor received 566,517 warrants to
purchase common stock exercisable at $.01 per share for ten (10) years.

The
terms of the warrant agreement contain certain antidilution provisions. The warrant
agreement also contains a make-whole provision that obligates the Company to pay certain
amounts to the holders of the warrants 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
purchase the common shares that underlie the warrants. The warrant agreement also contains
a provision that may obligate the Company to pay certain amounts to the holders of the
warrants in the event there is a change in control of the voting common stock of the
Company, if there is a sale of the Company, or if there is a public offering of the
Companys common stock.

The
value of the warrants was determined as of the date of issuance using the Black-Scholes
options-pricing model. In addition, an independent third party has estimated the value of
certain embedded features contained in the warrant agreement and registration rights
agreement between the Company and the warrant holder (a make-whole and
claw-back feature that obligated the Company to pay additional amounts, in
cash or additional shares at the option of the Company, if certain events occur in the
future). Using the relative value of the debt ($4,000,000), warrants ($1,564,000) and the
warrants embedded features ($233,000), the Company recorded the value of the
warrants and the warrants embedded features as part of its stockholders equity, in accordance
with EITF 00-19, and reduced the carrying amount of the debt as an original issue discount. The original issue
discount is being be amortized over the five year term of the subordinated notes and will
be recorded as interest expense and a corresponding increase in the carrying value of the
subordinated notes.

In
the event the Company is required to make payments to the holders of the warrants, it may
elect to issue additional warrants in lieu of cash payment. Although the make-whole
provision and other provisions of the warrant 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.

The
Company has determined the value of the warrants and the make-whole and other provisions
of the warrants and has recorded this amount as a component of its stockholders
equity. This amount, $1,240,000 also represents the original issue discount that is being
amortized over the five-year term of the subordinated note.

The Company also issued, to its
financial advisors, 125,000 warrants to purchase common stock as part of the fees related
to the above referenced financing. The warrants are fully exercisable for five (5) years
at $1.50 per share. The value of these warrants, $324,000, was determined as of the date
of issuance using the Black-Scholes options-pricing model. The Company allocated the value
between the proceeds received from the subordinated debt and the convertible preferred
stock based upon their respective amounts. The Company recorded the entire value of the
warrants as additional paid in capital. The portion of the value of the warrants that has
been allocated to the subordinated notes has been recorded as a long-term asset and will
be amortized over the five-year term of the subordinated notes as financing costs. The
portion of the value of the warrants that has been allocated to the convertible preferred
stock was recorded as a reduction in additional paid in capital.

During
fiscal year 2001, the Company entered into a financial advisory agreement with National
Securities Corporation (NSC). The terms of the agreement provided for the
issuance of 105,000 warrants to NSC as part of the compensation for their services. The
warrants were exercisable at an average price of $1.00 and expire in 2006. Compensation
expense related to these warrants totaled $49,000 and $45,000 for the years ended March
31, 2002 and 2001, respectively. During fiscal year 2002, NSC exercised their rights to
acquire 45,133 shares of common stock pursuant to the cashless exercise rights provision
contained in the warrant agreement representing 66,000 shares. The warrants were
exercisable at prices ranging from $.85 to $1.50 per share. In addition, certain holders
of warrants elected to exercise their rights to acquire 10,000 shares of common stock. The
warrants were exercisable at prices ranging from $1.13 to $1.50.

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During
fiscal 2003, NSC exercised their rights to acquire 23,529 shares of common stock pursuant
to the cashless exercise rights provision contained in the warrant agreement representing
39,000 shares. The warrants were exercisable at $1.50 per share. In addition, certain
holders of warrants elected to exercise their rights to acquire 7,333 shares of common
stock. The warrants were exercisable at $.35 per share.

