10-K

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-K

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

For fiscal year ended March 31, 2004

OR

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

For transition period from ____________________ to

Commission File Number:    0-16594

MEDICAL TECHNOLOGY SYSTEMS, INC.

(Exact Name of Registrant as 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	33762
(Address of Principal Executive Offices)	(Zip Code)

727-576-6311

(Registrant's Telephone Number, Including Area Code)

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

Title of Each Class	Name of Each Exchange on Which Registered
COMMON STOCK, $.01 PAR VALUE	AMERICAN STOCK EXCHANGE

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

NONE

(Title of Class)

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

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.     |X|

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

Approximate aggregate market value of voting Common Stock held by non-affiliates was $10,565,000 as of September 30, 2004.

The number of shares outstanding of the Registrant’s Common Stock, $.01 par value, was 5,601,937 as of June 21, 2004

Documents Incorporated by Reference

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

MEDICAL TECHNOLOGY SYSTEMS, INC.

CLEARWATER, FLORIDA

INDEX

		Page
PART I
Item 1.	Business	1
Item 2.	Properties	9
Item 3.	Legal Proceedings	10
Item 4.	Submission of Matters to a Vote of Security Holders	10
PART II
Item 5.	Market for Registrant's Common Equity and Related Stockholder Matters	11
Item 6.	Selected Financial Data	13
Item 7.	Management's Discussion and Analysis of Financial Condition and Results of Operations	14
Item 7A.	Quantitative and Qualitative Disclosure About Market Risk	23
Item 8.	Financial Statements and Supplementary Data	23
Item 9.	Changes in and Disagreements With Accountants on Accounting and Financial Disclosure	23
Item 9A.	Controls and Procedures	23
PART III
Item 10.	Directors and Executive Officers of the Registrant	25
Item 11.	Executive Compensation	25
Item 12.	Security Ownership of Certain Beneficial Owners, Management and Related Stockholder Matters	25
Item 13.	Certain Relationships and Related Transactions	25
Item 14.	Principal Accountant Fees and Services	25
PART IV
Item 15.	Exhibits, Financial Statements, Schedules and Reports on Form 8-K	26
Index to Financial Statements		27
Signatures		54
Certifications		59

i.

PART I

        This Annual Report on Form 10-K (the “10-K”) contains certain statements concerning the future that are subject to risks and uncertainties. Additional written or oral forward-looking statements may be made by us from time to time, in filings with the Securities and Exchange Commission (the “SEC”) or otherwise. Such statements include, among other things, information concerning possible-future results of operations, capital expenditures, the elimination of losses under certain programs, financing needs or plans relating to our products or services, assessments of materiality, predictions of future events, and the effects of pending and possible litigation, as well as assumptions relating to the foregoing, and those accompanied by the words “believes”, “anticipates,” “estimates,” “expects,” “intends,” “plans,” or similar expressions. For those statements we claim the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995.

        You should specifically consider the various factors identified in this 10-K, including the matters set forth in “Item 1. Business”; “Item 3. Legal Proceedings”; “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations”; and the Notes to Consolidated Financial Statements that could cause actual results to differ materially from those indicated in any forward-looking statements. Other factors that could contribute to or cause such differences include, but are not limited to, unanticipated increases in operating costs, labor disputes, capital requirements, increases in borrowing costs, product demand, pricing, market acceptance, intellectual property rights and litigation, risks in product and technology development and other risk factors detailed in our SEC filings.

        Readers are cautioned not to place undue reliance on any forward-looking statements contained in this 10-K, which speak only as of the date hereof. We undertake no obligation to publicly release the results of any revisions to these forward-looking statements that may be made to reflect events or circumstances after the date hereof or to reflect the occurrence of unexpected events.

        In this 10-K, unless otherwise indicated, the terms “we,” “us,” “our,” “registrant” and “Med Tech” refer to Medical Technology Systems, Inc., and its subsidiaries.

ITEM 1.    BUSINESS

Introduction

        We were incorporated in Delaware in March 1984. We are a holding company that operates through our subsidiaries, MTS Packaging Systems, Inc.™ (“MTS Packaging”) and MTS Packaging Systems International, Ltd. (“MTSPI”). MTS Packaging primarily manufactures and sells disposable medication punch cards, packaging equipment and ancillary products throughout the United States. Its customers are predominantly pharmacies that supply nursing homes, assisted living and correctional facilities with prescription medications for their patients. MTS Packaging manufactures its proprietary disposable punch cards and packaging equipment in its own facilities. This manufacturing process uses integrated machinery for manufacturing the disposable medication punch cards. The disposable medication punch cards and packaging equipment are designed to provide a cost effective method for pharmacies to dispense medications. MTS Packaging’s medication dispensing systems and products provide innovative methods for dispensing medications in disposable packages. MTSPI distributes products for MTS Packaging in the United Kingdom. We currently serve more than 3,000 institutional pharmacies in the long-term care and correctional facility markets, both domestically and internationally.

         On April 1, 2004, we provided our landlord with notice of intent to terminate the lease of our existing office, manufacturing and warehouse space in Clearwater, Florida on September 30, 2004. Effective October 1, 2004, we will occupy a new leased premises at 2003 Gandy Blvd., St Petersburg, Florida. The new facility will provide us with approximately 104,000 square feet of office and production space, which is an increase from the 79,600 square feet we currently occupy. The terms of the new lease allow us several months to make the transition from our current location without incurring any duplicative occupancy costs. We also have an option to lease an additional 28,000 square feet of contiguous space at any time, during the term of the new lease, provided that we give the landlord 120 days advance notice.

1

        In April 2004, we announced that we would begin to do business as MTS Medication Technologies and seek the approval of our stockholders to formally change our name to MTS Medication Technologies, Inc. We also intend to merge MTS Packaging Systems, Inc. into MTS Medication Technologies, Inc. when our formal name change is approved by our stockholders.

        In May 2004, we entered into a co-marketing agreement with Cardinal Health, Inc. (“Cardinal”) that provides Cardinal with exclusive rights to market certain of our systems directly to specified customers that serve the long-term care and correctional facilities markets. In addition, the co-marketing agreement provides Cardinal with the right to market the complete line of our filling and sealing equipment, and our OnDemand® system. The agreement will still allow us to sell disposable products to existing and future customers through our current distribution channels.

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

Products

        MTS Packaging manufactures proprietary medication dispensing systems and related products for use by medication prescription providers primarily servicing long-term care and correctional facilities. These systems utilize disposable medication punch cards and specialized machines that automatically or semi-automatically assemble, fill and seal drugs into medication punch cards representing a weekly or monthly supply of a patient’s medication.

         During fiscal 2002, we introduced our newest product, the OnDemand system, which we believe is the industry’s first automated system capable of dispensing prescription medications into punch card compliance packaging, improving accuracy and increasing productivity. We designed the OnDemand system to interface with the pharmacy information systems to receive orders and fill a patient-labeled medication compliance package on a “just-in-time,” fully-automated basis. The current system has the capacity to hold up to 400 different medications and dispense them into patient-specific labeled punch cards at a rate of up to eight cards per minute, utilizing only two employees. We believe this technology promotes a new industry standard for packaging and distributing medications through institutional pharmacies to a wide range of end users including skilled nursing, assisted living and correctional facilities.

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

        The retail price of MTS Packaging’s machinery ranges from $1,100 to $500,000 depending upon the degree of automation and options requested by a customer. The punch cards typically retail from approximately $155 to $225 per 1,000 cards and blisters, depending upon the size, design and volume of cards ordered by a customer. MTS Packaging has placed approximately 2,000 medication dispensing systems with pharmacy clientele since our inception. MTS Packaging also sells prescription labels and ancillary supplies designed to complement sales of disposable medication punch cards. MTS Packaging had approximately $749,000 in unshipped orders as of June 20, 2004 compared to approximately $869,000 as of June 20, 2003.

Research and Development

        We expended approximately $161,000, $172,000 and $87,000 on research and development activities for each of the fiscal years ended March 31, 2004, 2003 and 2002, respectively. In addition, we directed our product development efforts primarily towards the completion of several versions of our OnDemand machine during this fiscal year. We capitalized approximately $451,000 of product development during the fiscal year ended March 31, 2004. The majority of these expenditures were made for the OnDemand™ machine project.

2

Manufacturing Processes

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

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

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

Markets and Customers

         MTS Packaging’s products are sold primarily throughout the United States through its sales organization and independent sales representatives. In addition, MTS Packaging Systems International distributes product in the United Kingdom. MTS Packaging also participates in trade shows and training seminars. Sales to countries outside the United States represent less than 10% of the total revenue in fiscal 2004. Sales to our two largest customers represented approximately 14% and 13%, respectively, of MTS Packaging’s revenue in the fiscal year ended March 31, 2004.

        The primary customers for MTS Packaging’s proprietary packaging machinery and the related disposable punch cards, labels and ancillary supplies are pharmacies that supply prescription medication to nursing homes. These pharmacies serve from 50 to 45,000 nursing home beds per location and many serve the sub-acute care, assisted living, correctional and home health care markets as well.

Competition

        The pharmacy customers of MTS Packaging supply prescribed medications to nursing homes and assisted living facilities, which are the primary market for MTS Packaging’s products. This market is highly competitive. There are several competitors that have developed machines that automate the packaging and sealing of solid medications into punch cards. We believe that products developed by our competitors are not as efficient as our systems because they are not as automated. Our method of dispensing medication replaces more traditional dispensing methods, such as prescription vials. The principal methods of competition in supplying medication dispensing systems to prescription service providers are product innovation, price, customization and product performance. Many of our competitors have been in business longer and have substantially greater resources than us. There is no assurance that we will be able to compete effectively with competitive methods of dispensing medication or other punch card systems.

         Our primary competitors for punch card dispensing systems in the United States are Drug Package, Inc., AutoMed® Technologies and RX Systems, Inc. We believe that our automated proprietary packaging machinery distinguishes MTS Packaging from its competitors’ less automated systems. Our automated packaging machine with the highest throughput can fill and seal up to 900 disposable medication cards per hour. We believe that our production rates for the prepackaging of prescriptions and our “just-in-time” OnDemand system will meet the needs of our customers who are consolidating and require higher productivity to meet their growing market share.

3

Proprietary Technology

        In June 2003, we purchased the rights to certain proprietary technology that had previously been available through a license agreement with the Siegel Family Trust. The proprietary technology is supported by certain patents, which expire at various times during calendar years 2004 through 2008.

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

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

Government Regulations

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

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

Employees

        As of June 20, 2004, we employed 170 persons full time. None of our employees are covered by a collective bargaining agreement. We consider our relationship with our employees to be good.

Risk Factors

        You should be aware that the risks and uncertainties described below are not the only ones affecting us or that could affect us in the future. Any of the risks and uncertainties described below could have a material adverse effect on our business, results of operation and financial conditions, and could result in a partial or complete loss of your investment.

We have many competitors and expect new competitors to enter our market, which could adversely affect our ability to increase revenue,
maintain our margins or grow our market share.

        The market for our services is extremely competitive and the barriers to entry in our market are relatively low. We cannot be sure that we will have the resources or expertise to compete successfully in the future. Our competitors may be able to:

• develop and expand their product and service offerings more quickly;

• adapt to new or emerging technologies and changing customer needs more quickly;

• negotiate more favorable purchases agreements with suppliers;

• devote greater resources to the marketing and sale of their products; and

• address customers’ service-related issues more effectively.

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

4

Our operating results may fluctuate due to a number of factors, many of which are beyond our control.

        Our annual and quarterly operating results are affected by a number of factors, including:

• adverse changes in general economic conditions;

• the level and timing of customer orders;

• the composition of the costs of revenue between materials, labor and manufacturing overhead;

• our level of experience in manufacturing a particular product;

• fluctuations in materials costs and availability of materials; and

• the timing of expenditures in anticipation of increased sales and customer product delivery requirements.

        The volume and timing of orders placed by our customers vary due to variation in demand for our products, new product introductions and consolidations among our customers. In the past, changes in customer orders have had a significant effect on our results of operations due to corresponding changes in the level of overhead absorption. Any one or a combination of these factors could adversely affect our annual and quarterly results of operations in the future.

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

        For the fiscal year ended March 31, 2004, our 10 largest customers accounted for approximately 62% of our net revenue and our two largest customers accounted for approximately 27% of our net revenue. We are dependent upon the continued growth, viability and financial stability of our customers whose industries have experienced consolidation, pricing and regulatory pressures. We expect to continue to depend upon a relatively small number of customers for a significant percentage of our net revenue. Consolidation among our customers may further reduce the number of customers that generate a significant percentage of our revenues and exposes us to increased risks relating to dependence on a small number of customers. A significant reduction in sales to any of our customers or a customer exerting significant pricing and margin pressures on us, would have a material adverse effect on our results of operations.

We depend on a small number of suppliers for the raw materials used in the production of our products.

        We rely on a limited number of suppliers for the raw materials that are essential in the production of the products we produce. We cannot assure you that such suppliers will be able to meet our future demand for raw materials, or that shortages of these raw materials will not arise in the future. The failure of such suppliers to deliver such raw materials on a timely basis could have a material adverse effect on our business, financial condition and results of operations.

The markets for our products are characterized by rapidly changing technology and evolving process development.

        The continued success of our business will depend upon our ability to:

• Hire, retain and expand our qualified engineering and technical personnel;

• maintain technological leadership;

• develop and market products that meet changing customer needs; and

• successfully anticipate or respond to technological changes in manufacturing processes on a cost-effective and timely basis.

5

        Although we believe that our operations use the assembly and testing technologies, equipment and processes that are currently required by our customers, we cannot be certain that we will develop the capabilities required by our customers in the future. The emergence of new technology industry standards or customer requirements may render our equipment, inventory or processes obsolete or noncompetitive. In addition, we may have to acquire new assembly and testing technologies and equipment to remain competitive. The acquisition and implementation of new technologies and equipment may require significant expense or capital investment, which could reduce our operating margins and our operating results. Our failure to anticipate and adapt to our customers’ changing technological needs and requirements could have an adverse effect on our business.

We manufacture substantially all of our products from a single facility.

        We manufacture substantially of the products we sell. As a result, any prolonged disruption in the operations of our manufacturing facility, whether due to technical or labor difficulties, destruction of or damage to any facility or other reasons, could have a material adverse effect on our business, financial condition and results of operations. In this regard, our principal manufacturing facility is located in Clearwater, Florida and is thus exposed to the risks of damage from certain weather conditions including, without limitation: hurricanes, windstorms, and floods. If our facilities were to be out of production for an extended period, our business, financial condition and results of operation would be materially adversely affected.

We rely on short-term contracts with most of our clients.

         Long-term contracts are not a significant part of our business. Accordingly, future results cannot be reliably predicted by considering past trends or extrapolating past results.

We are dependent on the proper functioning of our information systems in operating our business.

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

Our success depends upon retaining the services of our management team.

        We are highly dependent on our management team. We expect that our continued success will largely depend upon the efforts and abilities of members of our management team. The loss of the services of any of our key executives for any reason could have a material adverse effect upon us. Our success also depends upon our ability to identify, develop, and retain qualified management, professionals and technical operating staff. We expend significant resources in recruiting and training our employees, and the pool of available applicants for these positions is limited. The loss of the services of any key executives, or our inability to continue to attract and retain qualified staff, could have a material adverse effect on our business, results of operations and financial condition.

Adverse results in tax audits could result in significant cash expenditures or exposure to unforeseen liabilities.

        We are subject to periodic federal, state and local income tax audits for various tax years. Although we attempt to comply with all taxing authority regulations, adverse findings or assessments made by the taxing authorities as the result of an audit could materially adversely affect us.

We are a holding company and we depend on receiving distributions from our subsidiaries, and we could be harmed if such distributions
could not be made in the future.

        We are a holding company with essentially no operations of our own and conduct all of our business through our subsidiaries. Our only significant asset is the outstanding capital stock of our subsidiaries. We are wholly dependent on the cash flow of our subsidiaries and dividends and distributions to us from our subsidiaries in order to service any current and future indebtedness obligations we may have.

6

We are prohibited from paying dividends on our common stock.

        We have not paid any dividends on our common stock and do not anticipate declaring or paying any dividends in the foreseeable future. The terms of our loan agreements prohibit us from paying dividends on our common stock.

The issuance of additional shares of our common stock as a result of the conversion or exercise of currently outstanding derivative securities
may cause our stock price to decline.

         As of June 21, 2004, we had 5,601,937 shares of common stock outstanding as of March 31, 2004. In addition, the following shares of our common stock are issuable upon exercise or conversion of currently outstanding securities:

• 999,000 shares of common stock are issuable upon exercise of currently outstanding common stock purchase options having exercise prices ranging from $0.48 to $25.00;

• 29,500 shares of common stock are issuable upon exercise of currently outstanding common stock purchase warrants having exercise prices ranging from $0.01 to $1.88; and

• 847,457 shares of common stock are issuable upon conversion of 2,000 shares of Series A Convertible Preferred Stock (the “Series A Preferred Stock”).

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

If we must make certain payments of certain amounts to Eureka I, L.P., such payments could have a material effect on our financial condition
and could cause our stock price to decline.

        The terms of our Series A Preferred Stock issued to Eureka I, L.P., contain certain anti-dilution provisions and a make-whole provision that obligates us to pay certain amounts to the holder of the Series A Preferred Stock if such holder does not ultimately receive an amount equal to the price per share of the common stock on the date they exercise their right to purchase the common shares that underlie the Series A Preferred Stock. In the event that we are required to make payments to the holders of the Series A Preferred Stock, we may elect to issue additional preferred stock in lieu of a cash payment. The make-whole provision and other provisions of the convertible preferred stock agreement provide for a maximum of 12,500,000 shares that may be issued pursuant to those provisions.

We may be adversely affected by governmental regulation of our business.

        Our business is subject to federal regulation concerning components of packaging materials that are in contact with food and drugs. While we have had no material difficulty complying with such regulations in the past, there can be no assurance that we will be able to continue to obtain all necessary approvals or that the cost of compliance will not prove to be material. Additionally, we cannot assure you that significant changes in such regulations will not occur in the foreseeable future. Our inability to comply with the current regulations and any future changes to such regulations could have a material adverse effect on our business, results of operations and financial condition.

We face an inherent risk of exposure to product liability claims in the event that the use of the products we manufacture and sell results
in personal injury.

        We face an inherent risk of exposure to product liability claims in the event that the use of the products we manufacture and sell results in personal injury. Although we have not experienced any losses due to product liability claims, we cannot assure you that we will not experience such losses in the future. We maintain insurance against product liability claims, but we cannot be certain that such coverage will be adequate to cover any liabilities that we may incur, or that such insurance will continue to be available on terms acceptable to us. A successful claim brought against us in excess of available insurance coverage, or any claim that results in significant adverse publicity against us, could harm our business.

7

If we are unable to protect our intellectual property rights, our business and prospects may be harmed.

        Our ability to compete effectively is dependent upon the proprietary nature of the designs, processes, technologies and materials owned by, used by or licensed to us. Although we attempt to protect our proprietary property, technologies and processes both in the United States and in foreign countries through a combination of patent law, trade secrets and non-disclosure agreements, these may be insufficient. In addition, because of the differences in foreign patent and other laws concerning proprietary rights, our products may not receive the same degree of protection in foreign countries as they would in the United States.

Intellectual property claims and litigation could subject us to significant liabilities for damages and invalidation of our proprietary rights.

        In the future we may have to resort to litigation to protect our intellectual property rights to protect our trade secrets or to develop the validity and scope of our proprietary rights of others. Any litigation, regardless of its success, would be costly and require significant time and attention of our key management and technical personnel. The litigation could also force us to:

• Stop or delay selling, incorporating or using products that incorporate the challenged intellectual property;

• Pay damages;

• Enter into licensing or royalty agreements, which may be unavailable under acceptable terms; and

• Redesign products and services that incorporate infringing technology.

        We may face infringement claims from third parties in the future. The medical packaging industry has seen frequent litigation over intellectual property rights, and we expect that participants in the medical packaging industry will be increasingly subject to infringement claims as the number of products, services, and competitors grow and functionality of the products and services overlap. We cannot assure you that the steps taken by us will be adequate to deter misappropriation of our proprietary rights or that third parties will not independently develop substantially similar products, services and technology. Furthermore, there can be no assurance that our products will not infringe upon the intellectual property rights of third parties. We may not be able to avoid infringement of third party intellectual property rights and may have to obtain a license, defend an infringement action, or challenge the validity of the intellectual property rights in court. Failure to obtain or maintain intellectual property rights in our products, for any reason, could have a material adverse effect on us.

Our business will suffer if we fail to comply with recent federal regulations and proposed rules of the SEC relating to corporate governance reform.

        As a public company, we are subject to certain federal regulations and the rules and regulations of the SEC. On July 30, 2002, President George W. Bush signed into law the Sarbanes-Oxley Act of 2002, effecting tighter accounting, corporate fraud and securities laws. To implement this legislation, the SEC is expected to adopt new rules pertaining to, among other things, audit committee requirements and additional disclosure and reporting requirements. Our reputation and financial results could be materially harmed by any failure by us to comply with any current or future rules or regulations relating to the Sarbanes-Oxley Act or to any other federal corporate reform measures.

Our stock price may be volatile.

        Our common stock is traded on the American Stock Exchange under the symbol “MPP”. The market price of our stock has fluctuated substantially in the past and could fluctuate substantially in the future, based on a variety of factors, including our operating results, changes in general conditions in the economy, the financial markets, or other developments affecting us, our clients, or our competitors, some of which may be unrelated to our performance. Those fluctuations and demand for our services may adversely affect the price of our stock. It is possible that the stock price may decline to a level where we lose our eligibility to remain listed on the American Stock Exchange.

8

        In addition, the stock market, in general, has experienced volatility that has often been unrelated to the operating performance of public companies. These broad market fluctuations may adversely affect the market price of our common stock, regardless of our operating results.

        Among other things, volatility in our stock price could mean that investors will not be able to sell their shares at or above prices at which they are acquired. The volatility also could impair our ability in the future to offer common stock as a source of additional capital.

Our stockholders do not have cumulative voting rights.

        The holders of our capital stock do not have cumulative voting rights. Accordingly, the holders of more than 50% of our outstanding shares entitled to vote for the election of directors can elect all of our directors then being elected; the holders of the remaining shares by themselves cannot elect any directors.

Provisions of our certificate of incorporation and the applicable Delaware General Corporation law may make it more difficult to complete a contested takeover of our Company.

        Certain provisions of our certificate of incorporation and the Delaware General Corporation Law (the “DGCL”) could deter a change in our management or render more difficult an attempt to obtain control of us, even if such a proposal is favored by a majority of our stockholders. For example, we are subject to the provisions of the DGCL that prohibit a public Delaware corporation from engaging in a broad range of business combinations with a person who, together with affiliates and associates, owns 15% or more of the corporation’s outstanding voting shares (an “interested shareholder”) for three years after the person became an interested shareholder, unless the business combination is approved in a prescribed manner. Finally, our certificate of incorporation includes undesignated preferred stock, which may enable our Board of Directors to discourage an attempt to obtain control of us by means of a tender offer, proxy contest, merger or otherwise.

Terrorist attacks and other acts of violence or war may affect any market on which our shares trade, the markets in which we operate, our operations and our profitability.

        Terrorist acts or acts of war or armed conflict could negatively affect our operations in a number of ways. Primarily, any of these acts could result in increased volatility in or damage to the United States and worldwide financial markets and economy. They could also result in a continuation of the current economic uncertainty in the United States and abroad. Acts of terrorism or armed conflict, and the uncertainty caused by such conflicts, could cause an overall reduction in sales of our products and the corresponding shipments of our products. This would have a corresponding negative effect on our operations. Also, terrorist activities similar to the type experienced on September 11, 2001 could result in another halt of trading of securities on the American Stock Exchange, which could also have an adverse affect on the trading price of our shares and overall market capitalization.

