Table of Contents

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

FORM 10-Q

(Mark One)

||X| | Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
|--- | ---------------------------------------------------------------------------------------

For quarterly period ended September 30, 2004

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

| | For transition period from _______________ to ______________
| | ------------------------------------------------------------

Commission File Number:   
0-16594

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

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

| | 2003 Gandy Boulevard North,
        Suite 800, St. Petersburg, Florida 33702 | 
| | ---------------------------------------------------------------------------- | 
| |                                                                              | 
| | (Address of Principal Executive Offices)                                     | 

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

| |                                                                                            | 
| | ------------------------------------------------------------------------------------------ | 
| | Medical Technology Systems, Inc.                                                           | 
| |                                                                                            | 
| | (Former Name, Former Address and Former Fiscal Year,
        if changed since last report) | 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to file such reports) and (2)
has been subject to such filing requirements for the past 90 days.   |X|   Yes
             [  ]    No

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

As of September 30, 2004, the registrant had 5,679,634 shares of common stock, $.01 par
        value per share, issued and outstanding.

---

# MEDICAL TECHNOLOGY
SYSTEMS, INC. AND SUBSIDIARIESIndex

| |         | Page                                                                                                               | 
| | ------- | ------------------------------------------------------------------------------------------------------------------ | 
|
|
|
| | Item 1. | Financial Statements                                                                                               | 
| |         |                                                                                                                    | 
| |         | Condensed Consolidated Balance
        Sheets - September 30, 2004 and March 31, 2004                              | 
|
| |         | Condensed Consolidated
        Statements of Earnings - Three and Six Months Ended September 30, 2004 and 2003     | 
|
| |         | Condensed Consolidated Statements
        of Changes in Stockholders' Equity - Six Months Ended September 30, 2004 | 
|
| |         | Condensed Consolidated Statements
        of Cash Flows - Six Months Ended September 30, 2004 and 2003             | 
| |         |                                                                                                                    | 
| |         | Notes to Condensed Consolidated
        Financial Statements                                                       | 
|
| | Item 2. | Management's Discussion and Analysis of
        Financial Condition and Results of Operations                      | 
| |         |                                                                                                                    | 
| | Item 3. | Quantitative and Qualitative Disclosures About
        Market Risk                                                 | 
| |         |                                                                                                                    | 
| | Item 4. | Controls and Procedures                                                                                            | 
| |         |                                                                                                                    | 
|
|
| |         |                                                                                                                    | 
| | Item 6. | Exhibits                                                                                                           | 
|
| |         | Signatures                                                                                                         | 
|
| |         | Certifications                                                                                                     | 

i.

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Table of Contents

Item 1.    
Financial Statements

# PART 1 - FINANCIAL
INFORMATION

MTS MEDICATION
TECHNOLOGIES, INC. AND SUBSIDIARIESCONDENSED CONSOLIDATED BALANCE SHEETS
(In Thousands)

# ASSETS

|                            | September 30, |  | March 31,
|--------------------------- | ------------- |  | ---------
|
|
|                            | (Unaudited)   |  |          
|Current Assets:             |               |  |          
|Cash                        |               |  | $        
|Accounts Receivable, Net    |               |  |          
|Inventories                 |               |  |          
|Prepaids and Other          |               |  |          
|Deferred Tax Benefits       |               |  |          
|
|Total Current Assets        |               |  |          
|
|Property and Equipment, Net |               |  |          
|Other Assets, Net           |               |  |          
|
|Total Assets                |               |  | $        
|

LIABILITIES AND STOCKHOLDERS' EQUITY

|                                                    |  | 
|--------------------------------------------------- |  | 
|Current Liabilities:                                |  | 
|Current Maturities of Long-Term Debt                |  | 
|Current Maturities of Related Party Note Payable    |  | 
|Accounts Payable and Accrued Liabilities            |  | 
|
|Total Current Liabilities                           |  | 
|
|Long-Term Debt, Less Current Maturities             |  | 
|Related Party Note Payable, 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.

1

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# MTS MEDICATION
TECHNOLOGIES, INC. AND SUBSIDIARIESCONDENSED CONSOLIDATED STATEMENTS OF
EARNINGS(In Thousands; Except Earnings Per Share Amounts)

(Unaudited)

|                                                   | Three Months Ended |  | Six Months Ended
|-------------------------------------------------- | ------------------ |  | ----------------
|
|
|
|
|
|Revenue:                                           |                    |  |                 
|Net Sales                                          |                    |  | $               
|
|Costs and Expenses:                                |                    | 
|Cost of Sales                                      |                    |  |                 
|Selling, General and Administrative                |                    |  |                 
|Depreciation and Amortization                      |                    |  |                 
|
|Total Costs and Expenses                           |                    |  |                 
|
|Operating Profit                                   |                    |  |                 
|
|Other Expenses                                     |                    | 
|Interest Expense                                   |                    |  |                 
|Amortization of:                                   |                    | 
|Financing Costs                                    |                    |  |                 
|Original Issue Discount                            |                    |  |                 
|
|Total Other Expenses                               |                    |  |                 
|
|Income Before Income Taxes                         |                    |  |                 
|
|Income Tax Expense                                 |                    |  |                 
|
|Net Income (Loss)                                  |                    |  |                 
|
|Convertible Preferred Stock Dividends              |                    |  |                 
|
|Net Income (Loss) Available to Common Stockholders |                    |  | $               
|
|Net Income (Loss) Per Basic Common Share           |                    |  | $               
|
|Net Income (Loss) Per Diluted Common Share         |                    |  | $               
|
|Weighted Average Shares - Basic                    |                    |  |                 
|
|Weighted Average Shares Outstanding - Diluted      |                    |  |                 
|

