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 December 31, 2003

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

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

Commission File Number:   
0-16594

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

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

| |                                                        
| | -------------------------------------------------------
| | 12920 Automobile Boulevard,
        Clearwater, Florida
| |                                                        
| | (Address of Principal Executive Offices)               

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

| |                                                                                            | 
| | ------------------------------------------------------------------------------------------ | 
| |                                                                                            | 
| |                                                                                            | 
| | (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 February 12, 2004, the registrant had 4,717,987 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 - December 31, 2003 and March 31, 2003                               | 
|
| |         | Condensed Consolidated
        Statements of Earnings - Three and Nine Months Ended December 31, 2003 and 2002     | 
|
| |         | Condensed Consolidated Statements
        of Changes in Stockholders' Equity - Nine Months Ended December 31, 2003 | 
|
| |         | Condensed Consolidated Statements
        of Cash Flows - Nine Months Ended December 31, 2003 and 2002             | 
| |         |                                                                                                                    | 
| |         | 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 and Reports on Form 8-K                                                                                   | 
|
| |         | Signatures                                                                                                         | 

i.

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Table of Contents

PART 1  FINANCIAL
INFORMATION

Item 1. Financial
Statements

MEDICAL
TECHNOLOGY SYSTEMS, INC. AND SUBSIDIARIESCONDENSED CONSOLIDATED BALANCE SHEETS

(In Thousands)

# ASSETS

|                            | December 31, |  | March 31, |       
|--------------------------- | ------------ |  | --------- | ------
|
|
|
|
|Current Assets:             |              |  |           |       
|Cash                        |              |  | $         | 245   
|Accounts Receivable, Net    |              |  |           | 5,180 
|Inventories                 |              |  |           | 3,630 
|Prepaids and Other          |              |  |           | 404   
|Deferred Tax Benefits       |              |  |           | 1,291 
|
|Total Current Assets        |              |  |           | 10,750
|Property and Equipment, Net |              |  |           | 3,939 
|Other Assets, Net           |              |  |           | 3,562 
|Deferred Tax Benefits       |              |  |           | 1,169 
|
|Total Assets                |              |  | $         | 19,420
|

# LIABILITIES AND
STOCKHOLDERS EQUITY

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

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

1

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# MEDICAL TECHNOLOGY
SYSTEMS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS

(In Thousands; Except
Earnings Per Share Amounts)

(Unaudited)

|                                                      | Three Months Ended |  | Nine Months Ended |      
|----------------------------------------------------- | ------------------ |  | ----------------- | -----
|
|                                                      |                    |  |                   |      
|
|
|Revenue:                                              |                    |  |                   |      
|Net Sales                                             |                    |  | $                 | 9,582
|Costs and Expenses:                                   |                    | 
|Cost of Sales                                         |                    |  |                   | 5,684
|Selling,
           General and Administrative        |                    |  |                   | 2,023
|Depreciation and
           Amortization              |                    |  |                   | 282  
|                                                      |                    |  |                   |      
|Total Costs and Expenses                              |                    |  |                   | 7,989
|                                                      |                    |  |                   |      
|Operating Profit                                      |                    |  |                   | 1,593
|Other Expenses                                        |                    | 
|Interest Expense                                      |                    |  |                   | 221  
|Amortization of:                                      |                    | 
|Financing
       Costs                                |                    |  |                   | 128  
|Original
             Issue Discount                  |                    |  |                   | 62   
|                                                      |                    |  |                   |      
|Total Other Expenses                                  |                    |  |                   | 411  
|Income Before Income Taxes                            |                    |  |                   | 1,182
|Income Tax Expense                                    |                    |  |                   | 448  
|                                                      |                    |  |                   |      
|Net Income                                            |                    |  |                   | 734  
|Non-Cash Constructive Dividend Related to             |                    | 
|Beneficial Conversion Feature
         of Convertible |                    | 
|Preferred
            Stock                           |                    |  |                   | 0    
|Convertible Preferred Stock Dividends                 |                    |  |                   | 55   
|                                                      |                    |  |                   |      
|Net Income Available to Common Stockholders           |                    |  | $                 | 679  
|                                                      |                    |  |                   |      
|Net Income Per Basic Common Share                     |                    |  | $                 | 0.13 
|                                                      |                    |  |                   |      
|Net Income Per Diluted Common Share                   |                    |  | $                 | 0.10 
|                                                      |                    |  |                   |      
|Weighted Average Shares - Basic                       |                    |  |                   | 5,045
|                                                      |                    |  |                   |      
|Weighted Average Shares Outstanding - Diluted         |                    |  |                   | 6,937
|                                                      |                    |  |                   |      