ITEM 2.    PROPERTIES

        We currently lease a 79,600 square foot plant consisting of office space and air-conditioned manufacturing and warehousing space near the St. Petersburg/Clearwater International Airport at 12920 Automobile Boulevard. Our corporate administrative offices and the primary manufacturing facilities for MTS Packaging are at this location. On April 1, 2004, we provided our landlord with notice of intent to terminate the lease on September 30, 2004 and vacate the premises. Effective October 1, 2004, we will occupy a new premises at 2003 Gandy Boulevard North, St. Petersburg, Florida. The lease for the new premises will be for a term of 12 years. The premises consists of approximately 104,000 square feet, increasing to approximately 132,000 square feet, and the monthly lease payments begin at $35,000 plus tax in the first year and increase to $63,000 plus tax in the final year. In addition, we are obligated to pay annual operating expenses (i.e., insurance, property taxes and common area maintenance fees). We also have an option to lease an additional 28,000 square feet of contiguous space at any time by providing the landlord with 120 days notice. Also, we will be paid a move-in allowance of $400,000 on the commencement date of the new lease. Our current monthly lease payments are approximately $38,000 including tax. Both the current premises and the new premises are generally suited for light manufacturing and/or distribution.

9

        MTS Packaging also leases approximately 5,200 square feet at approximately $3,200 per month for office and warehouse space at 21530 Drake Road, Cleveland, Ohio. The lease expires on March 31, 2005.

        MTS Packaging Systems International, Ltd. rents office and warehouse space at Unit 6A/6B Dalton Court, Blackburn Interchange, Lower Darwen, Blackburn, Lancashire, England. The lease is for a term of one year, and the monthly lease payments are £1,642.

ITEM 3.    LEGAL PROCEEDINGS

        We are involved in certain claims and legal actions arising in the ordinary course of business. There can be no assurances that these matters will be resolved on terms acceptable to us. In the opinion of management, based upon advice of counsel and consideration of all facts available at this time, the ultimate disposition of these matters are not expected to have a material adverse effect on our financial position, results of operations or liquidity.

        In November 1998, Medical Technology Laboratories, Inc. (“MTL”), a subsidiary that was sold in fiscal 2000, received a refund request in the amount of $1.8 million from Medicare Program Safeguards (“MPS”). MTL disputed the refund request in its response to MPS in December 1998. To date, MTL has not received any further correspondence from MPS regarding this matter.

ITEM 4.     SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

      None.

10

PART II

ITEM 5.     MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Price Range of Our Securities

        Our common stock began trading on the American Stock Exchange (“AMEX”) on December 26, 2002. Under the symbol “MPP”, our common stock previously traded on the OTC Bulletin Board (the “OTCBB”). The table below sets forth the range of high and low sales prices and/or bid information for our common stock for the periods indicated, as reported by the AMEX and OTCBB. OTCBB market quotations reflect inter-dealer prices, without retail markup, markdown or commission and may not necessarily represent actual transactions.

2005 Fiscal Year	High		Low
First Quarter	$	14.95	$	6.05
2004 Fiscal Year	High		Low
First Quarter	$	4.55	$	2.45
Second Quarter	$	4.78	$	3.50
Third Quarter	$	6.90	$	4.05
Fourth Quarter	$	14.84	$	6.00
2003 Fiscal Year	High		Low
First Quarter	$	3.05	$	2.45
Second Quarter	$	2.90	$	1.95
Third Quarter	$	2.47	$	1.45
Fourth Quarter	$	3.55	$	2.20

        As of June 21, 2004, there were approximately 2,500 holders of record of our common stock and the closing price of our common stock report on AMEX was $6.05.

        We have not declared a dividend on our common stock and do not currently intend to declare a dividend. Furthermore, we are restricted from paying dividends on our common stock pursuant to the terms of our loan agreements. We intend to reinvest our future earnings, if any, into the operations of our business.

        In June 2002, we issued 2,000 shares of the Series A Preferred Stock to Eureka I, L.P. for an aggregate consideration of approximately $2,000,000. The Series A Preferred Stock is not a publicly traded security. The purchase and sale was exempt pursuant to Rule 506 and under Section 4(2) of the Securities Act of 1933, as a transaction by an issuer not involving a public offering where the purchaser received or had access to adequate information about the registrant. The purchase was made for cash. The holders of the Series A Preferred Stock are entitled to receive quarterly dividends at the rate of 11% per annum. The dividends are payable in cash or shares of Series A Preferred Stock at our option and are cumulative. The Series A Preferred Stock is convertible into 847,457 shares of our common stock at $2.36 per share. The terms of the Series A Preferred Stock contain a make-whole provision that obligates us to pay certain amounts to the holders if they do not ultimately receive an amount equal to the price per share of our common stock on the date they elect to convert the Series A preferred stock into common stock. In addition, the terms of the Series A Preferred Stock agreement contains certain antidilution provisions.

11

Equity Compensation Plan Information

        We had 173,101 and 20,000 shares available for issuance under our equity compensation plans as of April 1, 2003 and March 31, 2004, respectively.

        During Fiscal Year 2004, we did not experience any changes in the exercise price of our outstanding options, through cancellation and reissuance or otherwise.

Purchases of Equity Securities

        We did not repurchase any of our equity securities during fiscal 2004.

12

ITEM 6.     SELECTED FINANCIAL DATA

        The following tables set forth selected financial and operating data regarding the Company. This information should be read in conjunction with “MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS” and the Company’s Financial Statements and Notes thereto. See “FINANCIAL STATEMENTS.”

	YEARS ENDED MARCH 31,
	(In Thousands, Except Earnings Per Share Amount)
	2004			2003			2002			2001			2000
Income Statement Data:
Net Sales	$	34,384		$	29,385		$	24,769		$	21,457		$	18,221
Cost of Sales and Other Expenses		31,214			26,413			21,561			19,406			17,007
Income from Continuing Operations
Before Income Taxes, Discontinued Operations
and Extraordinary Gain		3,170			2,972			3,208			2,051			1,214
Income Tax Benefit (Expense)		(1,190	)		(1,124	)		(1,234	)		5,570			0
(Loss) from Discontinued Operations		0			0			0			(227	)		(2,185	)
Gain on Forgiveness of Debt of Discontinued
Operations		0			0			0			0			1,249
Gain on Disposal of Discontinued Operations		0			0			0			0			2,221
Non-Cash Constructive Dividend Related to
Beneficial Conversion Feature of Convertible
Preferred Stock		0			(347	)		0			0			0
Convertible Preferred Stock Dividends		(220	)		(168	)		0			0			0
Net Income Available to Common Stockholders	$	1,760		$	1,333		$	1,974		$	7,394		$	2,499
Net Earnings (Loss) Per Basic and Diluted Common
Share: (Retroactively adjusted for the 1 for 2.5
reverse stock split in December 2000):
Net Earnings Per Basic Common Share
From Continuing Operations	$	0.35		$	0.28		$	0.46		$	2.45		$	0.47
Income (Loss) from Discontinued Operations		0.00			0.00			0.00			(0.07	)		0.50
Net Earnings Per Basic Common Share	$	0.35		$	0.28		$	0.46		$	2.38		$	0.97
Net Earnings Per Diluted Common Share
From Continuing Operations	$	0.29		$	0.26		$	0.44		$	2.43		$	0.47
Income (Loss) from Discontinued Operations		0.00			0.00			0.00			(0.07	)		0.50
Net Earnings Per Diluted Common Share	$	0.29		$	0.26		$	0.44		$	2.36		$	0.97

	AT MARCH 31
	(In Thousands)
	2004		2003		2002		2001			2000
Balance Sheet Data:
Net Working Capital	$	9,306	$	4,464	$	3,274	$	1,682		$	1,702
Assets		20,821		17,383		15,515		14,791			7,866
Short-Term Debt		516		1,461		968		963			1,052
Long-Term Debt		8,680		7,023		10,812		11,887			13,111
Stockholders' Equity (Deficit)		7,924		5,393		468		(1,598	)		(9,037	)

13

        The information set forth below represents selected quarterly results of operations for each of the quarters in fiscal years ended March 31, 2004 and 2003.

	Fiscal Year Ended March 31, 2004
	For The Three Months Ended
	(In Thousands, Except Earnings Per Share Amounts)
	June 30,		September 30,		December 31,		March 31,
	2003		2003		2003		2004
Income Statement Data:
Net Sales	$	7,013	$	8,015	$	9,582	$	9,771
Gross Profit	$	2,777	$	3,030	$	3,898	$	3,740
Net Income Available to Common Stockholders	$	283	$	381	$	679	$	418
Net Earnings Per Basic Common Share	$	0.07	$	0.08	$	0.12	$	0.08
Net Earnings Per Diluted Common Share	$	0.05	$	0.06	$	0.11	$	0.07

	Fiscal Year Ended March 31, 2003
	For The Three Months Ended
	(In Thousands, Except Earnings Per Share Amounts)
	June 30,		September 30,		December 31,		March 31,
	2002		2002		2002		2003
Income Statement Data:
Net Sales	$	6,907	$	6,719	$	7,694	$	8,065
Gross Profit	$	2,580	$	2,634	$	3,121	$	3,262
Net Income Available to Common Stockholders	$	85	$	235	$	370	$	643
Net Earnings Per Basic Common Share	$	0.02	$	0.05	$	0.07	$	0.14
Net Earnings Per Diluted Common Share	$	0.02	$	0.05	$	0.07	$	0.12

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

OVERVIEW

        We experienced growth of 17% in net sales derived from our disposable punch card product lines primarily due to: (1) increased penetration of independent pharmacies throughout the country; and (2) the aging demographics of the United States 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. In addition, we sold six OnDemand machines in fiscal 2004 compared to three machines in fiscal 2003.

14

        As the population ages, the number of nursing home and assisted living facility residents grows, which benefits our entire customer base. In addition, our revenue growth has been enhanced by increased sales of the machines we manufacture and sell to our customers, including our new OnDemand machine.

        Although competitive pricing issues related to the disposable punch card products arise from time to time, we rely heavily on the relationships we build 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.

        Although the cost of raw materials and the direct labor used to manufacture the disposable punch cards has risen during fiscal year ended March 31, 2004, compared with the previous fiscal year, we have been successful in maintaining the relationship between our selling prices and direct costs by adjusting prices where appropriate and developing efficiencies by adding new manufacturing equipment that better produces cards and blisters.

        Overhead costs incurred in manufacturing have risen approximately 19% in the fiscal year ended March 31, 2004 to approximately $4.0 million from approximately $3.4 million in the same period the prior fiscal year primarily due to costs added to properly supervise and warranty the OnDemand product line. The Company expects this trend will continue for the fiscal year ending in 2005 as the OnDemand product line generates more customer interest and subsequent revenue.

         Selling costs for the fiscal year ended March 31, 2004 compared to the same period in the prior fiscal year increased approximately 4% to $2.1 million from $2.0 million the prior year because the Company has added to its sales and customer service support staff. However, marketing costs have increased 65% over the same period in the prior fiscal year, from approximately $418,000 to approximately $691,000, 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 24% in the fiscal year ended March 31, 2004, compared to the same period in the prior fiscal year from approximately $3.7 million to approximately $4.6 million. The increase was primarily due to costs that have been added to support the operations in the United Kingdom and personnel related expenses including employee benefit costs in the United States. Currently we do not expect that our administrative costs will rise at the same percentage rate in fiscal 2005 as they did in fiscal 2004.

FISCAL YEAR 2004 COMPARED TO FISCAL YEAR 2003

Results of Operation

         Net Sales

        Net sales for the fiscal year ended March 31, 2004, increased 17.0% to $34.4 million from $29.4 million the prior year. Net sales increased in fiscal 2004 primarily as a result of an increase in disposable punch cards sold to existing and new customers in the United States, an increase in disposable punch cards and machines sold in the United Kingdom and the sale of OnDemand machines in the United States Selling prices for disposable punch cards were stable during fiscal 2004.

        We expect that selling prices for disposable punch cards may decrease in the next fiscal year depending on competitive factors. We believe that the number of punch cards sold will increase in the next fiscal year as a result of the addition of new customers in the United States and the United Kingdom, and a general increase in the number of nursing home and assisted living facility residents served by our customers. Additional sales of OnDemand machines in the next fiscal year are also expected to contribute to an overall growth in net sales.

15

         Cost of Sales

        Cost of sales for the fiscal year ended March 31, 2004, increased 17.4% to $20.9 million from $17.8 million the prior year. Cost of sales as a percentage of net sales increased to 60.8% from 60.5% for the prior year. The increase in cost of sales resulted primarily from the costs associated with increased net sales. The increase in the cost of sales percentage resulted primarily from the fact that OnDemand machine sales increased over the prior year, and the product margin on OnDemand machines is less than the product margin on disposable punch card products. In addition, overhead costs increased primarily due to additional personnel and benefit costs associated with employees that were added to support the increased production of disposable punch cards and the production and support of the OnDemand machines.

        During the fiscal year ended March 31, 2004, we wrote off approximately $100,000 in obsolete inventory primarily related to discontinued packaging equipment. In addition, the inventory valuation allowance related to obsolete and slow moving inventory was increased by $12,000. We will continue to evaluate our inventory valuation allowance and adjust it accordingly.

         We currently expect that raw material costs will increase in the next fiscal year and that direct labor costs should remain stable. Overhead expenses may continue to rise. At this point in time, we expect that the additional revenue associated with an increase in the volume of punch cards and machines sold should contribute to maintaining overall cost of sales, as a percentage of sales, at levels experienced during the fiscal year ended March 31, 2004.

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

        SG&A expenses for the year ended March 31, 2004, increased 19.1% to $7.5 million compared to $6.3 million the prior year. The increase resulted primarily from the costs associated with additional personnel and benefit costs for employees that were added to support our overall growth, costs associated with our United Kingdom operations and higher marketing expenditures. In addition, we charged off approximately $100,000 in uncollectable accounts receivable and increased our estimated bad debt reserve by $49,000. We regularly review the adequacy of our bad debt reserve by specific customer account analysis as well a review of historical trends.

        We expect SG&A expenses will increase during the next fiscal year. However, the additional revenue associated with an increase in the volume of punch cards and machines sold is expected to contribute to maintaining overall SG&A expenses, as a percentage of sales, at levels experienced during the fiscal year ended March 31, 2004.

         Depreciation and Amortization Expense

        Depreciation and amortization expense for the fiscal year ended March 31, 2004, increased 39.3% to $1,342,000 compared to $964,000 the prior year. The increase resulted primarily from the fact that we had a full year of amortization of the product development costs associated with our OnDemand machine during the fiscal year ended March 31, 2004, and began to amortize the cost of the patents acquired during the year ended March 31, 2004. In addition, newly purchased assets used in the manufacturing process that were acquired in fiscal 2004 began to be depreciated in fiscal 2004.

         Interest Expense

        Interest expense for the fiscal year ended March 31, 2004 decreased 2.9% to $851,000 compared to $876,000 the prior year. The decrease resulted from a reduction in outstanding debt resulting from the regular monthly principal payments made in accordance with the terms of our loan agreements. We expect our interest expense to decline during the next fiscal year due primarily to the prepayment in full of our $4,000,000 subordinated note in June 2004, which had an interest rate of 14%. The current interest rate payable on the funds borrowed to repay the subordinate note is the prime rate plus 1% (currently 5%).

16

         Amortization of Financing Costs and Original Issue Discount

        We refinanced our long-term debt in June 2002 and incurred approximately $1,478,000 in financing costs. The financing costs were allocated between components of the financing that represented debt and equity. $1,110,000 of costs that were allocated to the debt component of the financing began to be amortized over the term of the various loans and notes during fiscal year 2003. Amortization expense related to the financing costs was $364,000 and $271,000 for the fiscal years ended March 31, 2004 and 2003, respectively. In addition, the relative value of certain warrants and imbedded features of the warrants, which were issued in conjunction with the subordinated debt portion of the debt component, were recorded as part of the stockholders equity and reduced the carrying amount of the subordinated note as an original issue discount (“OID”). The OID of approximately $1,240,000 began to be amortized using the effective interest method over the term of the subordinated note during fiscal year 2003. Amortization expense related to the OID was $248,000 and $189,000 for the fiscal years ended March 31, 2004 and 2003, respectively. We expect our OID expense to decline during the next fiscal year due primarily to the prepayment in full of our $4,000,000 subordinated note in June 2004.

         Income Tax Expense

        Income tax expense for the fiscal year ended March 31, 2004, increased 5.9% to $1,190,000 compared to $1,124,000 the prior year. The increase resulted from higher pretax net income in fiscal 2004 compared to the prior year.

         Series A Preferred Stock Dividends

        The terms of the Series A Preferred Stock include the payment of quarterly dividends at the rate of 11% per annum. The amount of preferred stock dividends that accrued during fiscal 2004 was $220,000. The dividends are payable in cash or shares of Series A Preferred Stock at our option and are cumulative. All dividends accrued in the fiscal years ended March 31, 2004 and 2003 were paid in cash. In the fiscal year ended March 31, 2003, the accrued dividends were $168,000. The increase in fiscal 2004 over 2003 resulted from the Series A Preferred Stock having been outstanding for the entire year in fiscal 2004 compared to nine months in fiscal 2003.

FISCAL YEAR 2003 COMPARED TO FISCAL YEAR 2002

Results of Operations

         Net Sales

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

         Cost of Sales

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

        During the fiscal year ended March 31, 2003, we wrote off approximately $106,000 in obsolete inventory primarily related to discontinued packaging equipment. In addition, we determined that our estimate of the inventory valuation allowance, related to obsolescence and slow moving inventory, should be increased by $143,000 primarily because during the fiscal year ended March 31, 2003, several new packaging machines were introduced into the product line.

17

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

        SG&A expenses for the year ended March 31, 2003, increased 18.9% to $6.3 million compared to $5.3 million the prior year. The increase resulted primarily from the costs associated with additional personnel, training and benefit costs for employees that were added to support our overall growth, costs associated with our United Kingdom operations and higher research and development activities. In addition, during the previous fiscal year, we reduced our estimated bad debt reserve by $180,000. Also, during fiscal 2003, we determined that certain development projects were not going to be completed, and therefore, wrote off approximately $115,000 in costs that had been previously capitalized.

         Depreciation and Amortization Expense

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

         Interest Expense

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

         Amortization of Financing Costs and Original Issue Discount (“OID”)

        We refinanced our long-term debt in June 2002 and incurred certain costs totaling approximately $1,478,000 during the fiscal year ended March 31, 2003 to complete the financing. The financing costs were allocated between components of the financing that represented debt and equity. $1,110,000 of costs that were allocated to the debt component of the financing began to be amortized over the term of the various loans and notes during fiscal year 2003. Amortization expense related to the financing costs was $271,000 for the fiscal year ended March 31, 2003. In addition, the relative value of certain warrants and imbedded features of the warrants, which were issued in conjunction with the subordinated debt portion of the debt component, were recorded as part of the stockholders equity and reduced the carrying amount of the subordinated note as an OID. The OID of approximately $1,240,000 began to be amortized using the effective interest method over the term of the subordinated note during fiscal year 2003. Amortization expense related to the OID was $189,000 for the fiscal year ended March 31, 2003.

         Income Tax Expense

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

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

        The equity component of the June 2002 refinancing was comprised, in part, by 2,000 shares of Series A Preferred Stock, which were issued at $1,000 per share. The Series A Preferred Stock is convertible into 847,457 shares of our common stock at $2.36 per share. On the date the convertible preferred stock was issued, the fair market value of our common stock was $2.77 per share. The difference between the fair market value of the shares and the conversion price of the Series A Preferred Stock represented a constructive dividend to the holders of the Series A Preferred Stock in the amount of $347,000.

18

         Series A Preferred Stock Dividends

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

LIQUIDITY AND CAPITAL RESOURCES

        Our operations provided $2.6 million in the fiscal year ended March 31, 2004, compared to $3.2 million the prior year. The decrease in cash provided by operations resulted primarily from an increase in accounts receivable and inventory. These increases resulted primarily from increases in revenue.

        Investing activities used $2.0 million during the fiscal year ended March 31, 2004, compared to $1.7 million the prior year. The increase resulted primarily from the fact that we purchased a new machine for manufacturing punch cards in fiscal 2004.

        Financing activities used $.9 million during the fiscal year ended March 31, 2004 compared to $1.5 million the prior year. The decrease in cash required for financing activities resulted primarily from our receipt of approximately $500,000 during this fiscal year from the proceeds of the exercise of employee stock options. In addition, we increased our borrowings on our revolving line of credit during fiscal 2004.

        We had working capital of $9.3 million at March 31, 2004, compared to $4.5 at March 31, 2003. The increase in working capital resulted primarily from an increase in earnings before interest, taxes, depreciation and amortization, which was used primarily to support increases in accounts receivable and inventory.

        We do not maintain significant cash balances because all available cash is used to pay down our revolving line of credit. We view the excess availability on our line of credit as our cash reserve. At March 31, 2004, we had approximately $1.1 million available on our revolving line of credit.

        In June 2002, we repaid the entire amount, $11,310,000, of our bank term loan with the proceeds of a new revolving line of credit, term loans, a subordinated note and the Series A Preferred Stock. The revolving line of credit allowed for borrowings of up to $5,000,000 (the “Revolving Line of Credit”) based upon advance rates that are applied to our eligible accounts receivable and inventory. Interest was payable on the Revolving Line of Credit monthly based on the average unpaid balance at the prime rate plus 1.0%.

        As part of the June 2002 refinancing, we entered into certain term loans. One term loan in the amount of $700,000 is repayable in equal monthly installments over a five year term, plus interest at the prime rate plus 1.25%. The second term loan in the amount of $2,000,000 was repayable in equal monthly installments over two years plus interest at the prime rate plus 2.25% and included an excess cash flow payment provision. The second term loan was entirely repaid in January 2004.

        The Revolving Line of Credit and the term loan(s) are secured by our accounts receivable, inventory, machinery and equipment and all of our other assets.

        We executed a subordinated note in the amount of $4,000,000 (the “Subordinated Note”) as part of the June 2002 refinance, which was repayable over five years with interest only, at 14%, payable monthly until the maturity of the Subordinated Note. The Subordinated Note is secured by a second lien on all of our assets. In addition, the Subordinated Note holders were issued 566,517 warrants to purchase shares of our common stock exercisable for ten years at $.01 per share. In June 2004 we repaid the Subordinated Note in full.

        In June 2002, we issued 2,000 shares of Series A Preferred Stock at $1,000 per share. The holders of the Series A Preferred Stock are entitled to receive quarterly dividends at the rate of 11% per annum. The dividends are payable in cash or shares of Series A Preferred Stock, at our option, and are cumulative. The Series A Preferred Stock is convertible into 847,457 shares of our common stock at $2.36 per share.

19

        The terms of the Series A Preferred Stock agreement contains certain anti-dilution provisions and a make-whole provision that obligates us to pay certain amounts to the holders of the Series A 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 Series A Preferred Stock into our common stock.

        In the event that we are required to make payments to the holders of the Series A Preferred Stock, we may elect to issue additional shares of Series A Preferred Stock in lieu of a cash payment. Although the make-whole provision and other provisions of the Series A Preferred Stock agreement provide for a maximum of 12,500,000 shares that may be issued pursuant to those provisions, based upon current conditions, we believe it is unlikely that the maximum number of shares would be issued.

        In April 2004, the Subordinated Note holders exercised their rights to acquire the 566,517 shares of our common stock under the terms of the cashless exercise provisions of the warrant agreement and sold the common stock. The terms of the warrant agreement contained certain antidilution provisions. The warrant agreement also contained a make-whole provision that obligated us 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 us to pay certain amounts to the holders of the warrants in the event there was a change in control of our voting common stock, if we were sold, or if there was a public offering of our common stock.