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

2

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# MTS MEDICATION
TECHNOLOGIES, INC. AND SUBSIDIARIES  CONDENSED CONSOLIDATED STATEMENTS
OF CHANGES IN STOCKHOLDERS' EQUITY SIX MONTHS ENDED SEPTEMBER 30, 2004
(In Thousands)(Unaudited)

|                                     | Common Stock |           | Preferred Stock |   |    |  |       |  |   |   | 
|------------------------------------ | ------------ | --------- | --------------- | - | -- |  | ----- |  | - | - | 
|
|
|
|
|
|Balance March 31, 2004               |              | 4,863,120 |                 | $ | 49 |  | 2,000 |  | $ | 2 | 
|
|Stock Options and Warrants Exercised |              | 766,517   |                 |   | 7  |  |       |  |   |   | 
|
|Issuance of Stock as Compensation    |              | 50,000    |                 |   | 1  |  |       |  |   |   | 
|
|Tax Benefit from Stock Options       |             
|Exercised                            |              |           |                 |   |    |  |       |  |   |   | 
|
|Convertible Preferred Stock Dividend |              |           |                 |   |    |  |       |  |   |   | 
|
|Net (Loss) for Six Months Ended      |             
|September 30, 2004                   |              |           |                 |   |    |  |       |  |   |   | 
|
|Balance September 30, 2004           |              | 5,679,637 |                 | $ | 57 |  | 2,000 |  | $ | 2 | 
|

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

3

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# MTS MEDICATION
TECHNOLOGIES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF
CASH FLOWS(In Thousands)(Unaudited)

|                                                       | Six Months Ended
|------------------------------------------------------ | ----------------
|
|
|
|
|
|Operating Activities                                   |                 
|Net (Loss) Income                                      |                 
|
|Adjustments to Reconcile Net (Loss) Income to Net Cash |                 
|Provided by Operating Activities:                      |                 
|Amortization of Deferred Financing Costs               |                 
|Amortization of Original Issue Discount                |                 
|Depreciation and Amortization                          |                 
|Income Tax Expense                                     |                 
|Restricted Stock Grant Awarded                         |                 
|Loss on Disposal of Equipment                          |                 
|(Increase) Decrease in:                                |                 
|Accounts Receivable                                    |                 
|Inventories                                            |                 
|Prepaids and Other                                     |                 
|Increase (Decrease) in:                                |                 
|Accounts Payable and Other Accrued Liabilities         |                 
|
|Total Adjustments                                      |                 
|
|Net Cash Provided by Operations                        |                 
|
|Investing Activities                                   |                 
|Expended for Property and Equipment                    |                 
|Expended for Product Development                       |                 
|Expended for Patents and Other Assets                  |                 
|
|Net Cash Used by Investing Activities                  |                 
|
|Financing Activities                                   |                 
|Payments on Notes Payable and Long-Term Debt           |                 
|Advances (Paydowns) on Revolving Line of Credit        |                 
|Payments on Subordinated Notes                         |                 
|Borrowing on Term Loans and Subordinated Notes         |                 
|Payments on Term Loans                                 |                 
|Exercise of Stock Options                              |                 
|Expended for Financing Costs                           |                 
|Dividends on Convertible Preferred Stock               |                 
|
|Net Cash Used by Financing Activities                  |                 
|
|Net Increase (Decrease) in Cash                        |                 
|Cash at Beginning of Period                            |                 
|
|Cash at End of Period                                  |                 
|

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

Supplemental Disclosure
of Cash Flow Information

September 30,
2004    Non-Cash Activities - Reclassification of approximately $66,000 in machine
rentals from inventory to equipment as of September 30, 2004

September 30,
2003    Non-Cash Financing Activities - The Company purchased $199,000 in equipment and
financed the purchase with a capital lease obligation.

4

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# MTS MEDICATION
TECHNOLOGIES, INC. AND SUBSIDIARIESNOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED SEPTEMBER 30, 2004

# NOTE A  BASIS OF
PRESENTATION

The
accompanying unaudited condensed consolidated financial statements have been prepared in
accordance with accounting principles generally accepted in the United States of America
(US GAAP) for interim financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all of the information and
notes required by US GAAP for complete financial statements. In the opinion of management,
all adjustments (consisting of normal recurring accruals) considered necessary for a fair
presentation have been included. Operating results for the six-month period ended
September 30, 2004 are not necessarily indicative of the results that may be expected for
the year ended March 31, 2005. The unaudited condensed consolidated financial statements
should be read in conjunction with the consolidated financial statements and notes thereto
included in the Companys annual report on Form 10-K for the year ended March 31,
2004.

The
unaudited condensed consolidated financial statements include the accounts of the Company
and its subsidiaries, MTS Packaging Systems, Inc. (MTS Packaging) and MTS
Medication Technologies, Ltd. (MTSL). All other subsidiaries of the Company
did not have operations during the six-month period ended September 30, 2004 and 2003.

Accounting for the
Transfer Pricing Effect on Inventory

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

Reclassification of
Certain Amounts

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

# NOTE B  INVENTORIES

The
components of inventory consist of the following:

|                                     | September 30,  |   | March 31,
|------------------------------------ | -------------- | - | ---------
|
|
|                                     | (In Thousands)
|
|Raw Materials                        |                | $ | 2,196    
|Finished Goods and Work in Progress  |                |   | 2,529    
|Less:  Inventory Valuation Allowance |                |   | (166     
|
|                                     |                | $ | 4,559    
|

5

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# NOTE C  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 and any
warrants outstanding that are exercisable at a de minimus amount. 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 and the if converted
method as it relates to the convertible preferred stock outstanding.