# 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 is for a term of
10 years, calls 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 has historically elected to
receive additional compensation in cash. Additional compensation expense for the years
ended March 31, 2003, 2002 and 2001 totaled $7,000, $143,000 and $131,000, respectively
based upon the presumption that the CEO would continue to elect to receive the additional
compensation in cash instead of restricted stock. During the fiscal year 2003 and at March
31, 2003, the CEO elected to receive cash for all amounts earned. The Company and the CEO
intend to terminate the SAR during the first part of fiscal 2004 and enter into another
long-term incentive compensation agreement.

The
terms of the existing employment agreement between the Company and its Chief Financial
Officer (CFO) provides the CFO with the right to elect to receive any portion
of his compensation in the form of common stock of the Company, valued at 60%, in lieu of
cash compensation. The CFO may make the election at the beginning of each fiscal quarter.
The CFO elected to receive 50,000 shares of common stock in lieu of $18,750 of future
compensation during fiscal 2002. During fiscal 2003, the CFO elected to receive all
compensation earned in the form of cash. On April 1, 2003, the CFO elected to receive all
compensation earned during the fiscal quarter ending June 30, 2003 in the form of cash.

# NOTE 15  EARNINGS
PER SHARE

Income
from continuing operations per common share is computed by dividing income from continuing
operations by the basic and diluted weighted average number of shares of common stock
outstanding. 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
following table sets forth the computation of income from continuing operations per basic
and diluted common share:

|                                                     | Year Ended |   | Year Ended |  | Year Ended |          
|---------------------------------------------------- | ---------- | - | ---------- |  | ---------- | ---------
|
|                                                     |            |   |            |  |            |          
|
|Numerator:                                           |            |   |            |  |            |          
|Net Income Available to Common Stockholders          |            | $ | 1,333,000  |  | $          | 1,974,000
|                                                     |            |   |            |  |            |          
|Denominator:                                         |            |   |            |  |            |          
|Weighted Average Shares Outstanding - Basic          |            |   | 4,793,000  |  |            | 4,299,000
|Add:  Effect of Dilutive Options and Warrants        |            |   | 455,000    |  |            | 218,000  
|Effect of Conversion of Convertible Preferred        |            |   |            |  |            |          
|Stock into Common Stock                              |            |   | 645,000    |  |            | 0        
|                                                     |            |   |            |  |            |          
|Weighted Average Shares Outstanding - Diluted        |            |   | 5,893,000  |  |            | 4,517,000
|                                                     |            |   |            |  |            |          
|Income from Continuing Operations
        Per Common |            |   |            |  |            |          
|Share - Basic                                        |            | $ | 0.28       |  | $          | 0.46     
|                                                     |            |   |            |  |            |          
|Income from Continuing Operations per Common         |            |   |            |  |            |          
|Share - Diluted                                      |            | $ | 0.23       |  | $          | 0.44     
|                                                     |            |   |            |  |            |          

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The
effect of 1,127,000 and 440,806 options and warrants were not included in the calculation
of net income per diluted common share for 2003 and 2002, respectively, as the effect
would have been anti-dilutive. The effect of all options and warrants (see Note 14) for
2000 were not included in the calculation of income from continuing operations per diluted
common share as the effect would have been anti-dilutive.

Certain
provisions of the warrants and the terms 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).

# 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 described in Notes 8 and 14.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. Amortization expense
related to the financing costs was $271,000 for the fiscal year ended March 31, 2003.

# NOTE 17 
CONTINGENCIES

In
November 1998, Medical Technology Laboratories, Inc. (MTL), a subsidiary that
was sold in fiscal 2000 (see Note 20), 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