        In June 2004, we renewed and extended the Revolving Line of Credit (the “New Revolving Line of Credit”). The New Revolving Line of Credit is for $8,500,000 and expires in June 2007. In addition, we entered into a new secured equipment term loan agreement for $1,200,000. We used the additional availability on the New Revolving Line of Credit and our term loans to completely repay the $4,000,000 Subordinated Note. At the time of the early repayment of the Subordinated Note, we incurred a prepayment penalty of $120,000. All of our obligations under the warrant agreement were extinguished at the time the investor sold the common stock and the subordinated debt was repaid.

        The New Revolving Line of Credit allows for borrowings based upon advance rates that are applied to our eligible accounts receivable and inventory at the prime rate or London InterBank Offering Rate (“LIBOR”) plus 2.25%, and requires that we maintain $750,000 of excess availability at all times. The equipment secured loan is repayable over a three-year period with interest at the prime rate plus 1% or LIBOR plus 2.75%. In addition, a $3,000,000 overadvance was borrowed at the prime rate plus 1% or LIBOR plus 3.25%. The overadvance is repayable over a 15-month period.

        The New Revolving Line of Credit and the term loans each contain certain financial covenants that, among other things, requires the maintenance of a minimum tangible net worth, and debt service coverage ratios and limits the amount of capital expenditures and requires us to obtain the lenders approval for certain matters. We were in compliance with all provisions of the applicable revolving line of credit and the term loan agreements at March 31, 2004 and May 31, 2004.

        We also have a $300,000 capital expenditure term loan available to fund future expenditures for capital equipment.

        Our short-term and long-term liquidity is primarily dependent on our ability to generate cash flow from operations. Inventory levels may change based upon our success in selling our OnDemand 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 believe that the cash generated from operations during the next fiscal year and our available lines of credit will be sufficient to meet our capital expenditures, product development, working capital needs and the principal payments required by our loan agreements.

20

OFF-BALANCE SHEET ARRANGEMENTS

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

• any obligation under certain guarantee contracts;

• a retained or contingent interest in assets transferred to an unconsolidated entity or similar entity or similar arrangement that serves as credit, liquidity or market risk support to that entity for such assets;

• any obligation, including a contingent obligation, under a contract that would be accounted for as a derivative instruments; and

• any obligation, arising out of a variable interest in an unconsolidated entity that is held by, and material to, the registrant, where such entity provides financing, liquidity, market risk or credit risk support to the registrant, or engages in leasing, hedging or research and development services with the registrant.

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

CONTRACTUAL OBLIGATIONS

        Summarized below are our obligations and commitments to make future payments under certain contractual obligations as of March 31, 2004:

		Less Than	1 - 3	4 - 5	More Than
Contractual Obligations	Total	1 Year	Years	Years	5 Years
	(In Thousands)
Long-Term Debt	$   9,029	$   470	$   8,438	$   121	$   0
Capital Leases	167	46	99	22	0
Operating Leases	251	233	9	6	3
Purchaser Obligations	0	0	0		0
Other Long-Term Liabilities	0	0	0	0	0

ESTIMATES AND CRITICAL ACCOUNTING POLICIES

        The preparation of our consolidated financial statements in conformity with generally accepted accounting principles in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the financial statements and revenues and expenses for the respective period-ended for such statements. The determination of estimates requires the use of judgment since future events and their affect on our operations cannot be determined with absolute certainty. Actual results typically differ from these estimates in some fashion, and at times, these variances may be material to our financial statements. Our management continually evaluates its estimates and assumptions, which are based on historical experience and other factors that are believed to be reasonable under these circumstances. These estimates and our actual results are subject to the risk factors listed above under “Item 1. Business”. Nevertheless, our management believes the following items involve a higher degree of complexity and, judgment and therefore, has commented on these items below.

21

Valuation of Accounts Receivable at March 31, 2004 and 2003, respectively

        Our allowance for doubtful accounts of $187,000 and $138,000 at March 31, 2004 and 2003, respectively, is based on management’s estimates of the credit-worthiness of our customers, current economic conditions and historical information. In the opinion of management, our allowance for doubtful accounts is believed to be an amount sufficient to respond to normal business conditions. Historically, the levels of recorded bad debt expense and write-offs have not been material to our financial statements. Should business conditions deteriorate or any large customer default on its obligations to us, this allowance may need to be significantly increased, which would have a negative impact upon our operations.

Inventory Obsolescence Valuation Allowance

        Our allowance for inventory obsolescence and slow moving inventory is reviewed on a regular basis. We review various information related to the age and turnover of specific inventory items to assist in our assessment. In the opinion of management, the valuation allowance is believed to be sufficient to absorb the ultimate obsolescence of certain inventory as they may occur. The inventory obsolescence valuation allowance was $195,000 and $183,000 at March 31, 2004 and 2003, respectively.

Self Insurance Plan Reserve

        We established a reserve for unpaid medical claims of $101,000 and $86,000 at March 31, 2004 and 2003, respectively. Management reviews claims history information provided to it by the third-party administrator of the self insured plan on a regular basis and believes that the reserve is sufficient to respond to the claims that may be incurred by the participants in the plan.

Deferred Tax Asset Valuation Allowance

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

Impairment Valuations

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

22

Estimated Liabilities

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

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

Warranty

        We establish a reserve for warranty costs we may incur during the warranty period that is provided for in the OnDemand machine sales agreements with our customers. Warranty expense incurred during the period ended March 31, 2004, totaled $161,000.

ITEM 7A.    QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

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

ITEM 8.     FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

        Our consolidated financial statements, notes thereto and the report of Grant Thornton LLP, our independent auditors, are set forth on the pages indicated at Item 15 and are incorporated into this item by reference.

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

      None

ITEM 9A.     CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

        Disclosure controls and procedures are designed to ensure that information required to be disclosed in the reports filed or submitted under the Securities Exchange Act of 1934 (the “Exchange Act”) is recorded, processed, summarized and reported, within the time periods specified in the SEC rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in the reports filed under the Exchange Act is accumulated and communicated to management, including the chief executive officer and chief financial officer, as appropriate, to allow timely decisions regarding required disclosure. We carried out an evaluation required by Rules 13a-15 and 15d-15 of the Exchange Act (the “Evaluation”), under the supervision and with the participation of our management, including our chief executive officer (“CEO”) and chief financial officer (“CFO”), of the effectiveness of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15 and 15d-15).  Based upon and as of the date of the Evaluation, our CEO and CFO concluded that our disclosure controls and procedures are effective to ensure that information required to be disclosed in the reports we file and submit under the Exchange Act is recorded, processed, summarized and reported as and when required.

23

Changes in Internal Controls

        There has not been any change in our internal control over financial reporting identified in connection with the Evaluation that occurred during the fiscal quarter ended March 31, 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. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within our organization have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control.

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

24

PART III

ITEM 10.     DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

        The information required by this item is incorporated herein by reference to the information included in our definitive proxy statement, which will be filed by us within 120 days after the end of our 2004 fiscal year.

Code of Ethics and Business Conduct

        Our commitment to ethical business conduct is a fundamental shared value of our board of directors, management and employees and critical to our success. On June 26, 2003, we adopted a Code of Business Conduct and Ethics (the “Code”) applicable to all of our employees, consultants, agents and representatives. The Code provides that our representatives will uphold our ethical standards as vigorously as they pursue our financial objectives, and that honesty and integrity will not be compromised by our representatives anywhere at any time. A copy of the Code is posted on our web site www.mts-mt.com, and is available, free of charge upon request by contacting Michael P. Conroy, Chief Financial Officer, at michaelc@mts-mt.com.

        We intend to satisfy the disclosure requirement under Item 10 of Form 8-K regarding an amendment to, or waiver from, a provision of this code of ethics, as it relates to our CEO, CFO or controller by posting such information on our website, at the address specified above. Information contained in our website, whether currently posted or posted in the future, is not part of this document or the documents incorporated by reference in this document.

ITEM 11.     EXECUTIVE COMPENSATION

        The information required by this item is incorporated herein by reference to the information included in our definitive proxy statement, which will be filed within 120 days after the end of our 2004 fiscal year.

ITEM 12.     SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

        The information required by this item is incorporated herein by reference to the information included in our definitive proxy statement, which will be filed within 120 days after the end of our 2004 fiscal year.

        Information regarding equity compensation plans required by this item is included in Item 5 of Part II of this report and is incorporated into this item by reference.

ITEM 13.     CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

        The information required by this item is incorporated herein by reference to the information included in our definitive proxy statement, which will be filed within 120 days after the end of our 2004 fiscal year.

ITEM 14.     PRINCIPAL ACCOUNTANT FEES AND SERVICES

        The information required by this item is incorporated herein by reference to the information included in our definitive proxy statement, which will be filed within 120 days after the end of our 2004 fiscal year.

25

PART IV

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

(a)		The following documents are filed as part of this report:
	1.	Financial Statements. The consolidated financial statements, and related notes thereto, of Med Tech with the independent auditors' report thereon are included in Part IV of this Report on the pages indicated by the Index to Financial Statements and Schedule beginning on page 29 of this report.
	2.	Consolidated Financial Statement Schedule. The consolidated financial statement schedule of Med Tech is included in Part IV of this report on the page indicated by the Index to Financial Statements as beginning on page 53 of this report. The independent auditor's report as presented on page 52 of this report applies to the consolidated financial statement schedule. This financial statement schedule should be read in conjunction with the consolidated financial statements and related notes thereto.
		Schedules not listed in the Index to Financial Statements have been omitted because they are not applicable, not required, or the information required to be set forth therein is included in the consolidated financial statements or notes thereto.
	3.	For Exhibits, see Item 16(c) below. Each management contract or compensatory plan or arrangement required to be filed as an Exhibit hereto is listed in Exhibit Nos. 10.3, 10.4, 10.9 and 10.10 of Item 15(c) below.
b.		Reports on Form 8-K.
		On February 5, 2004, we filed a Current Report on Form 8-K in which we disclosed under Items 7 and 12 a press release regarding its financial results for the fiscal quarter ended December 31, 2003.
d.		Financial Statement Schedules. See Item 15(a) above.

26

MEDICAL TECHNOLOGY SYSTEMS, INC.

INDEX TO FINANCIAL STATEMENTS

	Page
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS	28
CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheets as of March 31, 2004 and 2003	29
Consolidated Statement of Earnings for the Years Ended March 31, 2004, 2003 and 2002	30
Consolidated Statements of Changes in Stockholders' Equity (Deficit) for the Years Ended March 31, 2004, 2003 and 2002	31
Consolidated Statements of Cash Flows for the Years Ended March 31, 2004, 2003 and 2002	32
Notes to Consolidated Financial Statements	33 - 51
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULE	52
FINANCIAL STATEMENT SCHEDULE
Schedule II - Valuation and Qualifying Accounts	53

        All other schedules are omitted since the required information is not present in amount sufficient to require submission of the schedule or because the information required is included in the financial statements and notes thereto.

27

REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

Board of Directors
Medical Technology Systems, Inc. and Subsidiaries
Clearwater, Florida  33762

          We have audited the accompanying consolidated balance sheets of Medical Technology Systems, Inc. and Subsidiaries as of March 31, 2004 and 2003 and the related consolidated statements of earnings, changes in stockholders’ equity and cash flows for each of the three years in the period ended March 31, 2004. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

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

          In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Medical Technology Systems, Inc. and Subsidiaries as of March 31, 2004 and 2003, and the consolidated results of operations and cash flows for each of the three years in the period ended March 31, 2004 in conformity with accounting principles generally accepted in the United States of America.

/s/ GRANT THRONTON, LLP

Tampa, Florida

June 4, 2004

28

MEDICAL TECHNOLOGY SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
MARCH 31, 2004 AND 2003

(In Thousands)

ASSETS

	2004		2003
Current Assets:
Cash	$	59	$	395
Accounts Receivable, Net		6,712		4,756
Inventories, Net		4,032		3,080
Prepaids and Other		411		76
Deferred Tax Benefits		2,309		1,124
Total Current Assets		13,523		9,431
Property and Equipment, Net		3,888		3,023
Other Assets, Net		3,410		2,774
Deferred Tax Benefits		0		2,155
Total Assets	$	20,821	$	17,383

LIABILITIES AND STOCKHOLDERS' EQUITY

Current Liabilities:
Current Maturities of Long-Term Debt	$	272		$	1,461
Current Maturities of Related Party Note Payable		244			0
Accounts Payable and Accrued Liabilities		3,701			3,506
Total Current Liabilities		4,217			4,967
Long-Term Debt, Less Current Maturities		7,650			7,023
Related Party Note Payable, Less Current Maturities		1,030			0
Total Liabilities		12,897			11,990
Stockholders' Equity:
Common Stock		49			44
Preferred Stock		1			1
Capital In Excess of Par Value		12,427			11,881
Accumulated Deficit		(4,225	)		(6,205	)
Treasury Stock		(328	)		(328	)
Total Stockholders' Equity		7,924			5,393
Total Liabilities and Stockholders' Equity	$	20,821		$	17,383

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

29

MEDICAL TECHNOLOGY SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
YEARS ENDED MARCH 31, 2004, 2003 AND 2002
(In Thousands; Except Earnings Per Share Amounts)

	2004		2003		2002
Net Sales	$	34,384	$	29,385	$	24,769
Costs and Expenses:
Cost of Sales		20,936		17,783		14,418
Selling, General and Administrative		7,473		6,330		5,298
Depreciation and Amortization		1,342		964		926
Total Costs and Expenses		29,751		25,077		20,642
Operating Profit		4,633		4,308		4,127
Other Expenses
Interest Expense		851		876		919
Amortization of:
Financing Costs		364		271		0
Original Issue Discount		248		189		0
Total Other Expenses		1,463		1,336		919
Income Before Taxes		3,170		2,972		3,208
Income Tax Expense		1,190		1,124		1,234
Net Income		1,980		1,848		1,974
Non-Cash Constructive Dividend Related to Beneficial
Conversion Feature of Convertible Preferred Stock		0		347		0
Convertible Preferred Stock Dividends		220		168		0
Net Income Available to Common Stockholders	$	1,760	$	1,333	$	1,974
Net Income Per Basic Common Share	$	0.35	$	0.28	$	0.46
Net Income Per Diluted Common Share	$	0.29	$	0.26	$	0.44

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

30

MEDICAL TECHNOLOGY SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
YEARS ENDED MARCH 31, 2004, 2003 AND 2002
(In Thousands)

	Common Stock			Preferred Stock
	$.01 Par Value			$.001 Par Value			Capital In									Total
							Excess of			Accumulated			Treasury			Shareholders'
	Shares	Amount		Shares	Amount		Par Value			Deficit			Stock			Equity
Balance March 31, 2001	4,217,028	$	42	0	$	0	$	8,715		$	(10,027	)	$	(328	)	$	(9,038	)
Issuance of Stock Options								49									49
Stock Options and Warrants Exercised	64,133		1					23									24
Stock Issued	50,000							19									19
Net Income											1,974						1,974
Balance March 31, 2002	4,331,161		43	0		0		8,806			(8,053	)		(328	)		468
Stock Options and Warrants Exercised	62,462		1					48									49
Warrants Issued								1,564									1,564
Preferred Stock Issued				2000		1		1,999									2,000
Costs Related to Equity Issued								(368	)								(368	)
Convertible Preferred Stock Dividend								(168	)								(168	)
Non-Cash Constructive Dividend Related
to Beneficial Conversion Feature
of Convertible Preferred Stock								(347	)								(347	)
Amortization of Non-Cash
Constructive Dividend Related to
Beneficial Conversion Feature
of Convertible Preferred Stock								347									347
Net Income											1,848						1,848
Balance March 31, 2003	4,393,623		44	2,000		1		11,881			(6,205	)		(328	)		5,393
Stock Options and Warrants Exercised	469,497		5					507									512
Tax Benefit from Stock Options Exercised								178									178
Convertible Preferred Stock Dividend								(220	)								(220	)
Foreign Currency Translation Adjustment								81									81
Net Income											1,980						1,980
Balance March 31, 2004	4,863,120	$	49	2,000	$	1	$	12,427		$	(4,225	)	$	(328	)	$	7,924

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

31

MEDICAL TECHNOLOGY SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED MARCH 31, 2003, 2002 AND 2001
(In Thousands)

Operating Activities
	2004			2003			2002
Net Income	$	1,980		$	1,848		$	1,974
Adjustments to Reconcile to Net Cash
Provided by Operating Activities:
Depreciation and Amortization		1,342			964			926
Amortization of Deferred Financing Costs		364			271			0
Deferred Income Tax Expense (Benefit)		1,148			1,062			1,234
Amortization of Original Issue Discount		248			189			0
Reserve for Obsolete Inventory		112			249			0
Development Costs Written Off		0			115			0
Issuance of Stock for Services		0			0			19
Deferred Compensation		0			0			49
(Increase) Decrease in:
Accounts Receivable		(1,956	)		(1,300	)		(889	)
Inventories		(878	)		(594	)		99
Prepaids and Other		(335	)		123			(70	)
Increase (Decrease) in:
Accounts Payable and Other Accrued Liabilities		571			302			(275	)
Total Adjustments		616			1,381			1,093
Net Cash Provided by Operations		2,596			3,229			3,067
Investing Activities
Expended for Property and Equipment		(1,469	)		(1,140	)		(809	)
Expended for Product Development		(451	)		(556	)		(853	)
Expended for Patents and Other Assets		(89	)		(33	)		(42	)
Net Cash Used by Investing Activities		(2,009	)		(1,729	)		(1,704	)
Financing Activities
Payments on Notes Payable and Long-Term Debt		(1,493	)		(12,410	)		(1,096	)
Payments on Related Party Note Payable		(178	)		0			0
Net Advances on Revolving Line of Credit		456			3,465			0
Issuance of Convertible Preferred Stock		0			2,000			0
Expended for Financing Costs		0			(1,151	)		0
Dividends on Convertible Preferred Stock		(220	)		(168	)		0
Exercise of Stock Options		512			49			24
Proceeds from Borrowing on Subordinated Notes and Long-Term Debt		0			6,700			27
Net Cash Used by Financing Activities		(923	)		(1,515	)		(1,045	)
Net (Decrease) Increase in Cash		(336	)		(15	)		318
Cash at Beginning of Period		395			410			92
Cash at End of Period	$	59		$	395		$	410

See Note 18 for supplemental disclosures of other cash flow information.

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

32

MEDICAL TECHNOLOGY SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2004, 2003 AND 2002

NOTE 1 — BACKGROUND INFORMATION

        Medical Technology Systems™, Inc., a Delaware corporation (the “Company”), was incorporated in March 1984. The Company is a holding company that operates through its subsidiaries, MTS Packaging Systems, Inc.™ (“MTS Packaging”) and MTS Packaging Systems International, Ltd. (“MTSPI”).

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

        In April 2004, the Company announced that it would begin to do business as MTS Medication Technologies and seek the approval of its stockholders to formally change the name of the Company to MTS Medication Technologies, Inc. The Company also intends to merge MTS Packaging Systems, Inc. into MTS Medication Technologies, Inc. when the formal name change is approved by the stockholders.

NOTE 2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Consolidation

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

Use of Estimates

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

Cash

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

Inventories

        Inventories are stated at the lower of cost or market. Cost is determined by the first-in, first-out (“FIFO”) method. As of March 31, 2004 and 2003, the Company has established an inventory valuation allowance of $195,000 and $183,000, respectively, to account for the estimated loss in value of inventory due to obsolescence.

33

Warranty

        The Company establishes a reserve for warranty costs it may incur during the warranty period that is provided for in the OnDemand® machine sales agreements with its customers. The warranty period is generally for a six-month period. Warranty costs incurred during the period ended March 31, 2004 totaled $161,000.

Revenue Recognition

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

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

        The geographic sales of the Company are primarily in the United States. There were two customers whose sales accounted for approximately 27%, 15% and 22% of net revenue for 2004, 2003 and 2002, respectively.

Allowance for Doubtful Accounts

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

Property and Equipment

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

34

	Years
Property and Equipment....................................................	3 - 7
Leasehold Improvements..................................................	5

        The Company uses accelerated methods of depreciation for tax purposes.

Research and Development and Product Development Costs

        The Company expenses research and development costs as incurred. The Company incurred approximately $161,000, $172,000 and $87,000 in research and development costs during fiscal 2004, 2003 and 2002, respectively.

        All costs incurred subsequent to the completion of research and development activities associated with the product’s hardware components and the software components achievement of technological feasibility is capitalized until the product is available for general release to customers. The Company initially classifies the construction costs of the first units produced for commercial use as product development costs prior to transferring certain of these costs to inventory. The Company capitalized approximately $451,000, $556,000 and $853,000 of product development costs during the years ended March 31, 2004, 2003 and 2002, respectively.

        All remaining product development costs are generally amortized on a straight-line basis over a five (5) year period. Amortization expense related to product development costs was $355,000, $303,000 and $79,000 for the years ended March 31, 2004, 2003 and 2002, respectively.

        In addition, during the fourth quarter of fiscal 2003, the Company evaluated the status of certain development products that were underway and determined that the recovery of the costs of these projects was doubtful, and therefore, were written off. The amount of the development costs written off during the years ended March 31, 2004 and 2003 was $0 and $115,000, respectively.

        At March 31, 2004 and 2003, the Company’s capitalized product development costs included its new OnDemand product, which represented $1,720,000 and $1,428,000, respectively of the total capitalized product development costs. During the year ended March 31, 2004, the Company sold six (6) OnDemand machines.

Other Assets

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

Valuation of Long-Lived Assets and Certain Identifiable Intangibles

        Long-lived assets and certain identifiable intangibles that are held and used by the Company are reviewed for impairment whenever events or changes in circumstance indicate that the carrying amount of these assets may not be recoverable in accordance with Financial Accounting Standards Board (FASB) Statement of Financial Accounting Standards (SFAS) No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets”. In performing the review for recoverability, the Company estimates the future cash flows expected to result from the use of the assets and their eventual disposition. If the sum of the expected future cash flows (undiscounted and without interest charges) is less than the carrying amount of the assets, an impairment loss is recognized. Long-lived assets and certain identifiable intangibles to be disposed of are to be reported at the lower of the carrying amount or the fair value less cost to sell, except for assets that are related to discontinued operations, which are reported at the lower of carrying value or net realizable value. There were no impairment losses in 2004, 2003 and 2002.

35

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 (see Note 15).

Income Taxes

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

Treasury Stock

        The Company records its treasury stock at cost.

Stock-Based Employee Compensation

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

	2004		2003		2002
Net Income Available to Common Shareholders as Reported	$	1,760	$	1,333	$	1,974
Less:
Stock Based Employee Compensation Cost Under the Fair Value Based Method, Net of Related Tax Effect		519		512		395
Net Income Proforma	$	1,241	$	821	$	1,579
Net Income Per Common Share, Basic as Reported	$	0.35	$	0.28	$	0.46
Net Income Per Common Share, Basic Proforma	$	0.24	$	0.17	$	0.37
Net Income Per Share - Diluted as Reported	$	0.29	$	0.26	$	0.44
Net Income Per Share - Diluted Proforma	$	0.21	$	0.17	$	0.35
For Basic Income Per Share - Weighted Average Shares		5,081		4,793		4,299
For Diluted Income Per Share - Weighted Average Shares		6,910		5,893		4,517

36

        The fair value of each option grant is estimated on the date of grant using the Binominal options-pricing model with the following weighted-average assumptions used for grants in 2004, 2003 and 2002, respectively, no dividend yield for all years, expected volatility of 133, 127 and 148 percent; risk-free interest rates of 3.0, 3.0 and 3.7 percent, and three-year expected lives for all years.

Fair Value of Financial Instruments

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

        The carrying amount of current and long-term portions of long-term debt approximates fair value since the interest rates approximate current prevailing market rates except for the carrying value of the subordinated notes, which has a fair value of approximately $4,549,000 and a carrying value of $3,197,000.

        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 8 and 14) and has determined that these financial instruments are properly classified in its financial statements as of March 31, 2004.