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

2

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# MEDICAL TECHNOLOGY
        SYSTEMS, INC. AND SUBSIDIARIESCONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY 
        NINE MONTHS ENDED DECEMBER 31, 2003(In Thousands)(Unaudited)

|                                                   | Common Stock |           | Preferred Stock |   | Capital |  |       |  |   |   | 
|-------------------------------------------------- | ------------ | --------- | --------------- | - | ------- |  | ----- |  | - | - | 
|
|
|
|
|
|Balance, March 31, 2003                            |              | 4,393,623 |                 | $ | 44      |  | 2,000 |  | $ | 1 | 
|
|Stock Options Exercised                            |              | 120,287   |                 |   | 1       |  |       |  |   |   | 
|
|Convertible Preferred Stock Dividend               |              |           |                 |   |         |  |       |  |   |   | 
|
|Currency Exchange Gain                             |              |           |                 |   |         |  |       |  |   |   | 
|
|Net Income for Nine Months Ended December 31, 2003 |              |           |                 |   |         |  |       |  |   |   | 
|
|Balance, December 31, 2003                         |              | 4,513,910 |                 | $ | 45      |  | 2,000 |  | $ | 1 | 
|

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

3

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MEDICAL TECHNOLOGY SYSTEMS, INC. AND SUBSIDIARIESCONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS(In Thousands)(Unaudited)

|                                                        | Nine Months Ended
|------------------------------------------------------- | -----------------
|
|                                                        |                  
|
|
|
|Operating Activities                                    |                  
|Net Income                                              |                  
|
|Adjustments to
        Reconcile Net Income to Net Cash |                  
|Provided by Operating Activities:                       |                  
|Reserve for Obsolete Inventory                          |                  
|Amortization of Deferred Financing Costs                |                  
|Amortization of Original Issue Discount                 |                  
|Depreciation and Amortization                           |                  
|Income Tax Expense                                      |                  
|(Increase) Decrease in:                                 |                  
|Accounts Receivable                                     |                  
|Inventories                                             |                  
|Prepaids and Other                                      |                  
|Increase (Decrease) in:                                 |                  
|Accounts Payable and 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 |                  
|Borrowing on Term Loans
        and Subordinated Notes  |                  
|Issuance of Convertible
        Preferred Stock         |                  
|Exercise of Stock
        Options                       |                  
|Expended for Financing
        Costs                    |                  
|Dividends on
        Convertible Preferred Stock        |                  
|
|Net Cash (Used) by
        Financing Activities         |                  
|
|Net (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

December     31,
2003     Non-Cash Financing Activities  The Company purchased $199,000 in equipment and
financed the purchase with a capital lease obligation.

December 31, 2003     
        Non-Cash Financing Activities  See Notes F, G, I and M.

4

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# MEDICAL TECHNOLOGY
SYSTEMS, INC. AND SUBSIDIARIESNOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED DECEMBER 31, 2003

# 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 three- and nine-month periods
ended December 31, 2003 are not necessarily indicative of the results that may be expected
for the year ended March 31, 2004. 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, 2003.

The
unaudited condensed consolidated financial statements include the accounts of the Company
and its subsidiaries, MTS Packaging Systems, Inc. (MTS Packaging) and MTS
Packaging Systems International, Ltd. (MTSPI). All other subsidiaries of the
Company did not have operations during the nine-month periods ended December 31, 2003 and
2002.

# NOTE B  INVENTORIES

The
components of inventory consist of the following:

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

NOTE C  EARNINGS PER SHARE

Net Income per common share is computed by dividing net income available to common shareholders by
the basic and diluted weighted average number of shares of common stock outstanding.  The number of shares
of common stock, for purposes of the basic earnings per share computation, include 566,517 shares that could
result from the exercise of warrants exercisable at $.01 per share by the holder of the warrants (see Note G).
For diluted  weighted  average shares outstanding, the Company used the treasury stock method to calculate
the common stock equivalents that the stock options and warrants would represent.  In addition, for diluted
weighted average shares outstanding, the convertible preferred stock has been treated as if it had been
converted into common stock on the date of issuance.