The
following table sets forth the computation of income (loss) per basic and diluted common
share:

|                                                                      | Three Months Ended                       |   | Six Months Ended
|--------------------------------------------------------------------- | ---------------------------------------- | - | ----------------
|
|
|
|
|                                                                      | (In Thousands; Except Per Share Amounts)
|
|Numerator:                                                            |                                          |   |                 
|
|Net Income (Loss)                                                     |                                          | $ | 395             
|
|Minus:                                                                |                                          |  
|Convertible Preferred Stock Dividend                                  |                                          |   | 55              
|
|Net Income (Loss) Available to Common Stockholders                    |                                          | $ | 340             
|
|Denominator:                                                          |                                          |  
|
|Weighted Average Shares Outstanding - Basic                           |                                          |   | 5,624           
|
|Add: Effect of Dilutive Warrants and Options                          |                                          |   | 607             
|
|Effect of Conversion of Convertible Preferred Stock into Common Stock |                                          |   | 847             
|
|Weighted Average Shares Outstanding - Diluted                         |                                          |   | 7,078           
|
|Income (Loss) Per Common Share - Basic                                |                                          | $ | 0.06            
|
|Income (Loss) Per Common Share - Diluted                              |                                          | $ | 0.06            
|

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

6

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The
effect of outstanding options and warrants of approximately 717,000 shares and the effect
of 847,000 shares of common stock that would be issued upon the conversion of the
convertible preferred stock have not been included in the calculation of the loss per
common share for the six months ended September 30, 2004 because their effect would have
been anti-dilutive.

# NOTE D  STOCK
BASED COMPENSATION

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

|                                                                                  | Three Months Ended                       |   | Six Months Ended
|--------------------------------------------------------------------------------- | ---------------------------------------- | - | ----------------
|
|
|
|
|                                                                                  | (In Thousands; Except Per Share Amounts)
|
|                                                                                  |                                          |   |                 
|Net Income (Loss) Available to Common Shareholders as Reported                    |                                          | $ | 340             
|
|Less:                                                                             |                                          |  
|Stock Based Employee
        Compensation Cost Under the Fair Value Based Method, |                                          |   |                 
|Net of Related Tax Effect                                                         |                                          |   | (123            
|
|Net Income (Loss) Pro forma                                                       |                                          | $ | 217             
|
|Net Income (Loss) Per Common Share, Basic as Reported                             |                                          | $ | 0.06            
|
|Net Income (Loss) Per Common Share, Basic Pro forma                               |                                          | $ | 0.04            
|
|Net Income (Loss) Per Share, Diluted as Reported                                  |                                          | $ | 0.06            
|
|Net Income (Loss) Per Share, Diluted Pro forma                                    |                                          | $ | 0.04            
|
|For Basic Income Per Share - Weighted Average Shares                              |                                          |   | 5,624           
|
|For Diluted Income Per Share - Weighted Average Shares                            |                                          |   | 7,078           

7

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# NOTE E  REVENUE
RECOGNITION

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

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

# NOTE F  RESEARCH
AND DEVELOPMENT AND PRODUCT DEVELOPMENT

The
Company expenses product research and development costs as incurred. The Company incurred
approximately $48,000 in the three months ended September 30, 2004 compared to $66,000 in
the prior year and $104,000 in the six months ended September 30, 2004 compared to $99,000
in the prior year.

All
costs incurred subsequent to the completion of research and development activities
associated with the products hardware components and the software components
achievement of technological feasibility are capitalized until the product is available
for general release to customers. The Company initially classifies the construction costs
of the first units produced for commercial use as product development costs prior to
transferring these costs to inventory. The Company capitalized approximately $112,000 in
the three months ended September 30, 2004 compared to $115,000 in the prior year and
$156,000 in the six months ended September 30, 2004 compared to $253,000 in the prior
year.

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 $81,000 for the
three months ended September 30, 2004 compared to $91,000 in the prior year and $163,000
for the six months ended September 30, 2004 compared to $182,000 in the prior year.

The
Companys capitalized product development costs included its new OnDemand product and
versions thereof, which represented $1,725,000 at September 30, 2004 and $1,675,000 at
March 31, 2004 (excluding accumulated amortization) of the total capitalized product
development costs (see Note K).

8

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# NOTE G  LONG-TERM
DEBT

|                                                                                                                                             | September 30,  |   | March 31,
|-------------------------------------------------------------------------------------------------------------------------------------------- | -------------- | - | ---------
|
|
|                                                                                                                                             | (In Thousands)
|
|Revolving  line of credit
        due June 2007 plus interest payable monthly at between the prime rate and 1% above the prime rate          |                |   |          
|(4.75% - 5.75%) at September 30, 2004.                                                                                                       |                | $ | 4,852    
|
|Bank term loan payable in graduated
        monthly installments of $16,000 - $52,000 plus interest at .50% above the prime rate             |                |   |          
|(5.25% at September 30, 2004) through June 2007.                                                                                             |                |   | 1,168    
|
|Note payable to related party (see Note L)
        payable in monthly installments of $28,785 including interest at 6.25% through July 2008. |                |   | 1,169    
|
|
|Subordinated Note  Face amount of
        $4,000,000, less unamortized original issue discount of $803,000 at March 31, 2004,               |                |   |          
|due June 26, 2007 plus interest payable monthly at 14%.                                                                                      |                |   |         
|
|Other Notes and Agreements                                                                                                                   |                |   | 279      
|
|Total Long-Term Debt                                                                                                                         |                |   | 7,468    
|
|Less Current Portion (including
        $280,000 and $244,000 due to a related party)                                                        |                |   | (612     
|
|Long-Term Debt Due After 1 Year                                                                                                              |                | $ | 6,856    

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

There
was $4.9 million borrowed and an additional $2.9 million available on the Companys
revolving line of credit at September 30, 2004 based upon eligible collateral and
overadvance capabilities provided for in the credit facility.

The
bank term loans also contain provisions that require the Company to maintain certain
financial ratios and minimum stockholders equity levels. 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 as of September
30, 2004.

At
September 30, 2004, the Company also had a $300,000 line of credit available for purchases
of equipment at an interest rate of prime plus .75%. Advances on the line of credit are
repayable over a three-year term. There were no amounts outstanding on this line of credit
at September 30, 2004.

In
June 2004, the Company repaid $4,000,000, the entire outstanding balance of its
subordinated note, which was due in June 2007, with the proceeds of an additional term
loan and advances on its revolving line of credit. At the time of the repayment, the
carrying value of the note was $3,259,000. The remaining amount of $741,000 represented
the balance of the original issue discount (OID) associated with the warrants
that were issued to the holder of the note in June 2002. This OID was being amortized over
the term of the note (five years), however, when the note was completely repaid, the
remaining amount was amortized.