Recent Accounting Pronouncements

        The financial Accounting Standards Board (FASB) issued Interpretation No. 46 (FIN 46), “Consolidation of Variable Interest Entities”, in January 2003 and amended the Interpretation in December 2003. FIN 46 requires an investor with a majority of the variable interests (primarily beneficiary) in a variable interest entity (VIE) to consolidate the entity and also required majority and significant variable interest investors to provide certain disclosures. A VIE is an entity in which the voting equity investors do not have a controlling financial interest or the equity investment at risk is insufficient to finance the entity’s activities without receiving additional subordinated financial support from the other parties. Development-stage entities that have sufficient equity invested to finance the activities they are currently engaged in and entities that are businesses, as defined in the Interpretation, are not considered VIEs. The provisions of FIN 46 were effective immediately for all arrangements entered into with new VIEs created after January 31, 2003, and the Company has elected to apply the remaining provisions of the Interpretation for the period ending March 31, 2004. The Company’s review of it operation and business structure did not identify any VIEs that would require consolidation or any significant exposure to VIEs that would require disclosure.

NOTE 3 — ACCOUNTS RECEIVABLE

        Accounts Receivable is shown net of allowance for doubtful accounts of $187,000 and $138,000 at March 31, 2004 and 2003, respectively. The changes in the allowance for doubtful accounts are summarized as follows:

	March 31,			March 31,
	2004			2003
	(In Thousands)
Beginning Balance	$	138		$	101
Provision for Doubtful Accounts		152			50
Charge-Offs		(103	)		(13	)
Ending Balance	$	187		$	138

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

37

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

NOTE 4 — INVENTORIES

        Inventories consist of the following:

	March 31,			March 31,
	2004			2003
	(In Thousands)
Raw Material	$	1,762		$	1,547
Finished Goods and Work in Process		2,465			1,716
Less: Inventory Valuation Allowance		(195	)		(183	)
	$	4,032		$	3,080

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

	March 31,			March 31,
	2004			2003
	(In Thousands)
Beginning Balance	$	183		$	40
Provision for Obsolescence		112			250
Charge-Offs		(100	)		(107	)
Ending Balance	$	195		$	183

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

NOTE 5 — PROPERTY AND EQUIPMENT

        Property and equipment consists of the following:

	March 31,			March 31,
	2004			2003
	(In Thousands)
Property and Equipment	$	10,543		$	9,014
Leasehold Improvements		816			713
		11,359			9,727
Less: Accumulated Depreciation and Amortization		(7,471	)		(6,704	)
	$	3,888		$	3,023

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

38

        Depreciation of property and equipment and amortization of leasehold improvements was approximately $767,000, $577,000 and $732,000 for fiscal years ending March 31, 2004, 2003 and 2002, respectively.

NOTE 6 — OTHER ASSETS

        Other assets consists of the following:

	Amortization
	Period	March 31,			March 31,
	(Years)	2004			2003
		(In Thousands)
Product Development (see Note 2)	5	$	2,383		$	1,941
Less:   Accumulated Amortization			(873	)		(518	)
		$	1,510	)	$	1,423
Patents	17	$	2,365		$	1,229
Less:   Accumulated Amortization			(1,026	)		(808	)
		$	1,339		$	421
Financing Costs (see Note 8)	3 - 5	$	1,110		$	1,110
Less:   Accumulated Amortization			(635	)		271
		$	475		$	839
Other	5	$	221		$	201
Less:   Accumulated Amortization			(135	)		(110	)
		$	86		$	91
Total Other Assets, Net		$	3,410		$	2,774

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

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

		(In Thousands)
2005 .....................................................................	$	267
2006 .....................................................................	$	253
2007 .....................................................................	$	244
2008 .....................................................................	$	232
2009 .....................................................................	$	119

39

NOTE 7 — ACCOUNTS PAYABLE AND ACCRUED LIABILITIES

        Accounts payable and accrued liabilities are comprised of the following:

	March 31,		March 31,
	2004		2003
	(In Thousands)
Accounts Payable/Trade	$	1,850	$	2,036
Accrued Liabilities:
Salaries, Commissions and Employee Benefits		953		731
Deferred Revenue		666		58
Medical Claims		101		86
Taxes		90		91
Royalties		0		437
Other		41		67
	$	3,701	$	3,506

NOTE 8 — LONG-TERM DEBT

        Long-term debt consists of the following:

	March 31,			March 31,
	2004			2003
	(In Thousands)
Revolving line of credit due June 2005 plus interest payable monthly at 1%
above the prime rate (5.0% at March 31, 2004).	$	3,921		$	3,465
Bank term loan payable in monthly installments of $83,333 plus interest at
2.25% above the prime rate (6.25% at March 31, 2004) repaid in the current year.		0			1,250
Bank term loan payable in monthly installments of $11,667 plus interest at 1.25%
above the prime rate (5.25% at March 31, 2004) through June 2005.		455			595
Note payable to related party (see Note 12) payable in monthly installments
of $28,785 including interest at 6.25% through July 2008.		1,302			0
Subordinated Note - Face amount of $4,000,000, less unamortized original issue
discount of $803,000, due June 26, 2007 plus interest payable monthly at 14%.		3,197			2,949
Other Notes and Agreements		321			226
Total Long - Term Debt		9,196			8,484
Less Current Portion (including $272,000 due to a related party)		(516	)		(1,461	)
Long Term Debt Due After One Year	$	8,680		$	7,023

40

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

        In June 2002, the Company repaid the entire amount, $11,310,000, of its bank term loan with the proceeds of a new revolving line of credit, term loans, a subordinated note and convertible preferred stock. The revolving line of credit allows for borrowing of up to $5,000,000 based upon advance rates that are applied to the Company’s eligible accounts receivable and inventory. There was $1,079,000 available at March 31, 2004 on the revolving line of credit based upon eligible accounts receivable and inventory. Interest is payable monthly on the revolving line of credit 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 was repayable in equal monthly installments over two (2) years plus interest at the prime rate plus 2.25% and included an excess cash flow payment provision. This second term loan was completely repaid in January 2004.

        The subordinated note in the amount of $4,000,000 is repayable in five (5) years with interest only, at 14%, payable monthly until the maturity of the note. The subordinated note is secured by a second lien on all of the assets of the Company. In addition, the subordinated note holders were issued 566,517 warrants to purchase common stock exercisable for ten (10) years at $.01 per share. (Subject to certain antidilution provisions.) (See note 14.) The relative value of the warrants, and certain imbedded features of the warrants, were recorded as part of the stockholders’ equity and reduced the carrying amount of the subordinated note as an original issue discount. The original issue discount is being amortized over the five (5) year term of the subordinated note. Amortization expense related to the original issue discount was $248,000 for the year ended March 31, 2004. In April 2004, the note holders exercised their rights to acquire 566,517 shares of common stock under the terms of the warrant agreements.

        In June 2004, the Company repaid the entire amount, $4,000,000, of its subordinated note with the proceeds of an additional senior term loan and advances on its revolving line of credit. Upon the repayment of the subordinated note, the Company incurred a prepayment penalty of $120,000. In addition, the Company renewed and extended the expiration date of its revolving credit facility with its senior lender to June 2007 and obtained a new $300,000 line of credit to fund future purchases of equipment. At the time the subordinated note was repaid, the Company recorded a one-time non-cash expense to extinguish the unamortized original issue discount of approximately $741,000 and wrote-off the deferred financing costs of approximately $325,000 that were incurred when the subordinated debt was acquired.

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

        The bank term loans also contain provisions that require the Company to maintain certain financial ratios and minimum stockholders’ equity levels of $5.9 million at March 31, 2004. In addition, certain provisions limit the amount of capital expenditures that the Company can make each year. The Company was in compliance with all provisions of the loan agreements of March 31, 2004.

        The following is a schedule by year of the regularly scheduled principal payments required on these notes payable and long-term debts as of March 31, 2004:

		(In Thousands)
2005 .....................................................................	$	516
2006 .....................................................................	$	535
2007 .....................................................................	$	500
2008 .....................................................................	$	8,319
2009 .....................................................................	$	126
Thereafter ...........................................................	$	0

41

        Interest expense for the years 2004, 2003 and 2002 amounted to $851,000, $876,000 and $919,000, respectively.

        At March 31, 2004, the Company also had a $1,000,000 line of credit available for purchases of equipment at an interest rate of prime plus 1.25%. Advances on the line of credit may be made in $250,000 increments and are repayable over a five-year term. There were no amounts outstanding on this line of credit at March 31, 2004.

NOTE 9 — LEASE COMMITMENTS

        The following is a schedule by year of future minimum rental payments required under operating leases, primarily facility leases that have an initial or remaining non-cancelable lease term in excess of one year as of March 31, 2004.

		(In Thousands)
2005 .....................................................................	$	233
2006 .....................................................................	$	3
2007 .....................................................................	$	3
2008 .....................................................................	$	3
Thereafter ...........................................................	$	3

        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 the lease on September 30, 2004 and vacate the premises. 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 104,000 square feet, and the monthly lease payments begin at $35,000 plus tax in the first year and increases to $63,000 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 also has an option to lease an additional 28,000 square feet of contiguous space at any time by providing the landlord with one hundred twenty (120) days notice. Also, the Company will be paid a move-in allowance, by the landlord, of $400,000 on the commencement date of the lease. The move-in allowance will be amortized over the term of the lease. In addition, at that time, the Company will accelerate the amortization of approximately $275,000 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 $300,000 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. Both the accelerated amortization and the moving expenses are expected to be recorded in the first and second quarters of the next fiscal year.

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

        MTS Packaging Systems International, Ltd. rents office and warehouse space in Lancashire, England. The lease is for a term of one year.

        Rent expense amounted to $476,000, $439,000 and $393,000 for the years ended March 31, 2004, 2003 and 2002, respectively.

42

NOTE 10 — 401(K) PROFIT SHARING PLAN

        The Company has a 401(K) Profit Sharing Plan. The Plan covers substantially all of its employees. Contributions are at the employees’ discretion and may be matched by the Company up to certain limits. For the years ended March 31, 2004, 2003 and 2002, the Company contributed $38,000, $43,000 and $30,000, respectively, to the plan.

NOTE 11 — SELF INSURANCE PLAN

        The Company has a Medical Health Benefit Self-insurance Plan, which covers substantially all of its employees. During the year ended March 31, 2004, the Company was reinsured for claims that exceed $50,000 per participant and an annual maximum aggregate limit of approximately $580,000. Reinsurance limits for subsequent fiscal years may change. Future claims experience may affect the reinsurance limits that may be available to the Company in subsequent fiscal years. The Company has established a reserve of $101,000 and $84,000 at March 31, 2004 and 2003, respectively, for all unpaid claims incurred and reported during fiscal year 2004 and an estimate of claims incurred during fiscal year 2004 that have not been reported as of March 31, 2004.

NOTE 12 — RELATED PARTY TRANSACTIONS

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

NOTE 13 — TAXES

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

	Years Ended March 31,
	2004		2003		2002
	(In Thousands)
Current Income Taxes	$	42	$	62	$	0
Deferred Income Taxes (Principally related to the
use of the tax loss carryforward)		1,148		1,062		1,234
Income Tax Expense (Benefit)	$	1,190	$	1,124	$	1,234

43

        Total income tax (benefit) expense for 2004, 2003 and 2002 resulted in effective tax rates of 37.5%, 37.8% and 38.5%, respectively. The reasons for the differences between these effective tax rates and the United States statutory rate of 34.0% — 35.0% are as follows:

	Years Ended March 31,
	2004		2003		2002
	(In Thousands)
Tax Expense at United States Statutory Rate	$	1,078	$	1,011	$	1,118
State Income Tax, Net		106		99		116
Other		6		14		0
	$	1,190	$	1,124	$	1,234

          Deferred taxes consist of the following:

	March 31, 2004			March 31, 2003
	(In Thousands)
Deferred Tax Assets:
Tax Loss Carry Forward	$	2,077		$	2,891
Reserves and Provisions		396			380
Inventory Valuation Allowance		74			69
Allowance for Doubtful Accounts		71			52
Depreciation/Amortization Temporary Difference		(309	)		(113	)
Deferred Income Taxes	$	2,309		$	3,279

        The Company believes that it is more likely than not that these income tax benefits will be realized in the future based in part on (1) the historical profitable operations of its core business; (2) expectations that its core business will continue to be profitable; (3) growth opportunities available for its core business; and (4) the length of time that the net operating loss carryforwards are available to offset future taxable income. The income tax benefit is comprised primarily of net operating loss carryforwards of approximately $5 million that are available to offset future taxable income. The carryforward losses expire beginning in fiscal year 2011 and ending in fiscal year 2020.

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

NOTE 14 — STOCKHOLDERS’ EQUITY (DEFICIT)

        Stockholders’ Equity consists of the following:

	March 31,	March 31,	March 31,
	2004	2003	2002
Series A Convertible Participating Preferred Stock
Par Value $.001 Per Share:
Authorized Shares	10,000	10,000	0
Issued Shares	2,000	2,000	0
Outstanding Shares	2,000	2,000	0

44

	March 31,	March 31,	March 31,
	2004	2003	2002
Common Stock
Par Value $.01 Per Share:
Authorized Shares	25,000,000	25,000,000	25,000,000
Outstanding Shares	4,863,120	4,393,623	4,312,281
Issued Shares	4,863,120	4,393,623	4,331,161

Series A Convertible Participating Preferred Stock

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

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

        In the event that the Company is required to make payments to the holders of the preferred stock, it may elect to issue additional preferred stock in lieu of a cash payment. Although the make-whole provision and other provisions of the convertible preferred stock agreement provide for a maximum of 12,500,000 shares that may be issued pursuant to those provisions, based upon current conditions, the Company believes it is unlikely that the maximum number of shares would be issued.

45

Stock Options

        Activity related to options is as follows:

								Weighted Average
	Number of		Range of					Exercise Price
	Shares		Exercise Price					Per Share
Outstanding at March 31, 2001	503,206		$	0.48	-	$	25.00	$	3.05
Granted in Fiscal 2002:
Officers and Directors	591,000		$	0.48	-	$	2.55	$	1.51
Employees	376,500		$	1.40	-	$	2.66	$	1.59
Options Exercised	(9,000	)				$	1.50	$	1.50
Options Expired	(11,900	)	$			$	2.00	$	4.20
Outstanding at March 31, 2002	1,449,806		$	0.48	-	$	25.00	$	2.04
Granted in Fiscal 2003:
Officers and Directors	43,000		$	2.30	-	$	2.67	$	2.47
Employees	84,000		$	2.30	-	$	2.80	$	2.62
Options Exercised	(31,600	)	$	1.50	-	$	2.50	$	1.55
Options Expired	(23,400	)	$	1.45	-	$	2.66	$	1.99
Outstanding at March 31, 2003	1,521,806		$	0.48	-	$	25.00	$	2.10
Granted in Fiscal 2004:
Officers and Directors	89,000		$	4.35	-	$	12.45	$	5.25
Employees	43,333		$	3.21	-	$	4.55	$	4.97
Options Exercised	(404,791	)	$	1.50	-	$	2.50	$	1.79
Options Expired	(78,048	)	$	1.40	-	$	25.00	$	4.15
Outstanding at March 31, 2004	1,171,300		$	0.48	-	$	15.95	$	2.38

          Outstanding Shares

		Weighted Average
		Remaining
Range of	Number	Contractual Life	Weighted Average
Exercise Prices	Outstanding	(Years)	Exercise Price
$0.48 -   $2.35	702,500	6.96	$1.61
2.50 -   $4.55	457,400	5.62	$3.03
$12.45 - $15.95	11,400	8.09	$13.05

46

Exercisable Shares

Range of	Number	Weighted Average	Weighted Average
Exercise Prices	Outstanding	Remaining	Exercise Price
		Contractual Life
		(Years)
$0.48 -   $2.35	494,333	6.91	$1.62
2.50 -   $5.00	296,900	3.78	$2.68
$12.45 - $15.95	2,400	1.00	$15.32

          The options outstanding at March 31, 2004 expire on various dates commencing in December 2004 and ending in March 2014.

          The weighted average grant date fair value of options granted during fiscal years 2004, 2003 and 2002 was $3.48, $1.75 and $1.25, respectively.

Warrants

          Activity related to warrants is as follows:

	Number of Shares		Weighted Average
			Price Per Share
Outstanding at March 31, 2001	205,600		$	0
Granted in Fiscal 2002	0			0
Warrants Exercised	(76,000	)		.97
Warrants Expired	0			0
Outstanding at March 31, 2002	129,600		$	1.60
Granted in Fiscal 2003	691,517			.28
Warrants Exercised	(47,000	)		.97
Warrants Expired	0			0
Outstanding at March 31, 2003	774,117		$	.45
Granted in Fiscal 2004	0			0
Warrants Exercised	(178,100	)		1.53
Warrants Expired	0			0
Outstanding at March 31, 2004	596,017		$	0.19

        The warrants expire on various dates commencing June 2007 and ending June 2012. All warrants are 100% vested at March 31, 2004.

        The weighted average grant date fair value of warrants granted during fiscal years 2004, 2003 and 2002 was $0, $2.72 and $0.90, respectively.

47

        In June 2002, the Company issued subordinated notes to an investor (see Note 8). As part of the consideration for the notes, the investor received 566,517 warrants to purchase common stock exercisable at $.01 per share for ten (10) years. The 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 is being be amortized over the five year term of the subordinated notes and will be recorded as interest expense and a corresponding increase in the carrying value of the subordinated notes. The Company determined the value of the warrants and the make-whole and other provisions of the warrants and recorded this amount as a component of its stockholders’ equity. This amount, $1,240,000 also represents the original issue discount that is being amortized over the five-year term of the subordinated note.

        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 antidilution 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 is 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 8).

        In June 2002, 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 were fully exercisable for five (5) years at $1.50 per share. The value of these warrants, $324,000, was determined as of the date of issuance using the Black-Scholes options-pricing model. The Company allocated the value between the proceeds received from the subordinated debt and the convertible preferred stock based upon their respective amounts. The Company recorded the entire value of the warrants as additional paid in capital. The portion of the value of the warrants that has been allocated to the subordinated notes has been recorded as a long-term asset and will be amortized over the five-year term of the subordinated notes as financing costs. The portion of the value of the warrants that has been allocated to the convertible preferred stock was recorded as a reduction in additional paid in capital. In February 2004, the financial advisors exercised their rights to acquire 125,000 shares of common stock under the terms of the warrant agreement.

Stock Appreciation Rights and Other Stock Based Compensation

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

48

        The terms of the previous employment agreement between the Company and its Chief Financial Officer (“CFO”) provided the CFO with the right to elect to receive any portion of his compensation in the form of common stock of the Company, valued at 60%, in lieu of cash compensation. The CFO could make the election at the beginning of each fiscal quarter. The CFO elected to receive 50,000 shares of common stock in lieu of $18,750 of future compensation during fiscal 2002. During fiscal 2003, the CFO elected to receive all compensation earned in the form of cash. On April 1, 2003, the Company and the CFO entered into a new employment agreement that does not provide the CFO with the right to elect to receive compensation in the form of common stock.

NOTE 15 — EARNINGS PER SHARE

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

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

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

	Year Ended		Year Ended		Year Ended
	March 31, 2004		March 31, 2003		March 31, 2002
	(In Thousands, Except Earnings Per Share Amounts)
Numerator:
Net Income Available to Common Stockholders	$	1,760	$	1,333	$	1,974
Denominator:
Weighted Average Shares Outstanding - Basic		5,081		4,793		4,299
Add:  Effect of Dilutive Options and Warrants		982		455		218
Effect of Conversion of Convertible Preferred
Stock into Common Stock		847		645		0
Weighted Average Shares Outstanding - Diluted		6,910		5,893		4,517
Net Income Per Common Share - Basic	$	0.35	$	0.28	$	.46
Net Income Per Common Share - Diluted	$	0.29	$	0.26	$	.44

49

        The effect of 11,400 and 1,127,000 options and warrants were not included in the calculation of net income per diluted common share for 2004 and 2003, respectively, as the effect would have been anti-dilutive. The effect of all options and warrants (see Note 14) for 2002 were not included in the calculation of income from continuing operations per diluted common share as the effect would have been anti-dilutive.

        The basic earnings per share calculation for the years ended March 31, 2004 and 2003 includes 566,517 shares and 399,000 shares, respectively, that may be issued upon the exercise of warrants exercisable at $.01 per share (see Note 14).

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

NOTE 16 – FINANCING COSTS

        The Company incurred approximately $1,478,000 of financing costs during the fiscal year ended March 31, 2003, including the value of the warrants issued to the Company’s financial advisors related to obtaining certain financing described in Notes 8 and 14. The financing costs were allocated between the components of the financing that represented debt and equity. The financing costs that were allocated to the debt proceeds, $1,110,000, have been recorded as another asset and will be amortized over the repayment term of the various loans and notes. The financing costs that were allocated to the equity proceeds, $368,000, have been recorded as a reduction of the equity proceeds. Amortization expense related to the financing costs was $364,000 and $271,000 for the fiscal years ended March 31, 2004 and 2003, respectively.

NOTE 17 – CONTINGENCIES

        In November 1998, Medical Technology Laboratories, Inc. (“MTL”), a subsidiary that was sold in fiscal 2000 (see Note 20), received a refund request in the amount of $1.8 million from Medicare Program Safeguards (“MPS”). MTL disputed the refund request in its response to MPS in December 1998. To date, MTL has not received any further correspondence from MPS regarding this matter.

        The Company is involved in certain claims and legal actions arising in the ordinary course of business including the matter referred to above. There can be no assurances that these matters will be resolved on terms acceptable to the Company. In the opinion of management, based upon advice of counsel and consideration of all facts available at this time, the ultimate disposition of these matters are not expected to have a material adverse effect on the financial position, results of operations or liquidity of the Company.

NOTE 18 — SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION

	2004		2003		2002
Supplemental Disclosure of Cash Flow Information:
Cash Paid for Interest	$	851	$	842	$	1,001
Cash Paid for Taxes	$	58	$	0	$	0

50

2004 – Non-Cash Activities

        During the fiscal year ended March 31, 2004, the company:

1. Transferred approximately $93,000 in product development costs to inventory;

2. Purchased $199,000 in equipment and financed the purchase with a capital lease obligation; and

3. Acquired proprietary technology in exchange for a note in the amount of $1,480,000 and extinguished a liability for accrued royalty payments of $348,000.

51

REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS ON
FINANCIAL STATEMENT SCHEDULE

Board of Directors
Medical Technology Systems, Inc.

        In connection with our audit of the consolidated financial statements of Medical Technology Systems, Inc. and Subsidiaries referred to in our report dated June 4, 2004, which is included in the Company’s Annual Report on SEC Form 10-K as of and for the year ended March 31, 2004, we have also audited Schedule II for the years ended March 31, 2004, 2003 and 2002. In our opinion, this schedule presents fairly in all material respects, the information required to be set forth herein.