5

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

|                                                                              | Three Months Ended                       |  | Nine Months Ended |      
|----------------------------------------------------------------------------- | ---------------------------------------- |  | ----------------- | -----
|
|
|
|
|                                                                              | (In Thousands; Except Per Share Amounts)
|
|Numerator:                                                                    |                                          |  |                   |      
|Net Income                                                                    |                                          |  | $                 | 734  
|Minus:                                                                        |                                          | 
|Constructive Dividend Related to Beneficial                                   |                                          | 
|Conversion Feature of the Convertible                                         |                                          | 
|Preferred Stock                                                               |                                          |  |                   | 0    
|Convertible Preferred Stock Dividend                                          |                                          |  |                   | 55   
|                                                                              |                                          |  |                   |      
|Net Income Available to Common
        Stockholders                           |                                          |  | $                 | 679  
|                                                                              |                                          |  |                   |      
|Denominator:                                                                  |                                          | 
|Weighted Average Shares
        Outstanding - Basic                           |                                          |  |                   | 5,045
|Add: Effect of Dilutive
        Warrants and Options                          |                                          |  |                   | 1,045
|Effect of Conversion of
        Convertible Preferred Stock into Common Stock |                                          |  |                   | 847  
|                                                                              |                                          |  |                   |      
|Weighted Average Shares
        Outstanding - Diluted                         |                                          |  |                   | 6,937
|                                                                              |                                          |  |                   |      
|Income Per Common Share 
        Basic                                       |                                          |  | $                 | 0.13 
|                                                                              |                                          |  |                   |      
|Income Per Common Share 
        Diluted                                     |                                          |  | $                 | 0.10 
|                                                                              |                                          |  |                   |      

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

# NOTE D  STOCK
BASED COMPENSATION

The
Company follows only the disclosure provisions of SFAS No. 123, Accounting for
Stock-Based Compensation(SFAS 123), which establishes a fair value based method of
accounting for stock-based employee compensation plans; however, the Company has elected
to account for its employee stock compensation plans using the intrinsic value method
under Accounting Principles Board Opinion No. 25, with pro forma disclosures of net
earnings and earnings per share as if the fair value based method of accounting defined in
SFAS 123 had been applied. The Company amortizes compensation costs related to the pro
forma disclosure using the straight-line method over the vesting period of the
employees common stock options. If compensation cost for the Companys stock
option plan had been determined based on the fair value at the grant dates for stock-based
employee compensation arrangements consistent with the method required by SFAS 123, the
Companys net income and net income per common share would have been the pro forma
amounts indicated below:

6

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|                                                                 | Three Months Ended                       |  | Nine Months Ended
|---------------------------------------------------------------- | ---------------------------------------- |  | -----------------
|
|
|
|
|                                                                 | (In Thousands; Except Per Share Amounts)
|
|Net Income Available to Common
         Shareholders as Reported |                                          |  | $                
|
|Less:                                                            |                                          |  |                  
|Stock Based Employee Compensation Cost Under the Fair            |                                          |  |                  
|Value Based Method, Net of Related Tax Effect                    |                                          |  |                  
|                                                                 |                                          |  |                  
|
|Net Income Proforma                                              |                                          |  | $                
|                                                                 |                                          |  |                  
|
|Net Income Per Common Share, Basic as Reported                   |                                          |  | $                
|
|Net Income Per Common Share, Basic Proforma                      |                                          |  | $                
|
|Net Income Per Share, Diluted as Reported                        |                                          |  | $                
|
|Net Income Per Share, Diluted Proforma                           |                                          |  | $                
|
|For Basic Income Per Share - Weighted Average Shares             |                                          |  |                  
|
|For Diluted Income Per Share - Weighted Average Shares           |                                          |  |                  

# NOTE  E  REVENUE
RECOGNITION

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

During
the quarter ended September 30, 2003, the Company reclassified, into cost of sales,
approximately $180,000 of freight costs incurred in the quarter ended June 30, 2003 that
had been improperly offset against revenue for freight billed to customers. In addition,
the appropriate reclassification was made to the second quarter ended September 30, 2002
financial statements in the amount of $127,000. The reclassifications did not result in a
change in gross profit or net income for the three or nine months ended December 31, 2003
or 2002.

7

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# NOTE  F  RESEARCH
AND DEVELOPMENT AND PRODUCT DEVELOPMENT

The
Company expenses product research and development costs as incurred. The Company incurred
approximately $136,000 and $119,000 during the nine months ended December 31, 2003 and
2002, respectively, for research and development costs.

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. During the nine months ended December 31, 2003, the
Company transferred approximately $92,000 from product development costs to inventory.
The Company capitalized approximately $68,000 of product development costs in the three months
ended December 31, 2003 compared with $125,000 in the comparable period the prior year and $320,000
in the nine months ended December 31, 2003 compared with $384,000 in the comparable period 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 $24,000 in the three
months ended December 31, 2003 compared with $28,000 in the prior year and $184,000 in the
nine months ended December 31, 2003 compared with $130,000 in the prior year.

At
December 31, 2003 and March 31, 2003, the Companys capitalized product development
costs included its new OnDemand product and versions thereof, which represented
$1,718,000 and $1,428,000, respectively, of the total capitalized product development
costs (see Note L).