9

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The
Company incurred a prepayment penalty of $120,000 when the note was repaid, and this
amount was recorded as additional interest expense.

# NOTE H 
CONTINGENCIES

In
November 1998, MTL, a discontinued operation, 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 I 
STOCKHOLDER EQUITY

In
June 2002, the Company issued subordinated notes to an investor (see Note G). 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 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 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 occurred 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, $1,240,000, was being amortized over the five year term of the subordinated
notes and a corresponding increase in the carrying value of the subordinated notes.

In
April 2004, the investors exercised their rights to acquire 566,517 shares of common stock
under the terms of the warrant agreement and sold the common stock. The terms of the
warrant agreement contained certain anti-dilution provisions. The warrant agreement also
contained a make-whole provision that obligated the Company to pay certain amounts to the
holders of the warrants if they did not ultimately receive an amount equal to the price
per share of the common stock on the date they exercise their right to purchase the common
shares that underlie the warrants. The warrant agreement also contained a provision that
may have obligated the Company to pay certain amounts to the holders of the warrants in
the event there was a change in control of the voting common stock of the Company, if
there was a sale of the Company, or if there was a public offering of the Companys
common stock. All of the Companys obligations under the warrant agreement, described
above, were extinguished at the time the investor sold the common stock, and the
subordinated note was repaid (see Note G).

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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, 2004, all dividends were paid in cash. The preferred stock is
convertible into 847,457 shares of the Companys common stock at $2.36 per share. 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. The terms of the convertible
preferred stock agreement contains certain anti-dilution provisions and also contains a
make-whole provision that obligates the Company to pay certain amounts to the holder of
the 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 convert the
convertible preferred stock into common stock. The Company followed the accounting
prescribed in EITF 98-5 and EITF00-27 for the recording of the convertible
preferred stock and the constructive dividend.

The
make-whole provision and certain anti-dilution 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 of common stock at some future
date; however, since the issuance of these shares is contingent on future events, the
effect of this feature will be recorded at the time the events occur. In addition, if the
holder of the preferred stock receives a certain multiple of its investment once the
convertible preferred shares are converted into common stock and the common stock is
subsequently sold, the make-whole provision is no longer applicable.

In
the event that the Company is required to make payments to the holders of the convertible
preferred stock, it may elect to issue additional convertible preferred stock in lieu of a
cash payment. Although the make-whole provision and other provisions of the convertible
preferred stock agreement provide for a maximum of 12,500,000 shares of common stock 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.

During
September 2004, the Company issued 50,000 common shares that are restricted under the
Securities and Exchange Commission Rule 144 to its former Chief Financial Officer as
remaining compensation under his employment agreement.  The restriction on the common
shares lapses on January 1, 2005.  The Company recorded compensation expense in the
amount of $351,500 during the three months ended September 30, 2004 based on the fair
value of the shares at the grant date.

# NOTE J  FINANCING
COSTS

During
fiscal year 2003, the Company incurred approximately $1,458,000 of financing costs
including the value of the warrants issued to the Companys financial advisors
related to obtaining certain financing described in Notes G and I. 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, $1,090,000, have been
recorded as other assets and have been amortized over the repayment term of the various
loans and notes. The financing costs that were allocated to the equity proceeds, $368,000,
were recorded as a reduction of the equity proceeds. In June 2004, the Company completely
repaid the outstanding loans that were obtained in fiscal year 2003. As a result,
financing costs in the amount of $420,000 that were allocated to these loans that remained
on the date the loans were completely repaid were completely amortized. The loans were
repaid with the proceeds of a new term loan and advances on a revolving line of credit.
During the period ended June 30, 2004, the Company incurred $95,000 of financing costs
associated with the new financing. These costs have been recorded as other assets and will
be amortized over the three-year term of the new loans.

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# NOTE K  OTHER
ASSETS

Other
assets consists of the following:

|                                        | Amortization |  |        |  |   |       
|--------------------------------------- | ------------ |  | ------ |  | - | ------
|
|
|
|
|
|Product
      Development  (see Note F) |              |  | 5      |  | $ | 2,530 
|Less:  Accumulated Amortization         |              |  |        |  |   | (1,036
|                                        |              |  |        | 
|                                        |              |  |        |  | $ | 1,494 
|                                        |              |  |        | 
|
|Patents (See Note L)                    |              |  | 5 - 17 |  | $ | 2,388 
|Less:   Accumulated Amortization        |              |  |        |  |   | (1,154
|                                        |              |  |        | 
|                                        |              |  |        |  | $ | 1,234 
|                                        |              |  |        | 
|
|Financing
      Costs  (see Note J)     |              |  | 3 - 5  |  | $ | 95    
|Less:  Accumulated Amortization         |              |  |        |  |   | (9    
|                                        |              |  |        | 
|                                        |              |  |        |  | $ | 86    
|                                        |              |  |        | 
|
|Other                                   |              |  | 5      |  | $ | 218   
|Less:  Accumulated Amortization         |              |  |        |  |   | (146  
|                                        |              |  |        | 
|                                        |              |  |        |  | $ | 72    
|                                        |              |  |        | 
|Total
      Other Assets, Net           |              |  |        |  | $ | 2,886 
|                                        |              |  |        | 

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

# NOTE L  RELATED
PARTY TRANSACTIONS

On
July 28, 2003, the Company entered into an Asset Purchase Agreement with the Siegel Family
Trust (the Trust) to purchase the rights to certain proprietary technology
that had previously been available to the Company through a license agreement between the
Company and the Trust. In order to assist the Company in determining the appropriate value
of the rights to the proprietary technology, the Board of Directors formed a special
committee comprised of three outside independent directors. The special committee engaged
an independent third party who appraised the value of the proprietary technology at
$1,132,000. As part of the agreement, the Trust agreed to terminate the license agreement.
The purchase price of the appraised amount of the proprietary technology and $348,000 of
accrued and unpaid royalties will be paid to the Trust in the form of a promissory note
that is payable in sixty (60) monthly payments of $28,785, beginning on August 1, 2003,
including interest at the rate of 6.25%. The Company reduced the purchase price of the
rights by the amount of the unpaid royalties and recorded the resulting amount as patents.
The patents will be amortized over a five-year period, which represents the remaining life
of the patents related to these rights. The amortization expense related to these patents
for the six months ended September 30, 2004 and 2003 was approximately $113,000, and
$38,000, respectively.