/s/GRANT THORNTON, LLP       

Tampa, Florida

June 4, 2004

52

SCHEDULE II

MEDICAL TECHNOLOGY SYSTEMS, INC. AND SUBSIDIARIES

VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED MARCH 31, 2002, 2003 AND 2004

Column A	Column B		Column C			Column D		Column E
	Balance at		Charged to			Accounts		Balance at
	Beginning of		Costs and			Written Off,		End of
	Year		Expenses			Net		Year
Inventory Valuation Allowance:
Year Ended March 31, 2002	$	40	$	0		$	0	$	40
Year Ended March 31, 2003	$	40	$	250		$	107	$	183
Year Ended March 31, 2004	$	183	$	112		$	100	$	195
Self Insured Medical Claims Reserve:
Year Ended March 31, 2002	$	107	$	324		$	329	$	102
Year Ended March 31, 2003	$	102	$	285		$	301	$	86
Year Ended March 31, 2004	$	86	$	515		$	300	$	101
Allowance for Doubtful Accounts:
Year Ended March 31, 2002	$	290	$	(180	)	$	9	$	101
Year Ended March 31, 2003	$	101	$	50		$	13	$	138
Year Ended March 31, 2004	$	138	$	152		$	103	$	187

53

SIGNATURES

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

Dated:  June 29, 2004	Medical Technology Systems, Inc.
	By:	/s/ Todd E. Siegel
		Todd E. Siegel, Chief Executive Officer

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

Signature	Title	Date
/s/Todd E. Siegel	Chairman of the Board of Directors, President and	June 29, 2004
Todd E. Siegel	Chief Executive Officer (principal executive officer)
/s/Michael P. Conroy	Director, Chief Financial Officer and Vice President	June 29, 2004
Michael P. Conroy	(principal financial officer)
/s/Michael Stevenson	Chief Operating Officer	June 29, 2004
Michael Stevenson
/s/Mark J. Connolly	Principal Accounting Officer and Controller	June 29, 2004
Mark J. Connolly
/s/John Stanton	Director and Vice Chairman of the Board of Directors	June 29, 2004
John Stanton
/s/David W. Kazarian	Director	June 29, 2004
David W. Kazarian
/s/Frank A. Newman	Director	June 29, 2004
Frank A. Newman

54

EXHIBIT INDEX

Exhibit No.		Description
	3.1	Certificate of Incorporation and Amendments thereto. (1)
	3.2	Certificate of Amendment of Certificate of Incorporation. (2)
	3.3	Certificate of Amendment of Certificate of Incorporation. (3)
	3.4	Certificate of Designation of Series A Preferred Stock. (4)
	3.5	Bylaws. (1)
	4.1	Specimen Stock Certificate. (3)
	4.2	See Exhibits 10.13-10.16, 10.26-10.30, 10.34, and 10.39-10.41 for Instruments Defining the Rights of Security Holders.
	10.1	Lease effective August 2, 1993 by and between C & C Park Building and Medical Technology Systems, Inc. for property located at 21540 Drake Road, Strongsville, Ohio.(5)
	10.2	Addendum to Lease dated September 30, 1993 with Leslie A. Rubin for facilities located at 12920 and 12910 Automobile Boulevard, Clearwater, Florida. (5)
	10.3	Form of Director/Officer Indemnification Agreement (5)
	10.4	Stock Option Plan dated March 4, 1997 (6)
	10.5	Form of Warrant dated August 7, 1998, between Sally Siegel and Medical Technology Systems, Inc. (7)
	10.6	Form of Warrant dated August 7, 1998, between Sally Siegel and Medical Technology Systems, Inc. (7)
	10.7	Form of Warrant dated August 18, 1998, between Todd and Shelia Siegel and Medical Technology Systems, Inc. (7)
	10.8	Form of Warrant dated August 18, 1998, between Todd and Shelia Siegel and Medical Technology Systems, Inc. (7)
	10.9	Employment Agreement between Medical Technology Systems, Inc. and Todd E. Siegel dated July 1, 2003. (8)
	10.10	Employment Agreement between Medical Technology Systems, Inc. and Michael P. Conroy, dated July 1, 2003. (8)
	10.11	Subordination Agreement between Eureka I, L.P., LaSalle Business Credit, Inc., Medical Technology Systems, Inc., MTS Packaging Systems, Inc. dated June 26, 2002. (4)
	10.12	Securities Purchase Agreement between Eureka I, L.P. and Medical Technology Systems, Inc. dated June 26, 2002. (4)
	10.13	Senior Subordinated Note between Eureka I, L.P. and Medical Technology Systems, Inc. dated June 26, 2002. (4)
	10.14	Registration Rights Agreement between Eureka I, L.P. and Medical Technology Systems, Inc. dated June 26, 2002. (4)
	10.15	Tag-Along Agreement between Eureka I, L.P., Medical Technology Systems, Inc. and JADE Partners dated June 26, 2002. (4)
	10.16	Tag-Along Agreement between Eureka I, L.P., Medical Technology Systems, Inc. and Todd E, Siegel dated June 26, 2002. (4)
	10.17	Guarantor Security Agreement between Eureka I, L.P., MTS Packaging Systems, Inc., Medication Management Technology, Inc., Clearwater Medical Services, Inc., Medical Technology Laboratories, Inc., Medication Management Systems, Inc., Systems Professionals, Inc., Cart-Ware, Inc., Vangard Pharmaceutical Packaging, Inc. LifeServ Technologies, Inc., Performance Pharmacy Systems, Inc., and MTS Sales & Marketing dated June 26, 2002. (4)
	10.18	Guaranty Agreement between Eureka I, L.P. Medical Technology Systems, Inc. dated June 26, 2002.
	10.19	Securities Pledge Agreement between Eureka I, L.P., Medical Technology Systems, Inc. and LifeServ Technologies, Inc. dated June 26, 2002. (4)
	10.20	Security Agreement between Eureka I, L.P., Medical Technology Systems, Inc. date June 26, 2002. (4)
	10.21	Trademark Security Agreement between Eureka I, L.P. and Medical Technology Systems, Inc. dated June 26, 2002. (4)
	10.22	Trademark Security Agreement between Eureka I, L.P. and MTS Packaging Systems, Inc. dated June 26, 2002. (4)
	10.23	Patent Security Agreement between Eureka I, L.P. and MTS Packaging Systems, Inc. dated June 26, 2002. (4)

55

Exhibit No.		Description
	10.24	Patent Security Agreement between Eureka I, L.P. and Medical Technology Systems, Inc. dated June 26, 2002. (4)
	10.25	Warrant Agreement between Eureka I, L.P. and Medical Technology Systems, Inc. dated June 26, 2002. (4)
	10.26	Loan and Security Agreement between LaSalle Business Credit, Inc. as Agent, Standard Federal Bank National Association Inc. as Lender and Medical Technology Systems, Inc. and MTS Packaging Systems, Inc. dated June 26, 2002. (4)
	10.27	Term Note A between LaSalle Business Credit, Inc. as Agent, Standard Federal Bank National Association Inc. as Lender and Medical Technology Systems, Inc. and MTS Packaging Systems, Inc. dated June 26, 2002. (4)
	10.28	Term Note B between LaSalle Business Credit, Inc. as Agent, Standard Federal Bank National Association Inc. as Lender and Medical Technology Systems, Inc. and MTS Packaging Systems, Inc. dated June 26, 2002. (4)
	10.29	Revolving Credit Note between LaSalle Business Credit, Inc. as Agent, Standard Federal Bank National Association Inc. as Lender and Medical Technology Systems, Inc. and MTS Packaging Systems, Inc. dated June 26, 2002 (4)
	10.30	Capex Note between LaSalle Business Credit, Inc. as Agent, Standard Federal Bank National Association Inc. as Lender and Medical Technology Systems, Inc. and MTS Packaging Systems, Inc. dated June 26, 2002. (4)
	10.31	Continuing Unconditional Guaranty between LaSalle Business Credit, Inc. as Agent, Standard Federal Bank National Association Inc. as Lender and Medical Technology Systems, Inc. and MTS Packaging Systems, Inc. dated June 26, 2002. (4)
	10.32	Securities Pledge Agreement between LaSalle Business Credit, Inc. as Agent, Standard Federal Bank National Association Inc. as Lender and Medical Technology Systems, Inc. and MTS Packaging Systems, Inc. dated June 26, 2002. (4)
	10.33	Guarantor Security Agreement between LaSalle Business Credit, Inc. as Agent, Standard Federal Bank National Association Inc. as Lender, Medication Management Technologies, Inc., Clearwater Medical Services, Inc., Medical Technology Laboratories, Inc., Medication Management Systems, Inc., Systems Professionals, Inc., Cart-Ware, Inc., Vangard Pharmaceutical Packaging, Inc. LifeServ Technologies, Inc., Performance Pharmacy Systems, Inc., and MTS Sales & Marketing, Inc. dated June 26, 2002. (4)
	10.34	First Amendment to Loan and Security Agreement between LaSalle Business Credit, Inc. as Agent, Standard Federal Bank National Association Inc. as Lender and Medical Technology Systems, Inc. and MTS Packaging Systems, Inc. dated July 8, 2003. (9)
	10.35	First Amendment to Securities Pledge Agreement between LaSalle Business Credit, Inc. as Agent, Standard Federal Bank National Association Inc. as Lender and Medical Technology Systems, Inc. and MTS Packaging Systems, Inc. dated July 8, 2003. (9)
	10.36	Continuing Unconditional Guarantee between LaSalle Business Credit, Inc. as Agent, Standard Federal Bank National Association Inc. as Lender and MTS Packaging Systems International, Ltd. dated July 8, 2003. (9)
	10.37	Industrial lease between Gateway Business Centre, Ltd. and Medical Technology Systems, Inc. dated April 13, 2004. (*)
	10.38	Co-Marketing Agreement between Cardinal Health and Medical Technology Systems, Inc. dated May 13, 2004. (*)
	10.39	Second Amendment to Loan and Security Agreement between LaSalle Business Credit, Inc. as Agent, Standard Federal Bank National Association Inc. as Lender and Medical Technology Systems, Inc. and MTS Packaging Systems, Inc. dated June 18, 2004.(*)
	10.40	Term Note C between LaSalle Business Credit, Inc. as Agent, Standard Federal Bank National Association Inc. as Lender and Medical Technology Systems, Inc. and MTS Packaging Systems, Inc. dated June 18, 2004. (*)
	10.41	Revolving Credit Note between LaSalle Business Credit, Inc. as Agent, Standard Federal Bank National Association Inc. as Lender and Medical Technology Systems, Inc. and MTS Packaging Systems, Inc. dated June 18, 2004. (*)
	23	Consent of Grant Thornton LLP dated June 4, 2004. (*)
	31.1	Certification by the Chief Executive Officer of Med Tech pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. (*)
	31.2	Certification by the Chief Financial Officer of Med Tech pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. (*)

56

Exhibit No.		Description
	32.1	Certification by the Chief Executive Officer of Med Tech pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (*)
	32.2	Certification by the Chief Executive Officer of Med Tech pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (*)
(1)		Incorporated herein by reference to same Exhibit(s), respectively, Registration Statement on Form S-1 (SEC File No. 33-17852) filed October 9, 1987
(2)		Incorporated herein by reference to same Exhibit(s), respectively, Registration Statement on Form S-1 No. 33-40678 filed with the Commission on May 17, 1991
(3)		Incorporated herein by reference to same Exhibit(s), respectively, Registration Statement on Form S-3 No 333-112212 filed with the Commission January 26, 2004
(4)		Incorporated herein by reference to Form 10-K (File No. 000-16594) for year ending March 31, 2002, filed July 1, 2002.
(5)		Incorporated herein by reference to Form 10-K (File No. 000-16594) for year ending March 31, 1995, filed July 13, 1995.
(6)		Incorporated herein by reference to the Registration Statement on Form S-8 (SEC File No. 333-56384) filed February 27, 2001.
(7)		Incorporated herein by reference to Form 10Q filed November 12, 1998 for quarter ending September 30, 1998.
(8)		Incorporated herein by reference to Form 10-Q file August 15, 2003
(9)		Incorporated herein by reference to Form 10-Q filed November 13, 2003
(*)		Filed herein

57

EXHIBIT 23

Consent of Independent Certified Public Accounts

        We have issued our reports dated June 4, 2004 accompanying the consolidated financial statements and schedule included in the Annual Report of Medical Technology Systems, Inc. on Form 10-K for the year ended March 31, 2004. We hereby consent to the incorporation by reference of said reports in the Registration Statement of Medical Technology Systems, Inc. on Forms S-8 (File No. 333-56384 effective March 1, 2001) and Form S-3 (File No. 333-112212, effective February 6, 2004).

/s/GRANT THORNTON, LLP       

Tampa, Florida

June 4, 2004

58

CERTIFICATIONS

EXHIBIT 31.1

I, Todd E. Siegel, certify that:

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

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

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

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

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

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

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

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

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

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

Date:   June 29, 2004	By:	/s/ Todd E. Siegel
		Todd E. Siegel
		President and Chief Executive Officer

59

EXHIBIT 31.2

I, Michael P. Conroy, certify that:

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

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

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

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

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

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

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

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

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

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

Date:   June 29, 2004	By:	/s/ Michael P. Conroy
		Michael P. Conroy
		Vice President and Chief Financial Officer

60

Exhibit 32.1

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

In connection with the Annual Report of Medical Technology Systems, Inc. (the “Company”) on Form 10-K for the year ended March 31, 2004 as filed with the Securities and Exchange Commission on the date hereof (the “Form 10-K”), I, Todd E. Siegel, President and Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. §1350, as adopted pursuant to §906 of the Sarbanes-Oxley Act of 2002, that:

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

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

Dated:  June 29, 2004

/s/Todd E. Siegel                                      

Todd E. Siegel

President and Chief Executive Officer

61

Exhibit 32.2

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

In connection with the Annual Report of Medical Technology Systems, Inc. (the “Company”) on Form 10-K for the year ended March 31, 2004 as filed with the Securities and Exchange Commission on the date hereof (the “Form 10-K”), I, Michael P. Conroy, Vice President and Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. §1350, as adopted pursuant to §906 of the Sarbanes-Oxley Act of 2002, that:

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

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

Dated:  June 29, 2004

/s/Michael P. Conroy                                      

Michael P. Conroy

Vice President and Chief Financial Officer

62

EX-10.37

INDUSTRIAL LEASE
(Gateway Business Centre, Ltd.)

        THIS LEASE is made and entered into this 31st day of March, 2004, by and between GATEWAY BUSINESS CENTRE, LTD., a Florida limited partnership (hereinafter the “Lessor”), and MEDICAL TECHNOLOGY SYSTEMS, INC., a Florida corporation (hereinafter the “Lessee”).

WITNESSETH

        Lessor and Lessee hereby agree to perform their respective obligations set forth in this Lease, each in consideration of the other party’s performance of its obligations hereunder. Lessor hereby leases to Lessee the following described property located in Pinellas County, Florida:

         A.     That certain warehouse space having an overall area of approximately 104,388 square feet, including approximately 22,795 square feet of office space (hereinafter the “Premises”), and which space is located in a Building with a street address of 2003 Gandy Boulevard North, St. Petersburg, Florida (the “Building”), located on land depicted on Exhibit “A” attached hereto (the “Land”). The Land and Building are part of Gateway Business Park, owned and operated by Lessor (the “Business Park”). The Building has an approximate overall area of 132,548 square feet. The area of the Premises and Building is calculated by measuring the square footage of ground floor from the outside surface of the exterior walls (and as to the Premises, to the center of any demising wall). Attached hereto, marked Exhibit “B” and by this reference incorporated herein is a floor plan of the Premises which is intended only to show the general layout of the Premises and is not intended to be scaled; any measurements or distances shown should be taken as approximate.

         B.     The appurtenant, non-exclusive right to use the driveways, walkways, parking areas, utility easements, and other common areas of the Building and Land, including without limitation, Lessee’s Proportionate Share (as defined in Section 7 below) of the parking spaces located on the Land. In addition, Lessee shall have the exclusive right to use the “truck loading area” and the 20 parking reserved and visitor parking spaces, all as identified on Exhibit “A”.

                    1.     Lease Term.

                            (a)     The initial term of this Lease (the “Initial Term”) shall be for a period of twelve (12) years, commencing on the first (1^st) day of October, 2004, as adjusted in accordance with the terms of the Work Letter attached hereto as Exhibit “C” (the “Commencement Date”). In addition, Lessee shall have the right to renew and extend this Lease (the “Renewal Option”) for two (2) renewal terms of five (5) years each (each, a “Renewal Term”), the first of which will commence upon the expiration of the Initial Term, and the second of which will commence upon the expiration of the first Renewal Term (if exercised). Lessee shall exercise this renewal option by giving Lessor written notice thereof at least nine (9) months prior to the expiration of the then current term (the Initial Term or first Renewal Term). In the event of such renewal, the “Term” shall include such Renewal Term and such renewal shall be upon the same provisions as for the Initial Term except that Base Rent shall be equal to Market Rate as determined hereunder.

                                     Within five (5) days after Lessor receives Lessee’s notice that it is exercising the Renewal Option (“Exercise Notice”), Lessor shall notify Lessee of Lessor’s good faith determination of the Market Rate. Within fifteen (15) days after Lessee’s receipt of Lessor’s determination, Lessee shall notify Lessor whether Lessee accepts or rejects said determination. In the event Lessee fails to notify Lessor within the foregoing fifteen (15) day period, Lessee shall be deemed to have rejected Lessor’s determination. If Lessee gives Lessor timely notice of its objection to Lessor’s determination, the arbitration process hereinafter set forth shall determine the Market Rate. Each party, at their own expense, shall then designate a real estate broker with not less than ten (10) years experience in commercial leasing transactions in the Pinellas County, Florida area and who has leased a minimum of 2 million square feet of industrial space, who shall determine and promptly report (and in no event later than the forty fifth (45th) day following Lessor’s receipt of the Exercise Notice) to both Lessor and Lessee in writing its determination of the Market Rate. If the higher of the Market Rates reported by the brokers is no more than five (5%) percent more than the lower rate, the Market Rate shall be an average of such amounts. However, if the higher amount is more than 105% of the lower amount, then within ten (10) days after receipt of both reports, Lessor and Lessee shall jointly appoint a third broker meeting the aforesaid criteria (or if Lessor and Lessee are unable to agree on such broker, each party shall identify a third broker acceptable to it, and the parties shall determine by coin flip which broker shall become the third broker), and the third broker shall determine the Market Rate by selecting either Lessor’s Market Rate determination or Lessee’s Market Rate determination according to whichever of the two valuations as set forth in the reports from Lessor’s broker or Lessee’s broker, respectively, is closer to the actual Market Rate in the opinion of such third broker. The third broker shall have no discretion other than to select one or the other report as aforesaid. The costs of such third broker shall be shared equally by Lessor and Lessee. The parties shall work together and coordinate efforts to obtain such third broker’s report in writing no later than sixty (60) days following the date of Lessor’s receipt of the Exercise Notice. Pending such determination and in the event the Renewal Term commences prior to the final determination of the Market Rate, Lessee shall continue to pay to Lessor the Minimum Rent payable for the last month of the then-current Initial Term or Renewal Term, subject to adjustment upon determination of Market Rate.

2

                                     The applicable fair market value rental rate (the “Market Rate”) shall be that rate (determined on a “net” lease basis) charged to Lessees for space of comparable size, location and conditions in comparable buildings located in the Pinellas County, Florida, further taking into consideration and making adjustment for all relevant factors establishing similarity and dissimilarity between the comparable lease and the leasing to Lessee of Premises for the Renewal Term, including without limitation, the following: the location, quality, condition and age of the building; the use, location, size and floor level(s) of the space in question; the condition and build-out of the premises; leasehold improvement allowances; abatements (including with respect to base rental, operating expenses and real estate taxes); extent of services provided or to be provided; any other adjustments (including by way of indices) to base rental; credit standing and financial stature of the Lessee; term or length of lease; the time the particular rental rate under consideration was agreed upon and became or is to become effective; the payment of a leasing commission and/or fees/bonuses in lieu thereof; and any other relevant term or condition in making such Market Rate determination.

                    2.     Rent. Beginning on the Commencement Date, Lessee shall pay Base Rent as set forth in this Section (assuming the area contained in the Premises as set forth above is correct) and Additional Rental as described in Section 6. below. Lessee shall also pay all sales tax due on Base Rent and Additional Rental paid under this Lease. Lessee shall not pay a security deposit under this Lease.

                            (a)     Year 1 Base Rent.  One the first (1^st) day of October, 2004, and on the first (1^st) day of each successive month thereafter up to and including September 1, 2005, Lessee shall pay Base Rent in the amount of THIRTY FIVE THOUSAND AND NO/100 DOLLARS ($35,000.00). In addition, Lessee shall pay estimated Additional Rental in accordance with Section 6 below, together with Florida sales tax. Lessor estimates Additional Rental for Year 1 of the Lease Term to be $19,572.75 (so that total Base Rent, Additional Rental and sales tax for Year 1 of the term is FIFTY-FOUR THOUSAND FIVE HUNDRED SEVENTY-TWO AND 75/100 DOLLARS ($54,572.75).

3

                           (b)     Year 2 Base Rent.  On the first (1^st) day of October, 2005, and on the first (1^st) day of each successive month thereafter up to and including September 1, 2006, Lessee shall pay Base Rent in the amount of FORTY-SEVEN THOUSAND THIRTY-NINE AND 84/100 DOLLARS ($47,039.84).

                           (c)     Year 3 Base Rent.  On the first (1^st) day of October, 2006, and on the first (1^st) day of each successive month thereafter up to and including September 1, 2007, Lessee shall pay Base Rent in the amount of FORTY-EIGHT THOUSAND FOUR HUNDRED FIFTY-ONE AND 04/100 DOLLARS ($48,451.04).

                           (d)     Year 4 Base Rent.  On the first (1^st) day of October, 2007, and on the first (1^st) day of each successive month thereafter up to and including September 1, 2008, Lessee shall pay Base Rent in the amount of FORTY-NINE THOUSAND NINE HUNDRED FOUR AND 56/100 DOLLARS ($49,904.56).

                           (e)     Year 5 Base Rent.  On the first (1^st) day of October, 2008, and on the first (1^st) day of each successive month thereafter up to and including September 1, 2009, Lessee shall pay Base Rent in the amount of FIFTY-ONE THOUSAND FOUR HUNDRED ONE AND 70/100 DOLLARS ($51,401.70).

                           (f)     Year 6 Base Rent.  On the first (1^st) day of October, 2009, and on the first (1^st) day of each successive month thereafter up to and including September 1, 2010, Lessee shall pay Base Rent in the amount of FIFTY-TWO THOUSAND NINE HUNDRED FORTY-THREE AND 76/200 DOLLARS ($52,943.76).

                           (g)     Year 7 Base Rent.  On the first (1^st) day of October, 2010, and on the first (1^st) day of each successive month thereafter up to and including September 1, 2011, Lessee shall pay Base Rent in the amount of FIFTY-FOUR THOUSAND FIVE HUNDRED THIRTY-TWO AND 06/100 DOLLARS ($54,532.06).

                           (h)     Year 8 Base Rent.  On the first (1^st) day of October, 2011, and on the first (1^st) day of each successive month thereafter up to and including September 1, 2012, Lessee shall pay FIFTY-SIX THOUSAND ONE HUNDRED SIXTY-EIGHT AND 03/100 DOLLARS ($56,168.03).

4

                           (i)     Year 9 Base Rent.  On the first (1^st) day of October, 2012, and on the first (1^st) day of each successive month thereafter up to and including September 1, 2013, Lessee shall pay Base Rent in the amount of FIFTY-SEVEN THOUSAND EIGHT HUNDRED FIFTY-THREE AND 07/100 DOLLARS ($57,853.07).

                           (j)     Year 10 Base Rent.  On the first (1^st) day of October, 2013, and on the first (1^st) day of each successive month thereafter up to and including September 1, 2014, Lessee shall pay Base Rent in the amount of FIFTY-NINE THOUSAND FIVE HUNDRED EIGHTY-EIGHT AND 66/100 DOLLARS ($59,588.66).

                           (k)     Year 11 Base Rent.  On the first (1^st) day of October, 2014, and on the first (1^st) day of each successive month thereafter up to and including September 1, 2015, Lessee shall pay Base Rent in the amount of SIXTY-ONE THOUSAND THREE HUNDRED SEVENTY-SIX AND 32/100 DOLLARS ($61,376.32).

                           (l)     Year 12 Base Rent.  On the first (1^st) day of October, 2015, and on the first (1^st) day of each successive month thereafter up to and including September 1, 2016, Lessee shall pay Base Rent in the amount of SIXTY-THREE THOUSAND TWO HUNDRED SEVENTEEN AND 61/100 DOLLARS ($63,217.61).

                           (m)     Late Fees.  The monthly rental payments shall be paid each month on the date set forth above, without demand, to Lessor at the address set forth in this Lease or at such other address as Lessor may designate in writing. In the event any rental payment is delinquent for a period of ten (10) days, then in that event, Lessee shall be liable for and agrees to pay a delinquent charge in an amount equal to five percent (5%) of each such delinquent payment, plus applicable sales tax.. A fee of $25.00 will be assessed for a check returned for insufficient funds.