|                                                                                            | 2003 |   | 2002 |  | 2001 |      
|------------------------------------------------------------------------------------------- | ---- | - | ---- |  | ---- | -----
|                                                                                            |      |   |      |  |      |      
|Supplemental Disclosure
        of Cash Flow Information:                                   |      |   |      |  |      |      
|                                                                                            |      |   |      |  |      |      
|Cash Paid for Interest                                                                      |      | $ | 842  |  | $    | 1,001
|                                                                                            |      |   |      |  |      |      
|Supplemental Cash Flow for Discontinued
        Operations:                                 |      |   |      |  |      |      
|                                                                                            |      |   |      |  |      |      
|Operating Activities:                                                                       |      |   |      |  |      |      
|Net Cash Provided by Discontinued Operations                                                |      |   | 0    |  |      | 0    
|                                                                                            |      |   |      |  |      |      
|Financing Activities:                                                                       |      |   |      |  |      |      
|Net Cash Used by Financing Activities of Discontinued 
                          Operations |      |   | 0    |  |      | 0    
|                                                                                            |      |   |      |  |      |      
|Net Increase (Decrease) in Cash -
        Discontinued Operations                           |      |   | 0    |  |      | 0    
|Cash at Beginning of Period -
        Discontinued Operations                               |      |   | 0    |  |      | 0    
|                                                                                            |      |   |      |  |      |      
|Cash at End of Period - Discontinued
        Operations                                     |      |   | 0    |  | $    | 0    
|                                                                                            |      |   |      |  |      |      

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2003  Non-Cash
Activities

The
Company transferred approximately $523,000 in product development costs to inventory. An
original issue discount (OID) of approximately $1,240,000 was recorded as a reduction in
the carrying value of the subordinated note, and included as a component of
stockholders equity. During 2003, the amortization of OID was $189,000.
Additionally, the Company issued 125,000 warrants (see Note 8) valued at
approximately $324,000 and included the value of the warrants as a component of its
financing costs.

# NOTE 19  SELECTED
QUARTERLY FINANCIAL DATA (UNAUDITED)

The information
set forth below represents unaudited selected quarterly financial data for the fiscal
years ended March 31, 2003 and 2002.

|                                            | Fiscal Year Ended March 31, 2003
|------------------------------------------- | --------------------------------
|                                            |                                 
|
|                                            |                                 
|
|
|
|
|                                            |                                 
|Income Statement Data:                      |                                 
|Net Sales                                   |                                 
|Gross Profit                                |                                 
|Income Before Income Taxes                  |                                 
|Income Tax Expense                          |                                 
|Dividends                                   |                                 
|                                            |                                 
|Net Income Available to Common Stockholders |                                 
|                                            |                                 
|Net Earnings Per Basic Common Share         |                                 
|                                            |                                 
|Net Earnings Per Diluted Common Share       |                                 
|                                            |                                 

|                                          | Fiscal Year Ended March 31, 2002
|----------------------------------------- | --------------------------------
|                                          |                                 
|
|                                          |                                 
|
|
|
|
|
|Income Statement Data:                    |                                 
|Net Sales                                 |                                 
|Gross Profit                              |                                 
|Income Before Income Taxes                |                                 
|Income Tax Expense                        |                                 
|                                          |                                 
|Net Income                                |                                 
|                                          |                                 
|Net Earnings Per Basic Common      Share  |                                 
|                                          |                                 
|Net Earnings Per Diluted Common     Share |                                 
|                                          |                                 

45

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# NOTE 20 
DISCONTINUED OPERATIONS

During
fiscal 2000, the Company sold the assets of two of its subsidiaries, LifeServ
Technologies, Inc. (LifeServ) and Medical Technology Laboratories, Inc.
(MTL). The operations of these discontinued subsidiaries during fiscal 2001
were confined to collection of accounts receivable and the settlement of certain
outstanding liabilities.