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# NOTE M  LEASE
COMMITMENTS

The
Company currently leases a 79,600 square foot plant consisting of office, manufacturing
and warehousing space. On March 31, 2004, the Company provided its landlord with notice of
intent to terminate this lease on October 31, 2004. Effective October 1, 2004, the Company
will occupy the new premises. The lease for the new premises will be for a term of twelve
(12) years. The premises consists of approximately 132,000 square feet, and the monthly
lease payments begin at $35,000 plus tax in the first year and increases to $80,270 plus
tax in the final year. In addition, the Company is obligated to pay annual operating
expenses, i.e., insurance, taxes and common area maintenance fees. The Company was paid a
move-in allowance, by the landlord, of $400,000 on the commencement date of the lease,
which will be amortized over the remaining term of the current lease. In addition, the
Company has accelerated the amortization of approximately $237,000 associated with the
abandonment of leasehold improvements that were made to the current premises over the
remaining life of the current lease. Also, the Company expects to incur approximately
$350,000 in costs associated with the move to the new facility and expenses associated
with bringing the current premises into a condition acceptable to the landlord. Although
an estimate cannot be reasonably made, management does not believe these costs will have a
material impact on the financial statements. The moving expenses are expected to be
recorded in the third quarter of this fiscal year.

The
Company also leases approximately 5,200 square feet of office and warehouse space in
Cleveland, Ohio at $3,200 per month. The lease expires on March 31, 2005.

One
of the Companys subsidiaries, MTS Medication Technologies, Ltd., rents office and
warehouse space in Lancashire, England at £1,929 per month, which as of September
30, 2004, is equivalent to approximately $3,490. This lease is for a term of one year.

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# MEDICAL TECHNOLOGY
SYSTEMS, INC. AND SUBSIDIARIES MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONSFOR THE SIX MONTHS ENDED SEPTEMBER 30, 2004

ITEM 2.    
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

References
in this Form 10-Q to the Company, MTS, we,
our or us means MTS Medication Technologies, Inc., together with
its subsidiaries, except where the context otherwise indicates. This Form 10-Q contains
forward-looking statements within the meaning of that term in Section 27A of the
Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Additional
written or oral forward-looking statements may be made by us from time to time, in filings
with the Securities and Exchange Commission or otherwise. Statements contained herein that
are not historical facts are forward-looking statements made pursuant to the safe harbor
provisions described above. Forward-looking statements may include, but are not limited
to, projections of revenues, income or losses, capital expenditures, plans for future
operations, the elimination of losses under certain programs, financing needs or plans,
compliance with financial covenants in loan agreements, plans for sale of assets or
businesses, plans relating to our products or services, assessments of materiality,
predictions of future events and the effects of pending and possible litigation, as well
as assumptions relating to the foregoing. In addition, when used in this discussion, the
words anticipates, estimates, expects,
intends, believes, plans and variations thereof and
similar expressions are intended to identify forward-looking statements.

Forward-looking
statements are inherently subject to risks and uncertainties, some of which cannot be
predicted or quantified based on current expectations. Consequently, future events and
actual results could differ materially from those set forth in, contemplated by, or
underlying the forward-looking statements contained herein. Statements in Quarterly
Reports, particularly in Item 2. Managements Discussion and Analysis of
Financial Condition and Results of Operations and Notes to Condensed Consolidated
Financial Statements, describe factors, among others, that could contribute to or cause
such differences. Other factors that could contribute to or cause such differences
include, but are not limited to, unanticipated increases in operating costs, labor
disputes, capital requirements, increases in borrowing costs, product demand, pricing,
market acceptance, intellectual property rights and litigation, risks in product and
technology development and other risk factors detailed in our Securities and Exchange
Commission filings. In particular any comments regarding possible default waivers related
to our loan agreement are forward-looking statements.

Readers
are cautioned not to place undue reliance on any forward-looking statements contained
herein, which speak only as of the date hereof. We undertake no obligation to publicly
release the result of any revisions of 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.

# Summary of Results

We
experienced growth in revenue of 28% in the second quarter and 35% in the six months ended
September 30, 2004 compared to the same periods of the prior year. Our revenue grew due to
increased sales of our disposable products to existing and new customers and increased
sales of our machines including the OnDemand® machine. We believe the revenue increase
in our disposable products is the result of: (1) increased penetration of independent
pharmacies and new markets; and (2) growth in market demands due to the aging demographics
of the U.S. population.

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The
following table sets forth, for the three-month and six month periods indicated, certain
key operating results and other financial information (in thousands, except per share
data).

|                                  | Three Month Ended                        |  | Six Months Ended
|--------------------------------- | ---------------------------------------- |  | ----------------
|
|
|
|
|                                  | (In Thousands; Except Per Share Amounts)
|
|
|Net Revenue                       |                                          |  | $               
|Gross Profit                      |                                          |  | $               
|Operating Income                  |                                          |  | $               
|Net Income                        |                                          |  | $               
|Diluted Earnings (Loss) Per Share |                                          |  | $               

# ESTIMATES AND CRITICAL
ACCOUNTING POLICIES

The
preparation of our unaudited condensed financial statements in conformity with US GAAP
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 because future events and their affect on our
operations cannot be determined with absolute certainty. Actual results typically differ
from these estimates in some fashion, and at times, these variances may be material to our
financial statements. Management continually evaluates its estimates and assumptions,
which are based on historical experience and other factors that are believed to be
reasonable under these circumstances. These estimates and our actual results are subject
to the risk factors listed above under this Item 2. Managements Discussion and
Analysis of Financial Condition and Results of Operations. Nevertheless, our
management believes the following items involve a higher degree of complexity and,
judgment and therefore, has commented on these items below.