# NOTE  G  LONG-TERM
DEBT

|                                                                                                                                             | December 31,   |   | March 31,
|-------------------------------------------------------------------------------------------------------------------------------------------- | -------------- | - | ---------
|
|
|                                                                                                                                             | (In Thousands)
|
|Revolving  Line of Credit
        due June 26, 2005 plus interest payable at 1% above the prime rate (5% at December 31, 2003).              |                | $ | 4,396    
|
|Bank Term Loan payable in monthly
        installments of $83,333 plus interest at 2.25% above the prime rate                                |                |   |          
|(6.25% at December 31, 2003) and fully repaid in January 2004.                                                                               |                |   | 153      
|
|Bank Term Loan payable in monthly
        installments of $11,667 plus interest at 1.25% above the prime rate                                |                |   |          
|(5.25% at  December 31, 2003) through June 2007.                                                                                             |                |   | 490      
|
|Note Payable to related party
        (see Note M) payable in monthly installments of $28,785 including interest at 6.25% through July 2008. |                |   | 1,368    
|
|Subordinated Note  Face amount of
        $4,000,000, less unamortized original issue discount of $865,000, due                             |                |   |          
|June 26, 2007 plus interest payable monthly at 14%.                                                                                          |                |   | 3,135    
|
|Other Notes and Agreements                                                                                                                   |                |   | 348      
|
|Total Long-Term Debt                                                                                                                         |                |   | 9,890    
|Less Current Portion                                                                                                                         |                |   | (567     
|
|LONG-TERM DEBT DUE AFTER 1 YEAR                                                                                                              |                | $ | 9,323    

8

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In
June 2002, the Company repaid the entire amount, $11,310,000, of its bank term loan with
the proceeds of a new revolving line of credit, term loans, a subordinated note and
convertible preferred stock. The revolving line of credit allows for borrowing of up to
$5,000,000 based upon advance rates that are applied to the Companys eligible
accounts receivable and inventory. At December 31, 2003, there was approximately $4.4
million borrowed and an additional approximately $600,000 available on the revolving line
of credit. Interest is payable on the revolving line of credit monthly based on the
average unpaid balance at the prime rate plus 1.0%.

One
term loan in the amount of $700,000 is repayable in equal monthly installments over a five
(5) year term, plus interest at the prime rate plus 1.25%. Another term loan in the amount
of $2,000,000 is repayable in equal monthly installments over two (2) years plus interest
at the prime rate plus 2.25% and is subject to an excess cash flow payment provision. The
Company and its lender agreed that the excess cash flow payment that was due on July 1,
2003, approximately $673,000, would be paid in equal monthly installments beginning August
1, 2003 and ending in January 2004, and as a result, the entire original amount of this
term loan will be paid at that date.

The
subordinated note in the amount of $4,000,000 is repayable in five (5) years with interest
only, at 14%, payable monthly until the maturity of the note. The subordinated note is
secured by a second lien on all of the assets of the Company. In addition, the
subordinated note holders were issued 566,517 warrants to purchase common stock
exercisable for ten (10) years at $.01 per share (subject to certain antidilution
provisions) (see Note I). The relative value of the warrants, and certain embedded
features of the warrants, were recorded as part of the stockholders equity and
reduced the carrying amount of the subordinated note as an original issue discount. The
original issue discount is being amortized over the five (5) year term of the subordinated
note. Amortization expense related to the original issue discount was $62,000 and $186,000
for the three and nine months ended December 31, 2003.

The
terms of the warrant agreement contain certain antidilution provisions and also contain a
make-whole provision that obligates the Company to pay certain amounts to the holders of
the warrants if they do not ultimately receive an amount equal to the price per share of
the common stock on the date they exercise their right to purchase the common shares that
underlie the warrants. The warrant agreement also contains a provision that may obligate
the Company to pay certain amounts to the holders of the warrants in the event there is a
change in control of the voting common stock of the Company, if there is a sale of the
Company, or if there is a public offering of the Companys common stock. In the event
the Company is required to make payments to the holders of the warrants, it may elect to
issue additional warrants in lieu of cash payment. The maximum number of shares that the
Company may be required to issue is 12,500,000.

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

The
bank term loans also contain provisions that require the Company to maintain certain
financial ratios and minimum stockholders equity levels of the greater of $4,600,000
or 95% of the stockholders equity at the end of the previous fiscal year. 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 at January
31, 2004.

# 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.

9

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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.

Also
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 December 31, 2003, all dividends due in the amount of approximately $55,000
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 (see Note C). The Company followed the accounting prescribed in
EITF 98-5 and EITF 00-27 for the recording of the convertible preferred
stock and the constructive dividend.

The
terms of the warrant and convertible preferred stock agreements contain certain
antidilution provisions and also contain a make-whole provision that obligates the Company
to pay certain amounts to the holders of the warrants and convertible preferred stock if
they do not ultimately receive an amount equal to the price per share of the common stock
on the date they exercise their right to purchase the common shares that underlie the
warrants or convert the preferred stock into common stock. The warrant agreement also
contains a provision that may obligate the Company to pay certain amounts to the holders
of the warrants in the event there is a change in control of the voting common stock of
the Company, if there is a sale of the Company, or if there is a public offering of the
Companys common stock.