46

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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 30, 2003 |  |  | 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      |  | June 30, 2003 | 
|Todd E. Siegel              |  | Chief Executive Officer
         (principal executive officer) |  |               | 
|                            |  |                                                                |  |               | 
|/s/Michael P. Conroy        |  | Director,
        Chief Financial Officer and Vice President   |  | June 30, 2003 | 
|Michael P. Conroy           |  | (principal financial officer)                                  |  |               | 
|                            |  |                                                                |  |               | 
|/s/Michael Stevenson        |  | Chief Operating
        Officer                                |  | June 30, 2003 | 
|Michael Stevenson           |  |                                                                |  |               | 
|                            |  |                                                                |  |               | 
|/s/Mark J.
        Connolly |  | Principal Accounting
         Officer and Controllertor        |  | June 30, 2003 | 
|Mark J. Connolly            |  |                                                                |  |               | 
|                            |  |                                                                |  |               | 
|/s/John Stanton             |  | Director and Vice
        Chairman of the Board of Directors   |  | June 30, 2003 | 
|John Stanton                |  |                                                                |  |               | 
|                            |  |                                                                |  |               | 
|/s/David W. Kazarian        |  | Director                                                       |  | June 30, 2003 | 
|David W. Kazarian           |  |                                                                |  |               | 
|                            |  |                                                                |  |               | 
|/s/Frank A. Newman          |  | Director                                                       |  | June 30, 2003 | 
|Frank A. Newman             |  |                                                                |  |               | 
|                            |  |                                                                |  |               | 

47

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Table of Contents

REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS ON
FINANCIAL STATEMENT SCHEDULE

Board of Directors
Medical Technology Systems, Inc.

In
connection with our audit of the consolidated financial statements of Medical Technology
Systems, Inc. and Subsidiaries referred to in our report dated June 10, 2003, which is
included in the Companys Annual Report on SEC Form 10-K as of and for the year ended
March 31, 2003, we have also audited Schedule II for the years ended March 31, 2003, 2002
and 2001. In our opinion, this schedule presents fairly in all material respects, the
information required to be set forth herein.

|                               | 
|------------------------------ | 
|/s/Grant
        Thornton, LLP | 
|GRANT THORNTON, LLP            | 
|Tampa, Florida                 | 
|                               | 
|June  10, 2003                 | 

48

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Exhibit 23.1

Consent of Independent
Certified Public Accounts

We
have issued our reports dated June 10, 2003 accompanying the consolidated financial
statements and schedule included in the Annual Report of Medical Technology Systems,
Inc. on Form 10-K for the year ended March 31, 2003. We hereby consent to the
incorporation by reference of said reports in the Registration Statement of Medical
Technology Systems, Inc. on Form S-8 (File No. 333-56384) effective March 1, 2001).

|                               | 
|------------------------------ | 
|/s/Grant
        Thornton, LLP | 
|GRANT THORNTON, LLP            | 
|Tampa, Florida                 | 
|                               | 
|June  10, 2003                 | 

49

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# CERTIFICATIONS

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 officers and I are responsible for
               establishing and maintaining disclosure controls and procedures (as defined in
               Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | a) | designed such disclosure controls and procedures 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 as of a date within 90 days prior to the filing date of this annual
               report (the Evaluation Date); and
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | c) | presented in this annual report our conclusions about the effectiveness of the
               disclosure controls and procedures based on our evaluation as of the Evaluation
               Date;
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

| | a) | all significant deficiencies in the design or operation of internal controls
               which could adversely affect the registrants ability to record, process,
               summarize and report financial data and have identified for the
               registrants auditors any material weaknesses in internal controls; 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; and
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 6. | The registrants other certifying officers and I have indicated in this
               annual report whether there were significant changes in internal controls or in
               other factors that could significantly affect internal controls subsequent to
               the date of our most recent evaluation, including any corrective actions with
               regard to significant deficiencies and material weaknesses.
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                      |  |  |  | 
|--------------------- |  |  |  | 
|Date:   June 30, 2003 |  |  |  | 
|                      |  |  |  | 
|                      |  |  |  | 