Revenue Recognition

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

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

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Valuation of Accounts
Receivable at September 30, 2004

Our
allowance for doubtful accounts of $227,000 at September 30, 2004 is based on
managements estimates of the credit-worthiness of our customers, current economic
conditions and historical information. In the opinion of management, our allowance for
doubtful accounts is believed to be an amount sufficient to respond to normal business
conditions. Historically, the levels of recorded bad debt expense and write-offs have not
been material to our financial statements. Should business conditions deteriorate or any
large customer default on its obligations to us, this allowance may need to be
significantly increased, which would have a negative impact upon our operations.

Inventory Obsolescence
Valuation Allowance

Our
allowance for inventory obsolescence and slow moving inventory is reviewed on a monthly
basis. We review various information related to the age and turnover of specific inventory
items to assist in our assessment. In the opinion of management, the valuation allowance
is believed to be sufficient to absorb the ultimate obsolescence of certain inventory as
they may occur. The inventory obsolescence valuation allowance was $166,000 at September
30, 2004.

Self-Insurance Plan
Reserve

We
have established a reserve for unpaid medical claims of $84,000 at September 30, 2004.
Management reviews claims history information provided to it by the third-party
administrator of the self insured plan on a regular basis and believes that the reserve is
sufficient to respond to the claims that may be incurred by the participants in the plan.

Deferred Tax Asset
Valuation Allowance

Our
deferred tax asset is comprised primarily of a tax loss carryforward. We believe that it
is more likely than not that the income tax benefits associated with the tax loss
carryforward will be realized in the future. Management bases this 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.

Impairment Valuations

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

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

Product Development

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

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Estimated Liabilities

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

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

Warranty

We
established a reserve for warranty costs that we may incur during the warranty period that
is provided for in the OnDemand machine sales agreements with our customers. To date,
warranty costs have not been material.

# RESULTS OF OPERATIONS

Three Months Ended
September 30, 2004 and 2003

Net
sales for the three months ended September 30, 2004 increased 28% to $10.2 million from
$8.0 million during the same period in the prior fiscal year. Net sales increased
primarily as a result of an increase in the amount of disposable punch cards and machines
sold to new and existing customers. In addition, revenue associated with the sale of
OnDemand machines was $0.8 million during the three months ended September 30, 2004
compared to $0.1 million in the same period in the prior year. Average selling prices for
disposable products were stable during the second quarter of fiscal year 2005 compared to
the same period in the prior fiscal year. The volume of disposable cards and machines is
currently anticipated to continue to grow as a result of the addition of new customers in
existing and new markets.

Cost
of sales for the three months ended September 30, 2004 increased 26% to $6.3 million from
$5.0 million during the same period in the prior year. Cost of sales as a percentage of
sales decreased to 61.3% from 62.2% during the same period in the prior fiscal year. Cost
of sales as a percentage of sales decreased in the second quarter of fiscal year 2005
compared to the same period in the prior year primarily due to an improvement in
efficiencies achieved in the manufacturing process for disposable products that were
realized from new production equipment added in the fourth quarter of fiscal 2004.

Selling,
general and administration expenses for the three months ended September 30, 2004
increased 62% to $2.7 million from $1.7 million in the prior year primarily due to: (i)
increased marketing expenses associated with our rebranding; (ii) increases in costs
related to sales personnel compensation plans that are tied to increased revenue and the
costs associated with senior management personnel that were added; and (iii) increases in
legal and professional fees, many of which related to compliance with the Sarbanes-Oxley
Act and related corporate governance issues. Also, employee benefit costs increased in the
second quarter of this year compared with the second quarter of the previous year. The
Company issued a 50,000 share restricted stock grant to its former Chief Financial Officer
in the second quarter incurring a charge of $351,500.

Depreciation
and amortization expenses for the three months ended September 30, 2004 increased 71% to
$527,000 from $309,000 during the same period of the prior year. The increase is primarily
due to accelerating the amortization of leasehold improvements made to our current
facility as a result of terminating our lease in anticipation of relocating in October
2004. In addition, we began to amortize the cost of the proprietary technology acquired
from a related party in the second quarter of the prior fiscal year. There was limited
amortization expense associated with this proprietary technology in the second quarter of
the prior year.

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Interest
expense for the three months ended September 30, 2004 decreased 50% to $103,000 from
$206,000 during the same period of the prior fiscal year. The decrease results primarily
from lower interest rates due to the refinancing of the $4,000,000 subordinated note in
June 2004.

Amortization
of original issue discount and financing costs decreased to $9,000 in the second quarter
of this year compared to $147,000 in the second quarter of the prior fiscal year. The
decrease resulted from the repayment of the $4,000,000 subordinated note in June 2004. At
that time, the remaining original issue discount and financing costs associated with that
note was completely amortized.

We
realized an income tax expense of $240,000 during the three months ended September 30,
2004 compared to $265,000 income tax expense during the same period in fiscal year 2004.
The effective tax rate for the period ended September 30, 2004 compared with the second
quarter of fiscal year 2004 remained the same.

Six Months Ended
September 30, 2004 and 2003

Net
sales for the six months ended September 30, 2004 increased 35% to $20.3 million from
$15.0 million during the same period in the prior fiscal year. Net sales increased
primarily as a result of an increase in the amount of disposable punch cards and machines
sold to new and existing customers. In addition, revenue associated with the sale of
OnDemand machines was $2.4 million during the six months ended September 30, 2004 compared
to $0.1 million in the same period of the prior fiscal year. Average selling prices for
disposable products were stable during the first six months of fiscal 2005 compared to the
same period in the prior fiscal year. The volume of disposable cards and machines is
currently anticipated to continue to grow as a result of the addition of new customers in
existing and new markets.