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

The
make-whole provision and certain antidilution provisions also represent a contingent
beneficial conversion feature of the convertible preferred stock. The effect of this
feature may result in the issuance of additional shares at some future date; however,
since the issuance of these shares is contingent on future events, the effect of this
feature will be recorded at the time the events occur.

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In
the event the Company is required to make payments to the holders of the warrants and/or
preferred stock, it may elect to issue additional warrants and/or preferred stock in lieu
of a cash payment. The make-whole provision and other provisions of the warrant agreement
and convertible preferred stock agreement provide for a maximum of 12,500,000 shares that
may be issued pursuant to those provisions.

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

The
Company also issued, to its financial advisors, 125,000 warrants to purchase common stock
as part of the fees related to the above referenced financing. The warrants are fully
exercisable for five (5) years at $1.50 per share. The value of these warrants, $324,000,
was determined based upon the value of the Companys common stock on the date the
warrants were issued. The Company recorded the value of the warrants as a component of its
financing costs incurred (see Note J).

# NOTE  J  FINANCING
COSTS

The Company
incurred approximately $1,458,000 of financing costs during the twelve months ended March
31, 2003, including the value of the warrants issued to the Companys financial
advisors related to obtaining certain financing described in Notes 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 will be amortized over the repayment term of the
various loans and notes. The financing costs that were allocated to the equity proceeds,
$368,000, have been recorded as a reduction of the equity proceeds. There were no
additional financing costs incurred during the nine-month period ending December 31, 2003.
Amortization expense related to the financing costs that was allocated to the debt was
$128,000 and $299,000 for the three and nine months ended December 31, 2003, respectively.

# NOTE  K  RECENT NEW
ACCOUNTING PRONOUNCEMENTS

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

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# NOTE  L  OTHER
ASSETS

Other
assets consists of the following:

|                                        | Amortization |  |        |  |   |      
|--------------------------------------- | ------------ |  | ------ |  | - | -----
|
|
|
|
|
|Product
      Development  (see Note F) |              |  | 5      |  | $ | 2,250
|Less:  Accumulated Amortization         |              |  |        |  |   | (702 
|                                        |              |  |        | 
|                                        |              |  |        |  | $ | 1,548
|                                        |              |  |        | 
|
|Patents (See Note M)                    |              |  | 5 - 17 |  | $ | 2,365
|Less:   Accumulated Amortization        |              |  |        |  |   | (967 
|                                        |              |  |        | 
|                                        |              |  |        |  | $ | 1,398
|                                        |              |  |        | 
|
|Financing
      Costs  (see Note J)     |              |  | 3 - 5  |  | $ | 1,110
|Less:  Accumulated Amortization         |              |  |        |  |   | (570 
|                                        |              |  |        | 
|                                        |              |  |        |  | $ | 540  
|                                        |              |  |        | 
|
|Other                                   |              |  | 5      |  | $ | 288  
|Less:  Accumulated Amortization         |              |  |        |  |   | (212 
|                                        |              |  |        | 
|                                        |              |  |        |  | $ | 76   
|                                        |              |  |        | 
|Total
      Other Assets, Net           |              |  |        |  | $ | 3,562
|                                        |              |  |        | 

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

# NOTE  M  RELATED
PARTY TRANSACTIONS

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

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# NOTE  N 
COMPENSATION MATTERS

In
July 2003, the Company entered into new employment agreements with its Chief Executive
Officer (CEO) and Chief Financial Officer (CFO) that expire on March 31, 2008 and March
31, 2006, respectively. All amounts that may be earned by the CEO and CFO are payable in
cash and do not provide the CEO or CFO with an election to receive any portion of the
amounts earned in the form of discounted common stock of the Company in lieu of cash.

In
July 2003, the Company and its CEO agreed to terminate, effective April 1, 2003, an
Executive Stock Appreciation Rights and a Non-Qualified Stock Option Agreement (SAR) that
was entered into in 1995. The agreement provided the CEO with an SAR equal to 3.25% of the
incremental increase in the aggregate value of the Companys common stock each
successive year. The agreement also allowed the CEO to receive all amounts owed pursuant
to the agreement in the form of discounted common stock of the Company in lieu of cash.