                           (n)     Payments.  All checks issued as payment for any of the amounts described in this paragraph shall be payable to Gateway Business Centre, Ltd.

5

                    3.     Utilities.  Lessee will, at its own expense, contract for and pay and discharge all charges for electricity, gas, water, sewer and garbage collection, and telephone/telecommunication furnished in connection with or for the use of the Premises, or any part thereof, including the making of deposits with the proper authorities or person in order to secure such services. At the time of the commencement of the term of this Lease, if any of the aforesaid services are being furnished to the Premises from accounts that are in the name of Lessor, Lessee agrees to immediately change such service accounts with the proper authorities or persons into the name of Lessee. In the event that Lessee fails to change such accounts into Lessee’s name within five (5) days after the commencement of the term of this Lease, Lessor shall have the right without any notification to Lessee to immediately notify the proper authorities or persons to terminate the furnishing of such services to the Premises without incurring any liability to Lessee on account of such termination. Lessor shall provide easements and access rights to any utility provider as reasonably required by such provider in connection with the delivery of utility service to the Premises. Except as provided in Section 6 below as to electricity, if at any time during the Term of this Lease, any utility service purchased and paid for by Lessee includes service provided to the Expansion Space (as defined in Section 33, below) prior to the expansion of the Premises to include the Expansion Space, either (i) Lessor, at its election and cost, shall cause a separate meter to be installed measuring such service to the Expansion Space and Lessee shall not pay for the cost of such service, or (ii) Lessee shall receive a credit against Base Rent for the difference between the cost of services to the Premises and the Expansion Space less Lessee’s Proportionate Share of such cost.

                    4.     Insurance.

                            (a)     Lessee shall, during the full term of this Lease, and at its own expense, carry commercial general liability insurance in the limits commonly known as $1,000,000 single limit and will provide Lessor with evidence of said insurance naming Lessor as additional insured. Lessee shall provide Lessor with copies or original insurance policies within ten (10) days after the Commencement Date of the Lease, and within ten (10) days after January 1 of each year, or promptly upon request of Lessor at any time.

                            (b)     The insurance company selected by Lessee must meet the following eligibility requirements:

                                       (1)     The insurance company must be licensed in the State of Florida.

                                       (2)     The minimum financial requirements for the insurance company are as follows:

                                                 (i)     The insurance company must have been in business for at least five (5) years.

6

                                                 (ii)     The insurance company must have at Best policy holders’ rating of A.

                                                 (iii)     The insurance company must have a financial category rating of Class X or better as established by Best rating.

                                       (3)     Each policy must show as additional insured the Lessor and any lender with a mortgage encumbering the Leased Premises of whom Lessee has been given notice.

                                       (4)     Each policy must contain a waiver of subrogation clause and a replacement cost endorsement with no co-insurance and provide for ten (10) days’ prior written notice to Lessor and any mortgagee of Lessor encumbering the Premises in the event of cancellation.

                            (c)     The Lessor shall pay for and maintain, during the term, the following policies of insurance covering the Premises, the building and the business park:

                                       (1)     Commercial General Liability Insurance. Including, but not limited to, coverage for Personal Injuries, with limits of no less than $2,000,000 combined single limit for death, personal injury and property damage, per occurrence, and contractual liability, naming Lessee as an additional insured.

                                       (2)     Special Form (All Risk) property Insurance.  Upon all building improvements and alterations, including, but not limited to, fire and extended coverage, vandalism, malicious mischief and sprinkler leakage in the amount of one hundred percent (100%) of full replacement cost.

                                       (3)     Loss of Rents Insurance.  The Lessor will purchase insurance against the loss of rental income sustained due to any necessary suspension in the availability of the Premises as a result of direct physical loss or damage to the property. The loss of rental income insurance shall be sufficient to cover the total anticipated rental income from the Lessee’s occupancy of the Premises for twelve months, plus any other charges under the terms of this Lease which are the legal obligations of the Lessee and which would otherwise be the Lessor’s obligation.

                                       (4)     Flood Insurance.  Lessor will purchase flood insurance coverage for the property if the property is in an insurance flood zone in an amount per the market value of the Building.

7

                                       Lessee agrees to reimburse Lessor for the cost of Lessee’s Proportionate Share of said insurance, which cost shall constitute additional rental hereunder, and shall be payable in the manner set forth in Paragraph 6 of this Lease.

                                       To assist Lessor in evaluating Lessee’s insurance needs and requirements, Lessee has executed the insurance questionnaire attached hereto as Exhibit “D” and by this reference incorporated herein. Lessee has completed the insurance questionnaire with the understanding that Lessor intends to rely thereon.

                            (f)        Anything in this Lease to the contrary notwithstanding, Lessor and Lessee each hereby waives any and all rights of recovery, claim, action or cause of action against the other (and any assignee of Lessor and assignee or subtenant of Lessee) for any loss or damage that may occur to the Building or Premises or any improvements thereto, or any personal property of Lessor or Lessee, arising from any cause that (a) customarily insured against under the terms special form (all-risk) property insurance; or (b) is insured against under the terms of any property insurance actually carried. The foregoing waiver shall apply regardless of the cause or origin of the claim, including but not limited to the negligence of a party or that party’s agents, officers, employees or contractors.

                    5.     Taxes.  Lessee agrees to pay Lessee’s Proportionate Share of all real estate taxes assessed against the Land and Building during the term of this Lease (calculated at the greatest discount for early delivery, and excluding penalties and interest) in the manner set forth in Paragraph 6 of this Lease. All personal property taxes assessed against personal property located on the Premises shall be paid by Lessee. Lessor represents and warrants to Lessee that the Land is a separate tax lot. Lessee, at its sole cost, may contest ad valorem taxes, and Lessor shall fully cooperate with Lessee, at no out-of-pocket cost to Lessor. Lessor shall reimburse Lessee within 30 days after invoice for its costs incurred in connection with such contest to the extent of any reduction achieved in the real estate taxes for the Land and Building.

                    6.     Maintenance.  Lessor shall maintain the Building’s roof, structural load bearing walls and slab in a safe, orderly and good operating condition, at its sole expense, not to be included in C.A.M. (as defined in the next sentence). Lessor shall also maintain the common areas of the Building, the Land, and the Business Park in safe, orderly and good operating condition, and costs of so maintaining these common areas shall be known as “Common Area Maintenance” or “C.A.M.”, and shall include, but not be limited to, reasonable management expenses and landscaping services, and such other reasonable costs and expenses as may be paid by Lessor in connection with the upkeep, maintenance, repair, replacement and management of the Premises, the Building and the Business Park. Notwithstanding the foregoing, C.A.M. shall not include those items described on Exhibit “E” attached hereto.

8

                            Lessee agrees to pay Lessee’s Proportionate Share of all Common Area Maintenance incurred during the terms of this Lease (except that the costs incurred in connection with the Business Park shall be equitably allocated among all buildings within the Business Park), which amount shall constitute additional rental hereunder and shall be payable by Lessee to Lessor in the manner set forth in Paragraph 6 of this Lease.

                            This Lease is what is commonly called a “net lease”, it being agreed that except as expressly provided in this Lease, Lessor shall receive the Base Rent set forth in Section 2 free and clear of any and all impositions, taxes, real estate taxes, liens, charges or expenses of any nature whatsoever in connection with the operation and maintenance of the Premises. In addition to the Base Rent reserved under Section 2 and the Additional Rental payable under Section 6, Lessee shall be responsible to pay all charges it incurs in connection with the Premises, including utilities, insurance premiums, construction costs and any other charges, costs and expenses incurred by Lessee. Lessee shall in no event be entitled to any abatement of or reduction in rent payable hereunder, except as specifically provided in this Lease. Notwithstanding the foregoing, Lessor acknowledges that the electricity provided to the Premises is not separately metered from that provided to the Expansion Space. Lessee shall pay the cost of electricity consumed within the Premises and the Expansion Space directly to the electrical utility, however, until such time as Lessee leases the Expansion Space or Lessor constructs a demising wall separating the Premises from the Expansion Space and installs meters separately measuring electricity consumed in the Premises: (i) provided there is a tenant or other occupant in the Expansion Space, Lessee shall receive a credit of $6,500.00 per month against each monthly installment of Base Rent; and (ii) during the period when the Expansion Space is unoccupied, Lessee shall receive a credit of $3,750.00 per month against each monthly installment of Base Rent. That monthly credit will be increased or decreased from time to time, to reflect any changes in the electrical utility’s pricing of electricity.

9

                            Lessee shall maintain and repair, at Lessee’s expense, all of the fire extinguishers located within the Premises and all sprinkler systems located within the Premises. The maintenance obligations of Lessee for these matters shall include the obligation of Lessee to see that the fire extinguishers and sprinkler systems are maintained at the minimum code requirements, including having the systems inspected and recharged as necessary or as otherwise required under the applicable city, county or state codes. It will be an event of default under this Lease should Lessee fail to maintain fire extinguishers and sprinkler systems to the standard described herein or should the fire extinguishers or sprinkler systems not pass any inspection conducted by any appropriate governmental authority. In addition to the foregoing, Lessee shall be responsible to maintain and repair, at Lessee’s expense, all exit lights, emergency lights and smoke detectors located throughout the Premises, to include but not be limited to replacement of light bulbs and emergency batteries, whether located in emergency lights, emergency exits or smoke detectors. Lessee shall be responsible to modify and add any additional fire extinguishers, safety lights or other safety features required by any governmental entity as a result of Lessee’s utilization of the Premises. All such matters shall be done at the expense of the Lessee. All fire extinguishers, safety lights and safety features required by any governmental entity shall remain the property of Lessor upon Lessee’s termination of the Lease.

                            Lessee shall maintain and repair, at Lessee’s expense, all other portions of the Premises including, but not limited to plumbing, lighting, air conditioning, heating, electrical, ventilation, interior walls and painting, exterior doors and window glass replacement and repair. Maintenance obligations of Lessee shall include maintenance on each of the items, including by way of illustration and not limitation maintenance and servicing of the heating, air conditioning and ventilation systems, whether in the form of replacement of filters, repair and replacement of air conditioning compressors, air handlers, heat pumps and the like; replacement of light bulbs and/or fluorescent light bars and other components of the light system. Lessee shall, upon occupancy of the Premises, at its own cost and expense, obtain and keep in force at all times during the term of this Lease a suitable heating/air conditioning maintenance agreement with a third party acceptable to Lessor. Lessee shall provide to Lessor a copy of said agreement immediately upon occupancy of the Premises. The heating and air conditioning system shall be under the control of Lessee, except to the extent that such costs are covered either under a warranty running in favor of Lessor or, in the event of fire or other casualty, where claims are reimbursed under Lessor’s insurance. Lessee shall be responsible for pest control services and trash collection services as needed by Lessee.

                            To the extent that Lessee defaults (as defined in Section 19, below) in its performance of its responsibilities to maintain, repair and replace the above described portions of the Premises, then and in that event Lessor may undertake such maintenance, repair and replacement obligations, and immediately upon completion of such work shall cause the costs of the same to be billed to Lessee as additional rent. Lessee shall pay the same within ten (10) days from the date of receiving such bill. Failure to pay such bill shall result in a default under the terms of the Lease.

10

                            Lessee shall, at the termination of the Lease, by lapsed time or otherwise, surrender up the Premises in good order, reasonable use, wear and tear excepted. Lessee may, at its sole election, remove any tenant improvement installed by Lessee except as otherwise stated hereinabove at the termination of the Lease provided Lessee pays the cost of removal and repairs of any and all damage in or to the Premises resulting from such removal.

                    7.     Additional Rental.  As additional rental hereunder (“Additional Rental”), Lessee shall pay to Lessor, monthly in advance, Lessee’s Proportionate Share of: (i) the cost of Lessor’s insurance described in Section 4(b) above, (ii) real estate taxes described in Section 5, above, and (iii) Common Area Maintenance described in Section 6, above. Notwithstanding anything to the contrary contained in this Lease, Lessee shall not be obligated to pay Controllable Expenses in any calendar year which exceed by more than five percent (5%) the Controllable Expenses for the immediately preceding calendar year. “Controllable Expenses” means all Additional Rental except taxes, insurance and utilities. “Lessee’s Proportionate Share” means a fraction, the numerator of which is the square footage contained in the Premises, and the denominator of which is the square footage contained in the Building. Assuming Lessor’s measurement of the Building and Premises set forth in the Witnesseth provision of this Lease are correct, Lessee’s Proportionate Share is 78.75%. Prior to the commencement of each calendar year of the Lease term, or as soon thereafter as practicable, Lessor shall give Lessee written notice of its good faith estimate of the Additional Rental due from Lessee the ensuing year of the Lease term. On the first day of each calendar month of the ensuing year, Lessee shall pay to Lessor 1/12^th of such estimated amount, provided, if such notice is not given on or before the January rental payment is due, Lessee shall continue to pay on the basis of the prior year’s estimate until the month after such notice is given. If at any time or times it appears to Lessor determines in good faith that its estimate of Additional Rental for the current year is understated by at least ten percent (10%), Lessor may, by written notice to Lessee, revise its estimate for such year, and subsequent payments of monthly installments of Additional Rental by Lessee shall be based upon such revised estimates. Within ninety (90) days after end of each calendar year of the Lease term, or as soon after such ninety (90) day period as practicable, Lessor shall deliver to Lessee a statement of Additional Rental and Base Rent payable under this paragraph for such year, certified by Lessor’s chief financial officer to be true and correct. If such statement shows that Lessee’s estimated payments for such year exceed the actual amount due, Lessor shall refund such excess payment to Lessee with delivery of the statement of Additional Rental. If such statement shows an amount owing by Lessee that is more than the estimated payments for such year previously made by Lessee, Lessee shall pay the deficiency to Lessor within fifteen (15) days after delivery of the statement. In the event the Commencement Date or the expiration date of this Lease fall on days other than January 1 and December 31, respectively, Additional Rental payable under this paragraph shall be calculated on a per diem basis for the actual number of days of the Lease term falling in the applicable calendar year.

11

                            Lessee, at its expense, shall have the right at all reasonable times to audit Lessor’s books and records relating to items affecting Additional Rental for any calendar year during the Lease term; provided that Lessee’s right to audit shall expire within two (2) years after Lessor has furnished to Lessee its Statement for the applicable calendar year and the final audit right shall expire within ninety (90) days from the Lease Termination Date and, Lessee has not notified Lessor in writing of Lessee’s election to conduct an audit. If Lessee has timely exercised its option to conduct an audit, Lessee shall have a period of ninety (90) days in which to complete the audit, which ninety (90) day period shall only commence after Lessor has afforded Lessee full access to such documents (in a location within the Business Park) as are in Lessor’s possession or control and which are necessary to conduct the audit including, without limitation (to the extent within Lessor’s possession and control), work papers prepared by Lessor’s certified public accountants, canceled checks, invoices, and such other documents as may be reasonably required, all of which documents shall be in accordance with generally accepted accounting standards. Lessor shall cooperate with Lessee as to facilitate the performance of Lessee’s audit. In the event that it is ultimately determined that a refund of any Additional Rental paid by Lessee which exceeds five percent (5%) of the total so paid by Lessee for such year (by agreement of the parties, by a final court determination, or otherwise) that the actual Additional Rental for any year is less than the amount set forth in Lessor’s Statement, then Lessor shall reimburse Lessee for such overcharge within fifteen (15) days of receipt of notice thereof. If the overcharge is by an amount in excess of five percent (5%), Lessor shall also reimburse Lessee for the cost or fees paid by Lessee in connection with such audit.

                    8.     Quiet Possession.  Lessor covenants, promises and agrees with Lessee that so long as the Lease term has not expired or otherwise terminated, Lessee shall and may lawfully, peacefully and quietly have, hold, use, occupy and enjoy the Premises hereby leased without disturbance.

12

                    9.     Use.  Lessee shall use and occupy the Premises during the term of this Lease only for the purpose of office/warehouse/assembly (which Lessor represents and warrants is permitted by the Building’s certificate of occupancy and pertinent law and codes) and for other uses permitted by pertinent laws and codes and no other purpose whatsoever without Lessor’s prior written consent, which consent shall not be unreasonably withheld. Lessee will not use or permit to be used the Premises hereby leased for any unlawful purpose or in any manner which would constitute a nuisance. Lessee will at all times comply with all laws or ordinances of any and all duly constituted governmental or municipal authorities, and of any and all of their departments and bureaus applicable to Lessee’s use of the Premises, and all lawful rules and regulations promulgated by said authorities and bureaus in connection with Lessee’s use of the Premises. However, nothing contained in this paragraph shall be construed to require Lessor or Lessee to make any structural repairs or other alterations to the Premises.

                    10.     Rules and Regulations.  Lessee shall observe that Building Rules and Regulations, if applicable, and such other reasonable Rules and Regulations as Lessor may make, and which, in Lessor’s reasonable judgment, are needed for the general well being, safety, care and cleanliness of the Premises and the Building, provided no such rule shall limit or restrict any right of Lessee under this Lease.

                               Attached hereto as Exhibit “F” and by this reference incorporated herein, are the current rules and regulations affecting the Premises. Lessee agrees to abide by these rules and regulation.

                    11.     Construction Liens.  Lessee shall have no authority to incur, create or permit, and shall not incur, create, permit or suffer any lien for labor or materials or services to attach to the interest or estate of either Lessor or Lessee in the Premises or other real estate of which the Premises form a part, and neither Lessee, nor anyone claiming by, through or under Lessee, shall have any right to file or place any labor or material lien of any kind or character whatsoever or any mechanics lien or other lien of any kind, upon the Premises or other real estate of which the Premises form a part, so as to encumber or affect the title of Lessor, and all persons contracting with Lessee directly or indirectly, or with any person who in turn is contracting with Lessee, for the erection, construction, installation, alteration or repair of the Premises or any improvements therein or thereon, including fixtures and equipment, and all materialmen, contractors, mechanics, laborers, architects, engineers and others are hereby charged with notice that as and from the date of this instrument, they and each of them must look to Lessee only to secure the payment of any bills or charges or claims for work done, or materials furnished, or services rendered or performed during the term hereby demised. Lessor and Lessee acknowledge and agree that each will execute a short form Memorandum of Lease memorializing the limitations on construction liens contained hereinabove. The Memorandum of Lease will be executed in recordable form and may be executed by Lessor in its sole discretion. The form of the Memorandum of Lease is attached hereto as Exhibit “G”.

13

                    12.     Assignment and Subletting.  Lessee will not assign this Lease without the written consent of Lessor, and Lessor agrees that such consent will not be unreasonably withheld or delayed. In the event that Lessor does consent to such assignment or subletting, it is understood and agreed that such will in no way relieve Lessee of its obligation to pay the rents as provided herein during the term of this Lease. Notwithstanding anything to the contrary set forth herein, Lessee shall have the right, without obtaining Lessor’s consent, but with prior written notice to Lessor (where permitted by applicable law), to: (a) assign this Lease or sublet all or any part of the Premises to a parent, subsidiary or affiliate of Lessee, or to a successor of Lessee (by merger, consolidation, or transfer of all or substantially all of Lessee’s assets), or (b) assign this Lease or sublet all or any part of the Premises to any operating division, group, department, or group of individuals formerly controlled by or under common control with Lessee (collectively an “Operating Unit”), which has ceased to be controlled by or under common control with Lessee as a result of a spin-off from Lessee or otherwise (regardless of whether such assignment or sublet is to a new entity formed by such Operating Unit, or to an existing entity of which the Operating Unit becomes a part). In no event will any such assignment release Lessee from its obligations under this Lease.

                    13.     Inspection and Emergency Access.  Lessee will permit Lessor to enter upon the Premises upon reasonable notice during the usual business hours for the purpose of making inspections or repairs, or for the purposes of obeying any laws or orders of any duly constituted governmental or municipal authorities, and/or for the purpose of exhibiting the Premises to prospective tenants or purchasers within six (6) months of the expiration of the Lease, provided Lessor does not materially or unnecessarily interfere with the operation of Lessee’s business. In making such inspections or repairs, Lessor shall observe all reasonable security regulations of Lessee and shall hold in confidence any information concerning business or products of Lessee which they, or any of them, may discover while present on the Premises.

14

                               In addition, Lessor shall have the right of emergency access (where Lessor reasonably deems that life or property are in immediate peril) to the Premises without any required notice to Lessee. By way of example and without limitation, Lessor shall have the right of emergency access in case of fire, fire alarm or circumstances where Lessor reasonably deems that life or property are in immediate peril. In order to facilitate said emergency access, Lessee shall at all times during the term of this Lease provide Lessor with a set of working keys and current alarm codes for the Premises. Nothing herein shall be deemed to require emergency access by Lessor or result in any Lessor liability for its actions or failure to take action.

                    14.     Hazard Damage.  The parties hereto agree if, by virtue of fire, storm or any cause other than the deliberate act of Lessee, the Premises becomes partly or wholly unusable by Lessee for Lessee’s intended purpose, then and in that event, the Base Rent and Additional Rental shall abate in proportion to the area of the Premises which are unusable for Lessee’s intended use for so long as they remain unusable. In the event the Premises are not totally destroyed, Lessor agrees to rebuild the Premises to their condition immediately preceding the casualty with all possible dispatch and deliver the same to Lessee within a period of one hundred eighty (180) days after the event causing the destruction. In the event the Premises are totally destroyed (which for purposes of this paragraph means that in the reasonable opinion of a licensed general contractor, restoration would require more than 240 days after the date of the casualty), then Lessee shall have the option to terminate this Lease within a period of thirty (30) days after the same destruction. In the event this Lease is not thus terminated, Lessor agrees to rebuild the Premises with all possible dispatch and deliver the same to Lessee within a period of not more than two hundred forty (240) days after an event causing total destruction. However, in no event shall Lessor be obligated to do any rebuilding if the remaining term of this Lease, including any exercised renewal option, shall have less than one (1) year to run following the expected completion of such rebuilding. Lessee shall also be responsible for all of Lessee’s equipment and/or data contained in said equipment in the event of an electrical storm or other hazard which may cause damage or destruction of data in computers and other equipment.

                    15.     Alterations.  Except as otherwise provided in this paragraph, Lessee will not make any improvements, installations, alterations or additions in or to the Premises without the written consent of Lessor, which consent shall not be unreasonably withheld, delayed or conditioned. If Lessor consents to such improvements, alterations or additions, any such improvements shall be installed at Lessee’s expense in substantial accordance with plans approved by Lessor and only by such contractors reasonably acceptable to Lessor. Lessee also agrees that all work will be done in a workmanlike manner, with all applicable permits being obtained and shall conform to all applicable codes. To the extent that any alteration is atypical of leasehold improvements within the Business Park and imposes demolition costs in connection with its removal materially greater than that of typical leasehold improvements, then if Lessor notifies Lessee in writing at the time of Lessor’s approval of such alteration that Lessee must remove such alterations at the expiration of the Lease term, Lessee shall remove such alterations and restore the Premises to its condition prior to the construction of those alterations. Notwithstanding the foregoing, Lessor has approved Lessee’s leasehold improvements related to the construction of the approximately 22,795 square feet of office space within the Premises, and Lessee shall not be required to demolish or remove any portion of such leasehold improvements at the expiration of the Lease term.

15

                    16.     Subordination.  Lessor represents and warrants to Lessee that Lessor holds fee simple title to the Building and Land, free and clear of all liens and encumbrances except for the mortgage in favor of Teachers Insurance and Annuity Association of America, Inc. (the “Lender”). Simultaneously with Lessor’s delivery of the executed original of this Lease to Lessee, Lessor shall deliver to Lessee a Subordination, Non-Disturbance and Attornment Agreement in the form attached hereto as Exhibit “H” (the “SNDA”) executed by the Lender. At the request of any subsequent mortgagee of Lessor who agrees to execute and deliver an SNDA to Lessee, Lessee agrees to execute and deliver an SNDA to such mortgagee. Any mortgage placed on the Premises by Lessor will not cover the equipment, furniture or furnishings owned by Lessee.