50

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# CERTIFICATIONS

I, Michael P. Conroy, 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 officers and I are responsible for
               establishing and maintaining disclosure controls and procedures (as defined in
               Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | a) | designed such disclosure controls and procedures 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 as of a date within 90 days prior to the filing date of this annual
               report (the Evaluation Date); and
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | c) | presented in this annual report our conclusions about the effectiveness of the
               disclosure controls and procedures based on our evaluation as of the Evaluation
               Date;
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

| | a) | all significant deficiencies in the design or operation of internal controls
               which could adversely affect the registrants ability to record, process,
               summarize and report financial data and have identified for the
               registrants auditors any material weaknesses in internal controls; 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; and
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 6. | The registrants other certifying officers and I have indicated in this
               annual report whether there were significant changes in internal controls or in
               other factors that could significantly affect internal controls subsequent to
               the date of our most recent evaluation, including any corrective actions with
               regard to significant deficiencies and material weaknesses.
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                      |  |  |  | 
|--------------------- |  |  |  | 
|Date:   June 30, 2003 |  |  |  | 
|                      |  |  |  | 
|                      |  |  |  | 

51

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Exhibit 99.1

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 period
ended March 31, 2003 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 30, 2003                 | 
|                                      | 
|/s/Todd E. Siegel                     | 
|Todd E. Siegel                        | 
|President and Chief Executive Officer | 
|                                      | 
|                                      | 

A signed original of this written
statement required by Section 906 has been provided to Medical Technology Systems, Inc.
and will be retained by Medical Technology Systems, Inc. and furnished to the Securities
and Exchange Commission or its staff upon request.

52

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Exhibit 99.2

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 period
ended March 31, 2003 as filed with the Securities and Exchange Commission on the date
hereof (the Form 10-K), I, Michael P. Conroy, 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 30, 2003                      | 
|                                           | 
|/s/Michael P. Conroy                       | 
|Michael P. Conroy                          | 
|Vice President and Chief Financial Officer | 
|                                           | 
|                                           | 

A signed original of this written
statement required by Section 906 has been provided to Medical Technology Systems, Inc.
and will be retained by Medical Technology Systems, Inc. and furnished to the Securities
and Exchange Commission or its staff upon request.

53

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# SCHEDULE II

# MEDICAL TECHNOLOGY
SYSTEMS, INC. AND SUBSIDIARIES

# VALUATION
AND QUALIFYING ACCOUNTSFOR THE YEARS ENDED MARCH 31, 2001, 2002 AND 2003

|Column A                                |  | Column B |   | Column C |  | Column D |       | Column E |  
|--------------------------------------- |  | -------- | - | -------- |  | -------- | ----- | -------- | -
|
|
|
|
|
|Deferred
      Tax Valuation Allowance: |  |          |   |          |  |          |       |          |  
|
|Year Ended March 31, 2001               |  |          | $ | 6,202    |  | $        | 6,202 |          | $
|Year Ended March 31, 2002               |  |          | $ | 0        |  | $        | 0     |          | $
|Year Ended March 31, 2003               |  |          | $ | 0        |  | $        | 0     |          | $
|
|Inventory Valuation Allowance:          |  |          |   |          |  |          |       |          |  
|
|Year Ended March 31, 2001               |  |          | $ | 40       |  | $        | 0     |          | $
|Year Ended March 31, 2002               |  |          | $ | 40       |  | $        | 0     |          | $
|Year Ended March 31, 2003               |  |          | $ | 40       |  | $        | 249   |          | $
|
|Self Insured Medical Claims Reserve:    |  |          |   |          |  |          |       |          |  
|
|Year Ended March 31, 2001               |  |          | $ | 72       |  | $        | 210   |          | $
|Year Ended March 31, 2002               |  |          | $ | 107      |  | $        | 324   |          | $
|Year Ended March 31, 2003               |  |          | $ | 102      |  | $        | 285   |          | $
|
|Allowance for Doubtful Accounts:        |  |          |   |          |  |          |       |          |  
|
|Year Ended March 31, 2001               |  |          | $ | 274      |  | $        | 120   |          | $
|Year Ended March 31, 2002               |  |          | $ | 290      |  | $        | (180  | )        | $
|Year Ended March 31, 2003               |  |          | $ | 101      |  | $        | 50    |          | $

S-1