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# MEDICAL TECHNOLOGY
SYSTEMS, INC. AND SUBSIDIARIES MANAGEMENTS DISCUSSION AND ANALYSIS OFFINANCIAL CONDITION
AND RESULTS OF OPERATIONSFOR THE NINE MONTHS ENDED DECEMBER 31, 2003

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

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 the Company 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 products or services
of the Company, assessments of materiality, predictions of future events and the effects
of pending and possible litigation, as well as assumptions relating to the foregoing. 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 can 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 the Companys Securities
and Exchange Commission filings. In particular any comments regarding possible default
waivers related to the Companys 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. The Company undertakes 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.

# Operations

The
Company has continued to experience growth in revenue derived from its disposable punch
card product lines primarily due to (1) increased penetration of independent pharmacies
throughout the country and (2) the aging demographics of the U.S. population. Independent
pharmacies are those that are not affiliated with pharmacies that are national in scope,
but rather rely on the relationships they have with nursing homes and assisted living
facilities in a small geographic region.

As
the population ages, the number of nursing home and assisted living facility residents
grows, which benefits our entire customer base and, in turn, us. In addition, our revenue
growth has been enhanced by increased sales of the machines the Company manufactures and
sells to its customers, including our new OnDemand® machines.

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

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Although
the cost of raw materials used to manufacture the disposable punch cards has risen during
the nine months ended December 31, 2003 as compared with the equivalent period in the
previous fiscal year, the Company has been successful in maintaining the relationship
between its selling prices and direct cost of materials by adjusting prices where
appropriate and developing efficiencies by adding new manufacturing equipment that
produces cards and blisters. These efficiencies have also offset direct labor cost
increases.

Overhead
costs incurred in manufacturing have risen approximately 11% in the nine months ended
December 31, 2003 from approximately $2.6 million to approximately $2.9 million compared
to the same period in the prior fiscal primarily due to costs added to properly supervise
and warranty the OnDemand product line. The Company expects this trend will continue for
the remaining portion of fiscal 2004 and for at least some period of fiscal year 2005 as
the OnDemand product line generates more customer interest and subsequent revenue.

Direct
selling costs declined to $1.5 million for the nine months ended December 31, 2003
compared to $1.6 million for the same period in the prior fiscal year because the Company
has not added significantly to the sales and customer service support staff. However,
marketing costs have increased over the same period in the prior fiscal year, from
approximately $327,000 to approximately $493,000, as more resources are dedicated to
improving product awareness in existing markets, such as skilled nursing and new markets,
such as assisted living. Also, it has been necessary to add technical support personnel to
assist in the installation and user training of OnDemand machines. The Company expects
that selling and marketing costs, as well as OnDemand support costs, will continue to rise
as it attempts to reach new markets for its disposable products and additional OnDemand
machine sales are realized.

Administrative
costs have risen approximately 13% in the first nine months ended December 31, 2003
compared to the same period in the prior fiscal year from approximately $2.8 million to
approximately $3.3 million. The increase is primarily due to costs that have been added to
support the operations in the United Kingdom and personnel related expenses including
employee benefit costs.

# Liquidity

Cash
flow from operations has been sufficient in the first nine months ended December 31, 2003
to fund the necessary capital expenditures and product development projects that are
underway. The overall revolving line of credit limit and the borrowing base availability
limitations have been sufficient to support the increases in both accounts receivable and
inventory that have resulted from increased revenue. As of January 2, 2004, the Company
has completely repaid one of its senior term loans. We expect to examine several options
that may be available to us to restructure or retire all or part of the existing
subordinated debt that carries a significantly higher interest rate. We do not carry
significant cash balances because our excess cash is used to reduce the balance on our
revolver and thereby providing additional borrowing availability. We view our borrowing
availability as our cash reserve. As we look forward, we believe that it may be necessary
to adjust the overall limit on our revolving line of credit to provide adequate capital to
fund our working capital needs. We intend to address that issue during our fourth fiscal
quarter of this year or the first quarter of next fiscal year.

# ESTIMATES AND CRITICAL
ACCOUNTING POLICIES

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

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Valuation of Accounts
Receivable at December 31, 2003

The
Companys allowance for doubtful accounts of $181,000 at December 31, 2003 is based
on managements estimates of the credit-worthiness of its customers, current economic
conditions and historical information. In the opinion of management, the Companys
allowance for doubtful accounts is believed to be an amount sufficient to respond to
normal business conditions. Historically, the levels of recorded bad debt expense and
write-offs have not been material to the Companys financial statements. Should
business conditions deteriorate or any large customer default on its obligations to the
Company, this allowance may need to be significantly increased, which would have a
negative impact upon the Companys operations.

Inventory Obsolescence
Valuation Allowance

The
Companys allowance for inventory obsolescence and slow moving inventory is reviewed
on a monthly basis. The Company reviews various information related to the age and
turnover of specific inventory items to assist in its assessment. In the opinion of
management, the valuation allowance is believed to be sufficient to absorb the ultimate
obsolescence of certain inventory as they may occur. The inventory obsolescence valuation
allowance was $211,000 at December 31, 2003.