                    17.     Estoppel Letter.  Each party shall, within fifteen (15) days after receiving a written request from the other, execute an Estoppel Letter and/or statement in writing certifying:

                              (a)     That the term of this Lease has commenced, setting forth the date of such commencement;

                              (b)     That this Lease is unmodified and in full force and effect or, if there have been modifications, that the Lease is in full force and effect as modified, stating the modification;

                              (c)     Whether or not there are then existing any known defaults, offsets or defenses against the enforcement of any of the certifying party’s covenants hereunder (and if so, specifying them);

                              (d)     The dates to which rent and other amounts have been paid in advance, if any;

16

                              (e)     If the Lessee is the certifying party, whether Lessee has acquired any interest in the Premises except for its interest under this Lease; and

                              (f)     Whether the certifying party has executed a mortgage or otherwise made any transfer or assignment of any part of the leasehold estate or Premises.

                    18.     Brokerage Agency Disclosure and Commission.

                              (a)     Grady Pridgen, Inc., a Florida corporate real estate broker, hereby discloses that it has been engaged by and acts as the agent of Lessor.

                              (b)     Lessor has agreed to pay a commission to Grady Pridgen, Inc. and CB Richard Ellis pursuant to a commission agreement set forth under a separate document. Lessee warrants that it has engaged no broker other than CB Richard Ellis in connection with this Lease and agrees to indemnify and save Lessor harmless from any claim (including reasonable attorneys’ fees) for a commission from a broker claiming to have worked with Lessee in connection with this Lease.

                    19.     Default Provisions.

                              (a)     The happening of any one or more of the following events shall, at the option of Lessor, constitute a default of this Lease on the part of Lessee and Lessor shall have such remedies as are herein provided:

                                        (1)     If Lessee fails to timely pay any installment of any Base Rent or Additional Rental due hereunder and such failure continues for ten (10) days after notice that such amount is due (except that Lessor shall not be required to provide more than two such notices in any calendar year, after which Lessee shall be deemed in default if any such payment is not paid within ten (10) days after the date due); or

                                        (2)     If Lessee fails to fully and promptly perform any non-monetary act, term or provision required of it in the performance of this Lease. If a breach is claimed under this subparagraph, written notice specifying the nature of such claimed breach shall be given to Lessee and Lessee shall have fifteen (15) days to cure such breach or such longer time as may reasonably be necessary due to the nature of such breach; or

17

                                        (3)     If Lessee petitions or applies to any tribunal for the appointment of a trustee or receiver of Lessee or commences any proceedings relating to Lessee under any bankruptcy, reorganization, arrangements, insolvency, readjustment, dissolution, liquidation law of any jurisdiction whether or not hereinafter in effect; or

                                        (4)     If any such petition or application is filed or any proceedings are commenced against Lessee and Lessee, by any act, indicates its approval thereof, consents thereto or acquiesces therein, or an order is entered appointing such trustee or receiver, or adjudicating Lessee bankrupt or insolvent, or approving the petition in any such proceedings, and such order remains in effect for more that 180 days.

                              (b)     Upon the happening of any of the above events of default, Lessor may, at Lessor’s option:

                                        (1)     Terminate and end this Lease and re-enter upon the Premises and at Lessor’s option, all of Lessee’s rights, title and interest under this Lease shall end and Lessee shall become a tenant at sufferance; or

                                        (2)     Elect to declare the entire rent for the balance of the remainder of the term, reduced by the fair market value of the Premises for the remainder of the term, and thereupon said term shall terminate at the option of Lessor except that, to the extent rents have been collected, Lessee shall be entitled to remain in possession to the exhaustion of the period covered by the rentals so collected; or

                                        (3)     Take possession of the Premises and rent the same for the account of Lessee.

                                        The exercise of any of the above options shall not be deemed to be the exclusive remedy of Lessor. In addition thereto, Lessor shall have the right of any of the provisions of the laws of the State of Florida governing default by Lessee, and, in any event of default by Lessee, Lessor shall take all reasonable action to mitigate damages.

                              (c)     If Lessee is in default under this Lease more than two (2) times within any twelve (12) month period, regardless of whether or not such default is cured, then, without limiting Lessor’s other rights and remedies provided for in this Lease or at law or in equity, the security deposit shall automatically be increased by an amount equal to or greater than two (2) times the original Security Deposit.

18

                    20.     Right to Cure Default. If either party (the “Defaulting Party”) fails to perform any obligation or covenant of this Lease and such failure is not cured within fifteen (15) days after notice from the other party (or such longer time as may reasonably be necessary due to the nature of such breach, provided cure of such failure is commenced within that fifteen (15) day period and thereafter diligently pursued), then in addition to all other remedies permitted at law or in equity the other party (the “Non-Defaulting Party”) may, but is not obligated to, perform the same for the account of the Defaulting Party, and the Defaulting Party shall reimburse the Non-Defaulting Party upon written demand for any expense incurred therefore together with interest at the highest legal rate from the date of Non-Defaulting Party’s disbursement of the expense (together, the “Reimbursement”). If the Defaulting Party fails to pay such Reimbursement within thirty (30) days after such written demand, the Non-Defaulting Party may offset the amount of the Reimbursement from any amount it owes to the Defaulting Party under this Lease. Notwithstanding the foregoing, if Lessor notifies Lessee within such thirty (30) day period that Lessor in good faith disputes Lessee’s right to such offset, then Lessee shall not be permitted to offset the Reimbursement until Lessee obtains an order from a court of competent jurisdiction permitting such offset.

                    21.     Notices.

                              (a)     The rent payable under this Lease and any notices to Lessor shall be delivered to:

                                        Gateway Business Centre, Ltd.
                                        c/o Grady Pridgen, Inc.
                                        3093 46th Avenue North
                                        St. Petersburg, FL 33714

                              (b)     Notices to Lessee shall be delivered to:

                                        Medical Technology Systems, Inc.
                                        c/o Todd E. Siegel
                                        2003 Gandy Boulevard North
                                        St. Petersburg, FL 33716

With a copy to:             Holland & Knight LLP
                                        100 North Tampa Street
                                        Suite 4100
                                        Tampa, Florida 33602
                                        Attn: Richard D. Eckhard, Esq.

19

Any notice shall be in writing and hand delivered or mailed by registered or certified mail, return receipt requested, to the address set forth above or to such other address as either party may hereafter designate by written notice to the other party. Notice by hand delivery shall be deemed given when received (or rejected) and notice by mail shall be deemed given on the third business day following the date of mailing.

                    22.     Gender Usage.  The use of any gender herein shall be deemed to be or include the other gender and the use of the singular herein shall be deemed to be or include the plural (and vice versa), wherever appropriate.

                    23.     Successors.  This Lease shall be binding upon the heirs, personal representatives, successors and assigns of the parties hereto.

                    24.     Radon Disclosure.  Radon is a naturally occurring radioactive gas that, when it has accumulated in a building in sufficient quantities, may present health risks to persons who are exposed to it over time. Levels of radon that exceed federal and state guidelines have been found in buildings in Florida. Additional information regarding radon and radon testing may be obtained from your county public health unit.

                    25.     Government Compliance.  Lessor represents and warrants to Lessee that as of the date of construction of the Building, the Land, Building and Premises comply with all federal, state or local laws, ordinances or regulations, including without limitation, environmental and accessibility laws (together, “Applicable Laws”). Lessee shall use the Premises in compliance with Applicable Laws, and shall not cause the Premises to violate any Applicable Law. Lessee shall not use, generate, manufacture, store or dispose of on, under or about the Premises or transport to or from the Premises any flammable explosives, radioactive materials, hazardous wastes, toxic substances defined as or included in the definition of “hazardous materials”, or “toxic substances” under any applicable federal or state laws or regulations, but specifically excluding any substances used by Lessee in the ordinary course of its business in accordance with applicable federal, state and local laws and regulations (collectively referred to herein as “Hazardous Materials”).

20

                              Lessee shall be solely responsible for, and shall indemnify and hold harmless Lessor, its successors and assigns, from and against any loss, damage, cost, expense or liability directly or indirectly arising out of or attributable to the use, generation, storage, release, threatened release, discharge, disposal or presence of Hazardous Materials on, under or about the Premises as a result of the action or inaction of Lessee, its agents, contractors, employees or invitees, including without limitation: (a) all foreseeable consequential damages; (b) the costs of any required or necessary repair, cleanup or detoxification of the Premises, and the preparation and implementation of any closure, remedial or other required plans; and (c) all reasonable costs and expenses incurred by Lessor in connection with clauses (a) and (b) of this paragraph, including, but not limited to, reasonable attorneys’ fees.

                              Lessor shall be solely responsible for, and shall indemnify and hold harmless Lessee, its successors and assigns, from and against any loss, damage, cost, expense or liability directly or indirectly arising out of or attributable the breach of any Lessor representation or warranty in this Section 24 or to the use, generation, storage, release, threatened release, discharge, disposal or presence of Hazardous Materials on, under or about the Land, Building or Premises as a result of the action or inaction of Lessor, its agents, contractors, employees or invitees, including without limitation: (a) all foreseeable consequential damages; (b) the costs of any required or necessary repair, cleanup or detoxification of the Premises, and the preparation and implementation of any closure, remedial or other required plans; and (c) all reasonable costs and expenses incurred by Lessee in connection with clauses (a) and (b) of this paragraph, including, but not limited to, reasonable attorneys’ fees.

                    26.     Signage.   Lessee shall not be permitted to install, construct, inscribe, paint, affix or display any sign, advertisement or logo visible from the exterior of the Premises in any common area without Lessor’s prior written consent, not to be unreasonably withheld or delayed. The exact size, design, configuration and replacement of all signs, advertisements and logos shall be subject to the reasonable approval of Lessor, the approval of the City of St. Petersburg or Pinellas County, Florida, and any other applicable governmental authorities. Under no circumstances may any sign, advertisement or logo violate any ordinance, rule or regulation of any governmental authority. Lessee hereby agrees to seek and obtain any and all governmental approvals, permits or licenses necessary for the lawful operation and placement of any signs, advertisements or logos approved by Lessor, and to provide copies of such permits or licenses to Lessor. All costs of installation, construction, erection, illumination (where appropriate), maintenance, repair and removal of any of the above referenced items shall be the obligation of Lessee. Before erecting or placing any signs, advertisements or logos or beginning any construction pursuant to preparation for the erection or placement thereof, Lessee shall submit to Lessor, for Lessor’s review and approval, detailed plans and specification for all work to be performed. After obtaining Lessor’s approval of said plans and specifications, the signs, advertisement or logos are to be constructed pursuant to the plans and specification without any deviation therefrom whatsoever. Upon vacating the Premises, Lessee shall remove all signs, advertisements or logos and repair all damage caused by such removal. Lessee’ obligation to observe or perform this covenant shall survive the expiration or termination of this Lease. Lessee hereby agrees to indemnify and hold Lessor harmless from and against any and all loss, cost, damage, claim, suit, action for any damage or injury to any person or property caused by the installation, construction, erection, maintenance, repair or removal of any of said signs, advertisements or logos.

21

                    27.     Condemnation.  If any substantial portion of the Premises or the access to or parking for the Building shall be taken by eminent domain, Lessee shall have the right to terminate this Lease as of the date of taking by giving written notice of such termination to Lessor within fifteen (15) days following the date of such taking, and in the event of such termination, rent shall cease as of the date of such termination and any rent paid beyond that date shall be refunded to Lessee. Whether or not Lessee shall exercise such right, Lessor and Lessee shall have and retain their respective rights to compensation from the condemning authority in connection with and following a taking by eminent domain. If Lessee does not terminate this Lease following a substantial taking by eminent domain or if the portion of the Premises or the access or parking for the Building taken is not substantial, the rent payable under this Lease for the remainder of the term shall be reduced as of the date of taking in the proportion that the area of the part taken bears to the total area of the Premises just prior to such taking or to equitably account for the reduction in access or parking. Substantial, as used herein, shall refer to the ability of Lessee to carry on its normal business without material adverse impact.

                    28.     Holding Over.  If Lessee shall hold over after the expiration of the Lease Term or other termination of this Lease, such holding over shall not be deemed to be a renewal of this Lease but shall be deemed to create a tenancy-at-will and by such holding over Lessee shall continue to be bound by all of the terms and conditions of this Lease except that during such tenancy-at-will, Lessee shall pay to Lessor (a) Rent at the rate equal to one hundred fifty percent (150%) of that provided for hereinabove and (b) any and all operating expenses and other forms of Additional Rental payable under the terms of this Lease. The increased Rent during such holding over is intended to liquidate any losses, damages and expenses suffered by Lessor as a result of such holdover, including frustrating and delaying Lessor’s ability to secure a replacement lessee. If Lessor loses a prospective lessee because Lessee fails to vacate the Premises on expiration of this Lease after notice to do so, Lessee will be liable for such damages as Lessor can prove because of Lessee’s wrongful failure to vacate.

                    29.     Hold Harmless.  Lessee agrees that all property belonging to or in the name, custody or control of Lessee or any occupant of the Premises which is in or on the Premises shall be there at the risk of Lessee or such occupant only, and Lessor shall not be liable for any injury thereto or loss or destruction thereof, excepting injury or loss resulting from breach of the terms of this Lease by Lessor. Lessee further agrees that Lessor shall not be liable to Lessee or any person for any injury, loss or damage to property or to any person on the Premises or on the common areas appurtenant thereto, excepting injury or loss resulting from breach of the terms of this Lease by Lessor. Lessor shall not be responsible for or liable to Lessee for any loss or damage that may be occasioned by or through the acts or omissions of persons occupying adjoining premises, or any part of the premises, adjacent to or connected with the Premises or any part of the Premises shown on the Site Plan or for any loss or damage resulting to Lessee or its property from burst, stopped or leaking water, gas, sewer or steam pipes or for any damage or loss of property within the Premises from any causes whatsoever, including theft, excepting injury or loss resulting from breach of the terms of this Lease by Lessor.

                    30.     No Waiver.  No assent, express or implied, to any breach of any of covenants or agreements shall be deemed a waiver of any succeeding breach of the same covenant or agreement. No delay or omission in exercising any right or remedy shall operate as a waiver thereof or the exercise of any other right or remedy.

                    31.     Leasehold Improvement Allowance.  Lessor agrees to provide to Lessee a THREE HUNDRED THOUSAND AND NO/100 DOLLARS ($300,000.00) allowance for the cost of leasehold improvements in the Premises. Lessor shall disburse the allowance (to Lessee or directly to Lessee’s contractor, as Lessee elects) on a monthly basis, within fifteen (15) days after receipt of invoice for work performed or materials purchased, executed by Lessee’s contractor. Any portion of the allowance not used for improvements to the Premises shall be placed in a separate account held by Lessor for future tenant improvements as required by Lessee and reasonably approved by Lessor during the term of this Lease. Lessee shall have full access to the Premises upon full execution of this Lease for the purpose of installing its fixtures, furniture and equipment. All leasehold improvements constructed by Lessor (or Lessee) shall be deemed to be Lessor’s property immediately upon installation in the Premises.

23

                    32.     Move-In Allowance.  In addition to the foregoing leasehold improvements allowance, Lessor agrees to pay to Lessee the sum of FOUR HUNDRED THOUSAND AND NO/100 DOLLARS ($400,000.00) as a move-in allowance. This sum shall be paid by Lessor to Lessee within thirty (30) days from the commencement of Base Rent Payment, but in any event not earlier than October 1, 2004.

                    33.     Right to Expand.  In the event that Lessee desires to expand the Premises to include the contiguous space of approximately 28,160 square feet depicted on Exhibit “B” as the “Expansion Space”, Lessee must provide written notice to Lessor no later than the second anniversary of the Commencement Date of its desire to do so, which notice must be provided at least one hundred twenty (120) days prior to the desired move-in date. The expansion space will be leased to Lessee upon the same terms and conditions as this Lease (including the then current Base Rent).

                    34.     Attorneys’ Fees.  If Lessor or Lessee shall bring any action for any relief against the other, declaratory or otherwise, arising out of or under this Lease, including any suit by Lessor for the recovery of rent or possession of the Premises, the losing party shall reimburse the successful party for all reasonable attorneys’ fees and disbursements incurred by the successful party in such suit and such attorneys’ fees shall be deemed to have accrued on the commencement of such action and shall be paid whether or not such action is prosecuted to judgment.

                    35.     Entire Agreement.  This Lease contains all of the agreements, covenants and conditions between the parties hereto with respect to the subject matter hereof and may not be altered or modified orally or in any other manner, except by an agreement in writing signed by all of the parties hereto, or by their respective successors in interest. The covenants and agreements herein contained shall be binding upon and shall inure to the benefit of the parties hereto and their respective heirs, personal representatives, successor and assigns. This Lease constitutes a Florida contract and shall be construed according to the laws of that state. The parties agree that the venue for any litigation arising hereunder shall be in a court of competent jurisdiction in Pinellas County, Florida.

24

                    36.     Subordination of Landlord’s Lien.  At Lessee’s request, Lessor shall execute documents acceptable to Lessee’s lenders, acknowledging Lessor’s subordination of its landlord’s lien under Florida law to any financing obtained by Lessee secured by a security interest granted in Lessee’s personal property located on the Premises.

                    37.     Generator/UPS.  Lessee shall have the right, without additional rental charge, to install and use: (a) an uniterruptable power supply (UPS) within the Premises, and (ii) up to a 750 kilowatt emergency generator containing a 100 gallon fuel tank and a concrete generator pad on the Building grounds, in the location reasonably approved by Lessor. The installation of the UPS, generator and generator pad shall be in compliance with Applicable Laws. Lessee shall be solely responsible for the cost of installation, operation and maintenance of the UPS and generator. The UPS and generator shall become the property of Lessor and shall be surrendered with the Premises, as a part thereof, at the end of the term hereof.

The balance of this page was intentionally left blank.

25

        IN WITNESS WHEREOF, the parties have caused these presents to be executed as of the day and year first above written.

Signed, sealed and delivered in the presence of:	LESSOR:
	GATEWAY BUSINESS CENTRE, LTD., a Florida limited partnership
(Signature of first witness on this line)
	By:           GATEWAY BUSINESS CENTRE MANAGEMENT, INC., a Florida corporation, its General Partner
(Legibly print name of first witness on this line)
	By:
(Signature of second witness on this line)		Jerome Fleeman, President
		(CORPORATE SEAL)
(Legibly print name of second witness on this line)
	Date:		2004
	LESSEE:
	MEDICAL TECHNOLOGY SYSTEMS, INC.
(Signature of first witness on this line)	a Delware Corporation
	By:
(Legibly print name of first witness on this line)		(Signature of officer on this line)
(Signature of second witness on this line)		(Legibly print name of officer on this line)
	Its		President
		(Legibly print title of officer on this line)
		(CORPORATE SEAL)
(Legibly print name of second witness on this line)
	Date:		2004

26

EXHIBIT “A”

SITE PLAN OF THE LAND

27

EXHIBIT “B”

FLOOR PLAN

28

EXHIBIT “C”

WORK LETTER AGREEMENT

        This Work Letter Agreement (this “Agreement”) is made and entered into this ______ day of March, 2004, between Gateway Business Centre, LTD (“Lessor”) and Medical Technology Systems, Inc. (“Lessee”). In the event of any inconsistencies between this Agreement and the Industrial Lease (the “Lease”) dated concurrently herewith to which this Agreement is attached as Exhibit “C”, this Agreement shall control. Capitalized terms used in this Agreement shall, unless otherwise specifically set forth herein, have the same meanings as in the Lease.

          1.     Lessor shall complete the initial buildout of the Premises as shown on the Final Plans (defined below) and as more fully described in this Section (“Initial Improvements”). To the extent that any demising walls is required by pertinent governmental authority to separate the Premises from the remainder of the Building, Lessor shall construct such demising wall at its sole cost (not to be funded from the Leasehold Improvement Allowance). Lessor shall engage an architect licensed in the State of Florida (“Architect”), to prepare preliminary space plans, which plans must be approved by Lessor and Lessee. Architect shall prepare complete and detailed demolition, architectural, structural, mechanical and engineering plans and specifications prepared and stamped by Architect, showing the Initial Improvements (“Construction Plans”). The cost of Architect’s services shall be funded by Lessor from the Leasehold Improvement Allowance. The Construction Plans shall be substantially in accordance with the preliminary space plans and shall otherwise be acceptable to Lessee in its reasonable discretion.

         2.     As used herein, “Final Plans” refers to the Construction Plans after the same have been approved in writing by Lessee.

         3.     Promptly following Lessee’s approval of the Final Plans, Lessor shall cause the Final Plans to be submitted for bid to not fewer than three (3) general contractors selected by Lessor. Lessee shall select one of the three contractors within three (3) business days of receiving the three (3) bids. Lessor shall engage the General Contractor to construct the Initial Improvements under an “open book” and Guaranteed Maximum Price (GMP) construction contract approved by Lessee, which shall provide for a price equal to the cost of the work plus the contractor’s overhead/general conditions and profit with a guaranteed maximum price (GMP).

29

         4.     Lessor shall not be responsible or liable for any delay in substantially completing the Initial Improvements resulting from any act, neglect, failure or omission of Lessee, its agents, servants, employees, contractors, or subcontractors (“Lessee Delay”). Lessee Delay means any actual delay resulting from:

a.         Lessee’s disapproval of the initial bids (including revision of the Construction Plans and resubmittal to contractors); or

b.         Lessee’s request for long lead item materials, finishes or installations (identified as such by Lessor at the time of Lessee’s selection); or

c.         Any change to or revision of the Final Plans (“Revisions”); or

d.         Lessee’s interference with Lessor’s performance of its construction obligations.

         5.     Lessor shall construct the Initial Improvements in accordance with the Final Plans and in compliance with all Applicable Laws. Lessor shall achieve Substantial Completion of the Initial Improvements on or before September 1, 2004 (30 days before the target Commencement Date). Lessee shall have the right from time to time to inspect the Premises during the construction of the Initial Improvements provided such inspection does not interfere with construction of the Initial Improvements.

         6.     During the 30 days before the Commencement Date, Lessee and its contractors and agents may enter the Premises to install equipment, furniture and fixtures and perform Lessee finishing work (“Lessee Work”) as it may desire provided that the Lessee Work is coordinated with Lessor to minimize interference with the performance of the Initial Improvements.

         7.     Lessee shall have the right to make Revisions. All Revisions shall be subject to Lessor’s prior written approval, which shall not be unreasonably withheld provided the Revisions are non-structural in nature. Lessor shall either approve or disapprove the Revisions within five (5) business days after submission thereof by Lessee. Lessor shall notify Lessee in writing of the actual out-of-pocket cost incurred by Lessor for such Revisions, and any Lessee Delay that the performance of the same may entail. If Lessee agrees with the cost and delay of such Revisions, Lessee shall acknowledge Lessee’s approval in writing within three (3) business days after Lessor’s notice thereof to Lessee. If Lessee fails to approve of the cost of such Revisions (and, if requested by Lessor, the amount of any Lessee Delay that Lessor estimates will occur as a result of such Revisions) within three (3) business days, Lessor shall not approve such Revisions. The cost of any Revisions shall be borne solely by Lessee.

30

         8.     Lessor shall notify Lessee of the date of Substantial Completion at least five (5) days prior thereto. As used herein, “Substantial Completion” shall mean that, with the exception of minor punch-list items which do not adversely affect Lessee’s use of the Premises, the Initial Improvements have been completed in accordance with the Final Plans and in compliance with all Applicable Laws and all mechanical systems serving or affecting the Premises shall then be in good working order. Lessor and Lessee shall thereupon set a mutually convenient time for Lessee and Lessor to inspect the Premises, at which time Lessee shall prepare and submit to Lessor a punch list of items to be completed. Lessor shall complete the punch list items within 30 days. In the event of any dispute as to when and whether the Initial Improvements have been substantially completed, the certificate of Lessor’s Architect and the temporary or final certificate of occupancy or completion (as may be applicable) issued by the local governmental authority shall be conclusive evidence of such completion, effective on the date of the issuance of such certificate to Lessee.