Cost
of sales for the six months ended September 30, 2004 increased 36% to $12.5 million from
$9.2 million during the same period in the prior fiscal year. Cost of sales as a
percentage of sales increased to 61.7% from 61.3% during the same period in the prior
fiscal year. Cost of sales as a percentage of sales increased because the product cost of
OnDemand machines as a percentage of sales is higher than the product cost of disposable
punch cards and six OnDemand machines were sold in the first half of this year compared
with one in the first half of the prior year.

Selling,
general and administration expenses for the six months ended September 30, 2004 increased
50% to $4.9 million from $3.3 million in the prior year primarily due to: (i) increased
marketing expenses associated with our rebranding; (ii) increases in costs related to
sales personnel compensation plans that are tied to increased revenue and the costs
associated with senior management personnel that were added; and (iii) increases in legal
and professional fees, many of which related to compliance with the Sarbanes-Oxley Act and
related corporate governance issues. Also, employee benefit costs increased in the first
six months of this year compared with the first six months of the previous year. In the
second quarter, the Company issued a 50,000 share restricted stock grant to its former
Chief Financial Officer incurring a charge of $351,500.

Depreciation
and amortization expenses for the six months ended September 30, 2004 increased 75% to
$1,025,000 from $585,000 during the same period in the prior fiscal year. The increase is
primarily due to accelerating the amortization of leasehold improvements made to our
current facility as a result of terminating our lease in anticipation of relocating in
October 2004. In addition, we began to amortize the cost of the proprietary technology
acquired from a related party in the second quarter of the prior fiscal year. There was
limited amortization expense associated with this proprietary technology in the first six
months of the prior year.

Interest
expense for the six months ended September 30, 2004 increased 2% to $416,000 from $409,000
during the same period in the prior fiscal year. The increase results primarily from the
fact that we incurred a $120,000 prepayment penalty when our $4,000,000 subordinated note
was repaid in June 2004 offset in part by lower debt levels and lower interest rates on
the new debt.

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Amortization
of original issue discount and financing costs increased to $1,287,000 for the first six
months of this year compared with $295,000 in the first quarter of the prior year. The
increase resulted from the repayment of the $4,000,000 subordinated note in June 2004. At
that time, the remaining original issue discount and financing costs associated with that
note was completely amortized.

We
realized an income tax expense of $150,000 during the six months ended September 30, 2004
compared to $470,000 income tax expense during the same period in the prior fiscal year.
The decrease results from the fact that we had lower income before tax during the
six-month period ended September 30, 2004 compared to the prior year. The increase in the
effective tax rate for the period ended September 30, 2004 compared with the same period
of the prior year resulted from the expense related to permanent difference between the
carrying value of the subordinated debt for book and tax purposes due to the repayment of
the subordinated debt in June 2004.

# LIQUIDITY AND CAPITAL
RESOURCES

During
the six months ended September 30, 2004, we had a net loss of $161,000 compared to net
income of $663,000 during the same period in the prior fiscal year. Cash provided by
operations was $2,931,000 during the six months ended September 30, 2004 compared to
$1,406,000 provided during the same period in the prior fiscal year. We had working
capital of $8,236,000 at September 30, 2004.

The
cash provided by operations during the six months ended September 30, 2004 consisted of
$51,000 net operating loss, $2,312,000 of depreciation and amortization, $150,000 in
income tax expense, $351,500 for restricted stock grant awarded, $794,000 in decreases in
accounts receivable, $114,000 increase in accounts payable and accrued liabilities offset
in part by a $708,000 increase in inventory and a $59,000 increase in prepaid expenses.

Investing
activities used $1,116,000 during six months ended September 30, 2004 compared to $731,000
during the same period in the prior fiscal year. The increase results primarily from an
increase in expenditures in property and equipment associated with the move of our
facilities.

Financing
activities used $1,708,000 during the six months ended September 30, 2004 compared to
$945,000 the same period the prior year primarily due to reductions in long-term debt that
resulted from cash provided by operations.

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

We
have new product development projects underway, principally new versions of our OnDemand
machine and our recently announced MedLocker system, 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 our ability to
fund them from cash flow from operations and other sources of capital.

There
was $4.9 million borrowed and an additional $2.9 million available on our revolving line
of credit at September 30, 2004 based upon eligible collateral and overadvance
capabilities provided for in the credit facility. In addition, we had $300,000 available
on our capital equipment line of credit.

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The
revolving line of credit, term loans and subordinated notes each contain financial
covenants that, among other things, requires us to maintain certain financial ratios,
tangible net worth and limits the amount of capital expenditures we can make. We were in
compliance with all provisions of the loan agreements at September 30, 2004.

We
believe that the cash generated from operations during this fiscal year, and amounts
available on our revolving line of credit, are expected to be sufficient to meet our
capital expenditures, product development, working capital needs and the principal
payments required by our term loan agreements.

# Item 3.     Quantitative and
Qualitative Disclosures About Market Risk

There
have been no material changes in our market risk during the six months ended September 30,
2004. Market risk information is contained under the caption Quantitative And
Qualitative Disclosures About Market Risk of our annual report on Form 10-K for
the fiscal year ended March 31, 2004 and is incorporated herein by reference.

# Item 4.    Controls and
Procedures

Evaluation of Disclosure
Controls and Procedures

We
carried out an evaluation required by Rules 13a-15 and 15d-15 under the Securities
Exchange Act of 1934 (the Evaluation), under the supervision and with the
participation of our management, including our Chief Executive Officer (CEO)
and Chief Financial Officer (CFO), of the effectiveness of our disclosure
controls and procedures as defined in Rules 13a-15 and 15d-15 promulgated under the
Securities Exchange Act of 1934 (Disclosure Controls). Although we believe
that our pre-existing Disclosure Controls were adequate to enable us to comply with our
disclosure obligations, as a result of such Evaluation, we implemented minor changes,
primarily to formalize, document and update the procedures already in place. Based on the
Evaluation, our CEO and CFO concluded that, subject to the limitations noted below, our
Disclosure Controls are effective in timely alerting them to material information required
to be in our periodic Securities and Exchange Commission reports.