Self-Insurance Plan
Reserve

The
Company established a reserve for unpaid medical claims of $89,000 at December 31, 2003.
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

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

Impairment Valuations

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

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

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Product Development

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

Estimated Liabilities

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

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

Warranty

The
Company establishes a reserve for warranty costs it may incur during the warranty period
that is provided for in the OnDemand machine sales agreements with its customers. To date,
warranty costs have not been material.

# RESULTS OF OPERATIONS

Three Months Ended
December 31, 2003 and 2002

Net
sales for the three months ended December 31, 2003 increased 24.6% to $9.6 million from
$7.7 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 increased in the three months ended December 31, 2003 compared to the
same period in the prior year. Average selling prices for disposable products were
slightly higher during the third quarter of fiscal 2004 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 December 31, 2003 increased 23.9% to $5.7 million from
$4.6 million during the same period in the prior year. Cost of sales as a percentage of
sales decreased to 59.4% from 59.7% during the same period in the prior fiscal
year. Cost of sales as a percentage of sales decreased on disposable punch cards because
the volume of punch cards increased, and therefore, absorbed more factory overhead costs.
However, overhead costs associated with the OnDemand product partially offset the
decreased cost of sales on disposable punch cards.

Selling,
general and administration expenses for the three months ended December 31, 2003 increased
11.1% to $2.0 million from $1.8 million in the prior year primarily due to increased
marketing expenses and support costs associated with the OnDemand machine product line. In
addition, operating costs in the United Kingdom were higher than in the prior fiscal year
primarily because of the addition of personnel and facilities to accommodate the growth in
business activity there.

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Depreciation
and amortization expenses for the three months ended December 31, 2003 increased 16.0% to
$282,000 from $243,000 during the same period in the prior fiscal year. The increase is
primarily a result of the fact that the Company began amortizing the capitalized product
development costs associated with the OnDemand machine during the second quarter of the
prior fiscal year and began amortizing the cost of the proprietary technology acquired in
the second quarter of this fiscal year. In addition, depreciation expense related to
capital expenditures made during the prior fiscal year contributed to the increase.

Interest
expense for the three months ended December 31, 2003 increased 1% to $221,000 from
$219,000 during the same period in the prior fiscal year. The increase results from an
overall increase in debt resulting from the purchase of proprietary technology from a
related party as well as higher borrowing on the revolving line of credit.

Other
expenses related to the June 2002 refinancing of the Companys long-term debt (see
Note G) were $190,000 and $151,000 during the three months ended December 31, 2003 and
2002, respectively. These expenses resulted from the amortization of certain costs
associated with the financing of approximately $128,000 and $89,000, respectively, as well
as the amortization of the original issue discount associated with the subordinated debt
portion of the financing of approximately $62,000 in both periods.

Income
tax expense increased 71% to $448,000 during the three months ended December 31, 2003
compared to $261,000 during the same period in the prior fiscal year. The increase results
from income tax expense associated with higher net income. There was no significant change
in the effective tax rates for the respective periods.

Nine Months Ended
December 31, 2003 and 2002

Net
sales for the nine months ended December 31, 2003 increased 14.9% to $24.6 million from
$21.4 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. Prices for disposable products were slightly higher
during the first nine months of fiscal 2004 compared to the same period in the prior
fiscal year. In addition, the Company realized an increase in revenue associated with sale
of OnDemand machines in the nine months ended December 31, 2003 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 nine months ended December 31, 2003 increased 13.7% to $14.9 million from
$13.1 million during the same period in the prior fiscal year. Cost of sales as a
percentage of sales decreased to 60.6% from 61.2% during the same period in the prior
fiscal year. Gross margins associated with disposable products increased in the nine
months ended December 31, 2003, however overhead costs associated with the OnDemand
product partially offset the decreased cost of sales on disposable punch cards.

Selling,
general and administration expenses for the nine months ended December 31, 2003 increased
10.4% to $5.3 million from $4.8 million in the same period during the prior fiscal year
primarily due to increased personnel benefit costs, costs associated with the
Companys operations in the United Kingdom, increased marketing costs and support
costs for the OnDemand machine product line.

Depreciation
and amortization expenses for the nine months ended December 31, 2003 increased 27.7% to
$867,000 from $679,000 during the same period in the prior fiscal year. The increase is
primarily a result of the fact that the Company began amortizing the capitalized product
development costs associated with the OnDemand machine during the second quarter of the
prior fiscal year and began amortizing the cost of the proprietary technology acquired in
the second quarter of this fiscal year. In addition, depreciation expense related to
capital expenditures made during the prior fiscal year contributed to the increase.

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Interest
expense for the nine months ended December 31, 2003 decreased 5.7% to $630,000 from
$668,000 during the same period in the prior year. Although the level of borrowing on the
revolving line of credit increased during the nine months ended December 31, 2003 and the
Company incurred more debt when it purchased proprietary technology from a related party,
the principal payments made in the nine months ended December 31, 2003 on the senior term
loans coupled with lower prime rates caused total interest expense to be lower in the nine
months ended December 31, 2003 compared to the same period in the prior fiscal year.

Other
expenses related to the June 2002 refinancing of the Companys long-term debt (see
Note G) increased to $485,000 during the nine months ended December 31, 2003 compared to
$305,000 during the same period in the prior fiscal year. These expenses resulted from the
amortization of certain costs associated with the financing of approximately $299,000 and
$178,000, respectively, as well as the amortization of the original issue discount
associated with the subordinated debt portion of the financing of approximately $186,000
and $127,000, respectively. These expenses increased because the financing was completed
at the end of the first quarter of the prior fiscal year 2003, and therefore, there was no
expense recorded in the first quarter of the prior fiscal year.

Income
tax expense increased 31.3% to $918,000 during the nine months ended December 31, 2003
compared to $699,000 in the same period in the prior fiscal year. The increase results
from income tax expense associated with higher net income. There was no significant change
in the effective tax rates for the respective periods.

# LIQUIDITY AND CAPITAL
RESOURCES

During
the nine months ended December 31, 2003, the Company had net income of $1,507,000 compared
to net income of $1,150,000 during the same period in the prior fiscal year. Cash provided
by operations was $1,989,000 during the nine months ended December 31, 2003 compared to
$2,077,000 provided during the same period in the prior fiscal year. The Company had
working capital of $7,570,000 at December 31, 2003.

The
decrease in cash provided by operating activities during the nine months ended December
31, 2003 compared to the same period in the prior fiscal year was due to an increase in
inventory primarily related to OnDemand machine component parts, and deposits provided to
subcontract manufacturers of OnDemand machines.

Investing
activities used $1,641,000 during the nine months ended December 31, 2003 compared to
$1,178,000 during the same period in the prior fiscal year. The increase results primarily
from an increase in expenditures made for new disposable punch card manufacturing
equipment.

Financing
activities used $498,000 during the nine months ended December 31, 2003 compared to
$1,187,000 during the same period in the prior fiscal year. The decrease results primarily
from the fact that during the same period in the prior year, the Company incurred certain
costs to obtain capital to refinance its long-term debt.

The
Companys short-term and long-term liquidity is primarily dependent on its ability to
generate cash flow from operations. Inventory levels may change significantly if the
Company is successful in selling its 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.

The
Company has new product development projects underway, principally new versions of its
OnDemand machine, that are expected to be funded by cash flow from operations. These
projects are monitored on a regular basis to attempt to ensure that the anticipated costs
associated with them do not exceed the Companys ability to fund them from cash flow
from operations and other sources of capital.

There
was $3.5 million borrowed and approximately an additional $1.0 million available on the
Companys revolving line of credit at January 28, 2004 based upon eligible accounts
receivable and inventory. In addition, the Company had $1,000,000 available on its 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 the Company to maintain certain financial
ratios, limits the amount of capital expenditures and requires the Company to obtain the
lenders approval for certain matters. The Company was in compliance with all provisions of
the loan agreements at January 28, 2004.

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

# Item 3.   Quantitative and
Qualitative Disclosures About Market Risk

There
have been no material changes in our market risk during the nine months ended December 31,
2003. 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, 2003 and is incorporated herein by reference.

# Item 4.   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, including our internal 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 December 31, 2003
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 accord 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 and
Reports on Form 8-K

| |                                                                                                                                                                                                                                           |                     |                                                                                                                                   
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------- | ----------------------------------------------------------------------------------------------------------------------------------
|
| | (a)                                                                                                                                                                                                                                       | Exhibits            |                                                                                                                                   
|
| |                                                                                                                                                                                                                                           | 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. §1350.                                   
|
| |                                                                                                                                                                                                                                           | 32.2                | Certification of the Vice President
        and Chief Financial Oficer Pursuant to 18 U.S.C. §1350.                               
|
| | (b)                                                                                                                                                                                                                                       | Reports on Form 8-K
|
| | On February 5, 2004, we filed a Current Report
        on Form 8-K in which we disclosed under Items 7 and 12 a press release announcing the results of
        operations for the third quarter and nine months ended December 31, 2003.

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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.

|                          | MEDICAL TECHNOLOGY SYSTEMS, INC.
|------------------------- | --------------------------------
|
|Date:   February 17, 2004 |                                 
|                          |                                 
|                          |                                 
|                          |                                 

|                          | 
|------------------------- | 
|Date:   February 17, 2004 | 
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