Changes in Internal
Controls

There
has not been any change in our internal control over financial reporting identified in
connection with the Evaluation that occurred during the quarter ended September 30, 2004
that has materially affected or is reasonably likely to materially affect, those controls.

Limitations on the
Effectiveness of Controls

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

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

CEO and CFO
Certifications

Exhibits
31.1 and 31.2 are Certifications of the CEO and the CFO, respectively. The Certifications
are required in accordance with Section 302 of the Sarbanes-Oxley Act of 2002 (the
Section 302 Certifications). This Item of this report, which you are currently
reading, is the information concerning the Evaluation referred to in the Section 302
Certifications and this information should be read in conjunction with the Section 302
Certifications for a more complete understanding of the topics presented.

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# PART II  OTHER
INFORMATION

# Item 6.    Exhibits

| | 10.1 | Employment Agreements between MTS and Michael Stevenson and MTS and Michael Branca are
incorporated by reference to MTSs Form 8-K filed on September 10, 2004.
| | ---- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 31.1 | Certification of the President and Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
| | ---- | ---------------------------------------------------------------------------------------------------------------------

| | 31.2 | Certification of the Vice President and Chief Financial  Officer pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
| | ---- | ---------------------------------------------------------------------------------------------------------------------------

| | 32.1 | Certification of the President and Chief Executive Officer pursuant to 18 U.S.C.ss.1350.
| | ---- | ----------------------------------------------------------------------------------------

| | 32.2 | Certification the Vice President and Chief Financial Officer pursuant to 18 U.S.C.ss.1350.
| | ---- | ------------------------------------------------------------------------------------------

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# Signatures

Pursuant
to the requirements 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.

|                          | MTS MEDICATION TECHNOLOGIES, INC.
|------------------------- | ---------------------------------
|
|Date:   November 15, 2004 |                                  
|                          |                                  
|                          |                                  
|                          |                                  

|                          | 
|------------------------- | 
|Date:   November 15, 2004 | 
|                          | 
|                          | 
|                          | 

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Exhibit 31.1

CERTIFICATION PURSUANT
TO SECTION 302

OF THE SARBANES-OXLEY
ACT OF 2002

I, Todd E. Siegel, certify that:

1.       
          I have reviewed this quarterly report on Form 10-Q of MTS Medication
          Technologies, Inc.;

2.       
          Based on my knowledge, this 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 report;

3.       
          Based on my knowledge, the financial statements, and other financial information
          included in this 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 report;

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

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

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

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

|(d) |  | Designed such internal control over financial reporting, or caused such internal
               control over financial reporting to be designed under our supervision to provide
               reasonable assurance regarding the reliability of financial reporting and the
               preparation of financial statements for external purposes in accordance with
               generally accepted accounting principles.
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

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

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

|                          |  |  |  | 
|------------------------- |  |  |  | 
|Date:   November 15, 2004 |  |  |  | 
|                          |  |  |  | 
|                          |  |  |  | 

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Exhibit 31.2

CERTIFICATION PURSUANT
TO SECTION 302

OF THE SARBANES-OXLEY
ACT OF 2002

I, Michael Branca,
certify that:

1.       
          I have reviewed this quarterly report on Form 10-Q of MTS Medication
          Technologies, Inc.;

2.       
          Based on my knowledge, this 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 report;

3.       
          Based on my knowledge, the financial statements, and other financial information
          included in this 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 report;

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

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

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

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

|(d) |  | Designed such internal control over financial reporting, or caused such internal
               control over financial reporting to be designed under our supervision to provide
               reasonable assurance regarding the reliability of financial reporting and the
               preparation of financial statements for external purposes in accordance with
               generally accepted accounting principles.
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

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

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

|                          |  |  |  | 
|------------------------- |  |  |  | 
|Date:   November 15, 2004 |  |  |  | 
|                          |  |  |  | 
|                          |  |  |  | 

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Exhibit 32.1

CERTIFICATION PURSUANT
TO

18 U.S.C. §1350,
AS ADOPTED PURSUANT TO

SECTION 906 OF THE
SARBANES-OXLEY ACT OF 2002

In
connection with the quarterly report of MTS Medication Technologies, Inc. (the
Company) on Form 10-Q for the quarterly period ended September 30, 2004, as
filed with the Securities and Exchange Commission on the date hereof (the Form
10-Q), I, Todd E. Siegel, President and Chief Executive Officer of the Company,
certify, pursuant to 18 U.S.C. §1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, that:

(1)       
          The Form 10-Q 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-Q fairly presents, in all material
          respects, the financial condition and results of operations of the Company.

|                                      | 
|------------------------------------- | 
|Dated:
          November 15, 2004    | 
|                                      | 
|/s/Todd E. Siegel                     | 
|Todd E. Siegel                        | 
|President and Chief Executive Officer | 
|                                      | 
|                                      | 

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Exhibit 32.2

CERTIFICATION PURSUANT
TO

18 U.S.C. §1350,
AS ADOPTED PURSUANT TO

SECTION 906 OF THE
SARBANES-OXLEY ACT OF 2002

In
connection with the quarterly report of MTS Medication Technologies, Inc. (the
Company) on Form 10-Q for the quarterly period ended September 30, 2004, as
filed with the Securities and Exchange Commission on the date hereof (the Form
10-Q), I, Michael Branca, Vice President and Chief Financial Officer of the Company,
certify, pursuant to 18 U.S.C. §1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, that:

(1)
               
          The Form 10-Q 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-Q fairly presents, in all material
          respects, the financial condition and results of operations of the Company.

|                                           | 
|------------------------------------------ | 
|Dated:
          November 15, 2004         | 
|                                           | 
|/s/Michael Branca                          | 
|Michael Branca                             | 
|Vice President and Chief Financial Officer | 
|                                           | 
|                                           | 

27