         9.     If Lessor’s Work is not Substantially Completed by the “Substantial Completion Target Date” for any reason or cause other than acts of God or other matters beyond the reasonable control of Lessor, its contractors or subcontractors (hereinafter referred to as “Force Majeure”) or Lessee Delay, the Commencement Date shall be delayed 1 day for each such day of delay in achieving Substantial Completion. In that event, beginning on the Commencement Date as adjusted, Base Rent will abate one (1) day for each day of delay in achieving Substantial Completion and Lessor shall be responsible for any expenses directly or indirectly incurred by Lessee due to the delay.

         10.     The “Commencement Date” of the Lease shall be the date on or after October 1, 2004, which the following conditions have been satisfied: (i) Substantial Completion of the Initial Improvements has occurred; and (ii) at least thirty (30) days have elapsed after Substantial Completion during which Lessee has been afforded unrestricted access to all parts of the Premises for installation of, equipment, fixtures, and furnishings. The Commencement Date will not be adjusted for delays caused by Lessee.

        “Lessee’s Construction Costs” means the total amount actually paid by Lessor for all costs related to the tenant improvements, including by way of illustration and not limitation, architect and engineer fees, permit fees, connection fees, application and license fees. supervision fees and impact fees under the contract with the General Contractor for the Initial Improvements, as increased or decreased pursuant to any change order executed by Lessor and Lessee in accordance with the provisions of this Agreement. Lessee’s Construction Costs will not include: (i) any construction management or plan approval fees, supervision or overhead charges of Lessor or any affiliate of Lessor, or any other costs and expenses of Lessor; (ii) any additional costs associated with correcting any deficiencies in workmanship, equipment and materials; or (iii) overtime work unless pre-approved in writing by Lessee; (iv) charges for parking, utilities, elevator services, or security.

31

         11.     Lessor warrants that the Initial Improvements will be free from defects in workmanship or material and will comply with the Final Plans and Applicable Laws. In addition, Lessor also warrants that all equipment and materials installed in the Initial Improvements will be new and of good quality.

        IN WITNESS WHEREOF, the parties have signed and delivered this Lease as of the day and year first above written.

"LESSOR"

"LESSEE"

32

EXHIBIT “D”

INSURANCE QUESTIONNAIRE

A. Do you use, store or contemplate using at any time fluids or other materials having a closed cup flash 80 degrees or less including, but not limited to, gasoline, benzene, carbon disulfide, naphtha, kerosene, LPG, or other materials?

                    Yes           No        If yes, please answer the following:

1.         Will you use Underwriter’s Laboratory approved self-closing cans?          Yes           No

2.          What is the gallon capacity you anticipate storing or using?

3.          Will the above be “shelf stock” stored in original sealed containers:          Yes           No

4.          Do you plan to store or use outside the building?         Yes           No

B. Do you have or plan to have a gasoline engine or other gasoline powered equipment to be used in the building (other than forklifts)?          Yes           No

C. Do you contemplate the use of any spray painting equipment?

                    Yes           No        If yes, please answer the following:

1.         Will you use Underwriter’s Laboratory approved booth be installed?         Yes           No

2.          If yes, submit the specifications for the booth or furnish the name of the booth company and person to contact, including telephone and address.

3.        Is the booth vented to the outside of the building?         Yes           No

D. Do you contemplate or plan to operate a restaurant or similar cooking facility?

                    Yes           No        If yes, please answer the following:

1.          Will you install an Underwriter’s Laboratory approved hood and dust fire extinguisher system?           Yes          No

33

E. Do you contemplate the use of the Premises for any woodworking operation?

                    Yes           No        If yes, please answer the following:

1.          Will a dust collection system be attached to each work station that has a saw?           Yes           No

2.           Describe the type of woodworking that is to be done.

F. Do you contemplate the use of the Premises for any plastics manufacturing?           Yes           No

If yes, describe the type of manufacturing  _________________________________________

G. Do you contemplate any of the following? If yes, please check the appropriate boxes.

	Storage of dynamite caps or gunpowder		Celluloid Goods
	Paper Box Manufacturing		Fireworks
	Excelsior Works		Furniture Repairing
	Paper Shredding		Furniture Factories
	Upholstery Works		Moving Picture Film
	Cotton Storage		Paint Manufacturing
	Broom Manufacturing		Printer’s Ink Manufacturing
	Calcium Carbide (storage)		Rubber Tire Recap

H. If building is sprinklered, please answer the following:

1.         Do you contemplate storing without racks, or over 12 feet with racks?         Yes           No

2.           How many fee in height will it go?  ___________________________

3.          Will you use racks or shelves?           Yes           No      If yes, please answer the following:

(a)        Are racks slatted or solid?          Slatted          Solid     

(b)        What is width of racks?    _______________________________

34

(c)        Will racks be single or double           Single          Double     

(d)       What is aisle width between racks?     _______________________________

4.           Describe goods to be stored:

5.           What materials are products?

6.           Will your inventory consist of the following? Please check the appropriate boxes:

	Linoleum Product		Alcohols in Cans, Bottles or Cartons
	Lacquers in Canisters		Wood Patterns, Pallets and Flats
	All High Hazard		Upholstered Furniture
	Rolled Pulp & Paper (vertical storage)		Wooden Furniture
	Rolled Pulp & Paper (racked storage)		Unbanded or Light Tissue Crepe
	Rolled Asphalt Paper (vertical)		Eight-six Pro Liquors
	Baled Waste Paper		Foam or Sponge Rubber
	Pharmaceuticals		Foamed Plastic Products (with or without cartons)
	Crude or Synthetic Rubber		Rubber Tires
	Goods Encapsulated by Plastic		Rugs and Carpets

I. If any of the above is “checked”, do you plan to install approved in-rack or in-bin sprinklers?            Yes           No

J. Do you plan to install other fire protection devices?           Yes           No

If yes, please describe:

K. What is your contemplated usage if no previously covered?

35

Company Name:   ______________________________________________________________________

Location of Premises to be Leased:   ________________________________________________________

Date:  _________________  Signed by: ______________________________  Title __________________

36

EXHIBIT “E”

COMMON AREA EXPENSE EXCLUSIONS

The following are excluded from Common Area Expenses:

1. Repairs or other work occasioned by fire, windstorm, or other casualty of an insurable nature in excess of any deductible, or by the exercise of the right of eminent domain.

2. Attorney’s fees, costs, and disbursements, and other expenses incurred in connection with negotiations or disputes with other Lessees, other occupants, or prospective Lessees or other occupants.

3. Expenses, including permits, license, design, space planning, and inspection costs, incurred in tenant build-out, renovating or otherwise improving or decorating, painting or redecorating space for other tenants or other occupants of space.

4. Lessor’s cost of electricity and other services that are sold to other tenants or for which Lessor is entitled to be reimbursed by tenants or other parties.

5. Any cost for depreciation and amortization.

6. All costs incurred due to violation by Lessor or any other tenant of the terms and conditions of any lease.

7. Costs incurred to cure or correct any design or construction defects.

8. Costs incurred to cure any violation of, or to otherwise comply with, any laws, statutes, ordinances, codes or other governmental rules, regulations or requirements in force as of the date of this Lease.

9. The excess over competitive costs by independent suppliers and contractors, of the cost of supplies and services provided by subsidiaries and affiliates of Lessor.

10. Interest on debt or amortization payments on any mortgages, and rental payments on any ground lease or other underlying lease.

11. Lessor’s general overhead except to the extent it is expended in direct connection with management and operation of the Building.

12. Compensation and benefits provided to administrative and executive personnel of Lessor above the level of Building superintendent.

13. Management costs or fees to the extent they exceed competitive costs for the management of comparable buildings in the general vicinity of the Building (and in no event in excess of 5% of gross rent received from the operation of the Building).

37

14. Any charge for Lessor’s income tax, excess profit tax, franchise tax, or like tax on Lessor’s business and tax penalties incurred as a result of Lessor’s negligence, inability or unwillingness to make payments and/or to file any income tax or informational returns when due.

15. Costs incurred in the removal, encapsulation, replacement, or other treatment to any substance considered to be detrimental to the health, safety, or general environment of the tenants and occupants of the Building and notwithstanding any contrary provision of this Lease, costs arising from the presence of hazardous materials, asbestos or PCB’s in or about the Building or Land which violate laws in effect as of the date of this Lease.

16. Advertising, promotional and marketing costs and leasing commissions, attorneys’ fees and other related costs and expenses in connection with the negotiation and preparation of letters, deal memos, letters of intent, leases, subleases and/or assignments, space planning costs, and other costs and expenses incurred in connection with lease, sublease and/or assignment negotiations and transactions with present or prospective tenants or other occupants of the Building.

17. Overhead and profit increment paid to Lessor or to subsidiaries or affiliates of Lessor for goods and/or services in the Building to the extent the same exceeds the costs of such goods and/or services rendered by unaffiliated third parties on a competitive basis.

18. Costs of signs in or on the Building or Land identifying the owner of the Building or other tenants’ signs.

19. Costs incurred in connection with upgrading the Building to comply with the applicable laws and codes, including without limitation, Americans with Disabilities Act, life, fire handicap, and safety codes in effect as of the date of this Lease.

20. Assessments which can be paid by Lessor in installments, shall be paid by Lessor in the maximum number of installments permitted by law and not included except in the year in which the assessment or premium installment is actually paid.

21. Costs arising from the negligence or fault of Lessor or its agents, or any vendors, contractors, or providers of materials or services selected, hired or engaged by Lessor or its agents including, without limitation, the selection of building materials.

38

22. Costs arising from Lessor’s charitable or political contributions.

Lessor and Lessee intend that Additional Rental paid by Lessee under this Lease reimburse Lessor for any actual increase in costs incurred by Lessor but not provide a profit to Lessor. In no event shall Additional Rental per square foot, as determined by Lessor for any calendar year, multiplied by the rentable area of the Building, exceed one hundred percent (100%) of the actual expenses included in the definition of Additional Rental incurred by Lessor in that calendar year.

39

EXHIBIT “F”

RULES AND REGULATIONS

I. All parking shall be within the property boundaries and within marked parking spaces. There shall be no on-street parking and at no time shall any lessee obstruct drives and loading areas intended to the use of all lessees. The drives and parking areas are for the joint and nonexclusive use of Lessor’s tenants, and their agents, customers and invitees, unless specifically marked. In the event Lessee, its agents, customers and/or invitees use a disproportionate portion of the parking, Lessor shall have the right to restrict Lessee, its agents, customers and/or invitees to certain parking areas. Lessee shall not permit any fleet trucks to park overnight in the Building’s parking areas. Lessee shall not leave any vehicle in a state of disrepair (including without limitation, flat tires, out of date license plates) on the Premises or project. If Lessee, or its employees, agents or invitees, park their vehicles in areas other than the designated parking areas or leave any vehicle in a state of disrepair, Lessor, after giving written notice to Lessee of such violation, shall have the right to remove such vehicle at Lessee’s expense.

II. Unless specifically approved by Lessor in writing, no materials, supplies or equipment shall be stored anywhere except inside the Premises. In no event shall lessee cause or allow any outside storage of trash, refuse or debris, whether in the area of the dumpster or otherwise.

III. No additional locks shall be placed on the doors of the Premises by Lessee nor shall any existing locks be changed unless Lessor is immediately furnished with two (2) keys thereto. Lessor will, without charge, furnish Lessee with two (2) keys for each lock on the entrance doors when Lessee assumes possession, with the understanding that at the termination or expiration of the term of the Lease the keys shall be returned.

IV. Lessee will refer all contractors, contractor’s representatives and installation technicians rendering any service on or to the Premises for Lessee to Lessor for its approval (not to be unreasonably withheld) and supervision before performance of any service. This provision shall apply to all work performed on or about the Leased Premises or project in the Building, including, but not limited to, installations of electrical devices and attachments and installations of any nature affecting floors, walls, woodwork, trim, windows, ceilings, equipment or any other physical portion of the Building.

IV. No Lessee shall at any time occupy any part of the Building as sleeping or lodging quarters.

VI. Lessee shall not place, install or operate on the Premises or in any part of the Building, an engine, stove or machinery, or conduct mechanical operations or cook thereof or therein, or place in use in or about the Premises any explosives., gasoline, kerosene, oil, acids, caustics or any other flammable, explosive or hazardous material without the prior written consent of Lessor, except as permitted under the Lease.

VII. Windows facing the Building exterior shall at all times be wholly clear and uncovered (except for such blinds or curtains or other window coverings Lessor may provide or approve) so that full unobstructed view of the interior of the Premises may be had from outside the Building.

40

VIII. No dogs, cats, fowl, reptiles or other animals shall be brought into or kept in or about the Premises or project except for dogs specifically trained to assist disabled persons.

IX. None of the parking, plaza, recreation or law areas, entries, passages, doors or stairways shall be blocked or obstructed, or any rubbish, litter, trash or material of any nature placed, emptied or thrown into these areas nor shall such area be used by Lessee’s agents, employees or invitees at any time for purposes inconsistent with their designation by Lessor.

X. Lessor will not install any antenna or aerial wire or other equipment outside of the Building or upon the roof of the Building without Lessor’s prior written approval not to be unreasonably withheld.

41

EXHIBIT “G”

MEMORANDUM OF LEASE

PAGES	__________
ACCT	__________
REC	__________
DR 219	__________
DS	__________
INT	__________
FEES	__________
MTF	__________
P/C	__________
REV	__________	This instrument prepared by and RETURNED TO:
TOTAL	__________	JAMES N. POWELL
CK BAL	__________	Powell, Carney, Gross, Maller & Ramsay, P.A.
CHG	__________	Post Office Box 1689
AMT	__________	St. Petersburg, Florida 33731-1689	(Space above reserved for Clerk's Office)

MEMORANDUM OF LEASE

        THIS MEMORANDUM OF LEASE (the “Memorandum”) is entered into this _______ day of _____________, 2004, by and between GATEWAY BUSINESS CENTRE, LTD., a Florida limited partnership, whose address is 3093 46^th Avenue North, St. Petersburg, Florida 33714 (hereinafter called “Lessor”) and MEDICAL TECHNOLOGY SYSTEMS, INC., a ________________ corporation, whose address is 2003 Gandy Boulevard North, St. Petersburg, Florida 33716 (hereinafter called “Lessee”) and is made with reference to the following facts:

RECITALS

    A.        Lessor is the owner in fee simple title to that certain real property located in Pinellas County, Florida, and which is more particularly described in Exhibit “A” attached hereto and by this reference made a part hereof (the “Property”).

    B.        On or about ____________________, 2004, Lessor and Lessee entered into that certain Lease Agreement (the “Lease”) whereby Lessor agreed to lease to Lessee the Property.

    C.        The Lease provided in part that the Property is leased to Lessee and the term of this Lease commenced on May 1, 2004 and shall continue thereafter until April 30, 2014 (the “Termination Date”).

        NOW, THEREFORE, for and in consideration of the premises, the parties covenant and agree as follows:

     1.        Notice.  The parties hereby give notice of public record of the existence of said Lease and the matters contained therein, and all parties dealing with the Property or with any parties attempting to obtain any interest or lien therein on or after the date hereof, are hereby put on public notice and inquiry of the matters contained in said Lease.

     2.        Construction Lien Limitation.  The Lease Agreement by and between the above captioned Lessor and Lessee specifically prohibits Lessee from taking any action which would cause the interest of Lessor in the described real property to be subject to liens for improvements made by Lessee. The Lease Agreement specifically prohibits Lessee from taking any action which would subject the Premises to any lien of mechanic’s, laborers, materialmen, contractors or subcontractors, or to any other liens or charges whatsoever arising out of the construction, maintenance or repair of the building, structures or other improvements or arising in any other manner. Under the terms of the Lease Agreement, Lessee agrees to discharge promptly any mechanic’s, materialmen’s or other liens against the Premises which may arise out of or be purported to be due for any labor, services, materials, supplies or equipment alleged to have been furnished to or for Lessee in, upon or about the described Premises.

42

        IN WITNESS WHEREOF, the parties have executed this Agreement on the day and year first above written.

Signed, sealed and delivered in the presence of:	LESSOR:
	GATEWAY BUSINESS CENTRE, LTD., a Florida limited partnership
(Signature of first witness on this line)
	By:              GATEWAY BUSINESS CENTRE MANAGEMENT, INC., a Florida corporation, its General Partner
(Legibly print name of first witness on this line)
	By:
(Signature of second witness on this line)		Jerome Fleeman, President
		(CORPORATE SEAL)
(Legibly print name of second witness on this line)
	Date:		2004
	LESSEE:
	MEDICAL TECHNOLOGY SYSTEMS, INC.
(Signature of first witness on this line)	a Delware Corporation
	By:
(Legibly print name of first witness on this line)
(Signature of second witness on this line)		(Legibly print name of officer on this line)
	Its		President
		(CORPORATE SEAL)
(Legibly print name of second witness on this line)
	Date:		2004

43

STATE OF FLORIDA                    )
COUNTY OF MIAMI-DADE       )

        The foregoing instrument was acknowledged before me this ___________ day of ____________, 2004, by JEROME FLEEMAN as President of GATEWAY BUSINESS CENTRE MANAGEMENT, INC., a Florida corporation, as General Partner of GATEWAY BUSINESS CENTRE, LTD., a Florida limited partnership, on behalf of the partnership. He  is personally known to me, or  produced a valid Florida driver’s license or  ________________________________________________________ as identification.

My Commission Expires:
	Notary Public	(SEAL)
	(Legibly print name of notary public on this line)

STATE OF ______________
COUNTY OF ______________

The foregoing instrument was acknowledged before me this ________ day of _________, 2004, by _________________________________ as ________________ President of MEDICAL TECHNOLOGY SYSTEMS, INC., a __________________ corporation, on behalf of the corporation.  He  She is  personally known to me, or  produced a valid _______________ driver's license, or  _______________________________________ as identification.

My Commission Expires:
	Notary Public	(SEAL)
	(Legibly print name of notary public on this line)

44

EXHIBIT “H”

SNDA

PAGES	__________
ACCT	__________
REC	__________
DR 219	__________
DS	__________
INT	__________
FEES	__________
MTF	__________
P/C	__________
REV	__________	This instrument prepared by and RETURNED TO:
TOTAL	__________	JAMES N. POWELL
CK BAL	__________	Powell, Carney, Gross, Maller & Ramsay, P.A.
CHG	__________	Post Office Box 1689
AMT	__________	St. Petersburg, Florida 33731-1689	(Space above reserved for Clerk's Office)

SUBORDINATION, NON-DISTURBANCE
AND ATTORNMENT AGREEMENT

THIS SUBORDINATION, NON-DISTURBANCE AND ATTORNMENT AGREEMENT (the "Agreement") is made by and between ___________________________________, a _________________ corporation with offices at ______________________________________ ("Lender") and __________________________, a ____________ corporation, with its principal place of business at ________________________________ ("Tenant").

RECITALS

    A.        Lender has made or is about to make a loan (together with all advances and increases, the “Loan”) to Gateway Business Centre, Ltd., a Florida limited partnership (“Borrower”).

    B.        Borrower, as landlord, and Tenant have entered in to a Lease dated ________________, (the “Lease”) which leased to Tenant __________________________ (the “Leased Space”) located in the Property (defined below).

    C.        The loan is or will be secured by the Mortgage, Assignment of Leases and Rents, Fixture Filing Statement and Security Agreement recorded or to be recorded in the official records of the County of Pinellas, State of Florida (together with all advances, increases, amendments or consolidations, the “Mortgage”) and the Assignment of Leases and Rents recorded or to be recorded in such official records (together with all amendments or consolidations, the “Assignment”), assigning to Lender the Lease and all rents, additional rents and other sums payable by Tenant under the Lease (the “Rent”).

    D.        The Mortgage encumbers the real property , improvements and fixtures located at Gateway Business Centre in the City of St. Petersburg, County of Pinellas, State of Florida, commonly known as ____________________________________________, and described on Exhibit “A” (the “Property”).

        IN CONSIDERATION of the mutual agreements contained in this Agreement, Lender and Tenant agree as follows.

45

                   1.        The Lease and all of Tenant’s rights under the Lease are and will remain subject and subordinate to the lien of the Mortgage and all of Lender’s rights under the Mortgage and Tenant will not subordinate the Lease to any other lien against the Property without Lender’s prior consent.

                   2.        This Agreement constitutes notice to Tenant of the Mortgage and the Assignment and, upon receipt of notice from Lender, Tenant will pay the Rent as and when due under the Lease to Lender and the payments will be credited against the Rent due under the Lease.

                   3.        Tenant does not have and will not acquire any right or option to purchase any portion of or interest in the Property.

                   4.        Tenant and Lender agree that if Lender exercises its remedies under the Mortgage or the Assignment and if Tenant is not then in default under this Agreement and if Tenant is not then in default beyond any applicable grace and cure periods under the Lease;

                               (a)        Lender will not name Tenant as a party to any judicial or non-judicial foreclosure or other proceeding to enforce the Mortgage unless joinder is required under applicable law but in such case Lender will not seek affirmative relief against Tenant, the Lease will not be terminated and Tenant’s possession of the Leased Space will not be disturbed;

                               (b)        If Lender or any other entity (a “Successor Landlord”) acquires the Property through foreclosure or other proceeding to enforce the Mortgage or by deed-in-lieu of foreclosure (a “Foreclosure”), Tenant’s possession of the Leased Space will not be disturbed and the Lease will continue in full force and effect between Successor Landlord and Tenant; and

                               (c)        If, notwithstanding the foregoing, the Lease is terminated as a result of a Foreclosure, a lease between Successor Landlord and Tenant will be deemed created, with no further instrument required, on the same terms as the Lease except that the term of the replacement lease will be the then unexpired term of the Lease. Successor Landlord and Tenant will execute a replacement lease at the request of either.

                   5.        Upon Foreclosure, Tenant will recognize and attorn to Successor Landlord as the landlord under the Lease for the balance of the term. Tenant’s attornment will be self-operative with no further instrument required to effectuate the attornment except that at Successor Landlord’s request, Tenant will execute instruments reasonably satisfactory to Successor Landlord confirming the attornment.

                   6.        Successor Landlord will not be:

                               (a)        liable for any act or omission of any prior landlord under the Lease occurring before the date of the Foreclosure except for repair and maintenance obligations of a continuing nature imposed on the landlord under the Lease;

                               (b)        required to credit Tenant with any Rent paid more than one month in advance or for any security deposit unless such Rent or security deposit has been received by Successor Landlord;

                               (c)        bound by any amendment, renewal or extension of the Lease that is inconsistent with the terms of this Agreement or is not in writing and signed by both Tenant and landlord;

                               (d)        bound by any reduction of the Rent unless the reduction is in connection with an extension or renewal of the Lease at prevailing market terms or was made with Lender’s prior consent;

46

                               (e)        bound by any reduction of the term 1 of the Lease or any termination, cancellation or surrender of the Lease unless the reduction, termination, cancellation or surrender occurred during the last 6 months of the term or was made with Lender’s prior consent;

                               (f)        bound by any amendment, renewal or extension of the Lease entered into without Lender’s prior consent if the Leased Space represents 50% or more of the net rentable area of the building in which the Leased Space is located;

                               (h)        bound by any obligation to make improvements to the Property, including the Leased Space, to make any payment or give any credit or allowance to Tenant provided for in the Lease or to pay any leasing commissions arising out of the Lease, except that Successor Landlord will be:

                                             (i)        bound by any such obligations expressly set forth in the Lease;

                                             (ii)        bound by any such obligations if the overall economic terms of the Lease (including the economic terms of any renewal options) represented market terms for similar space in properties comparable to the Property when the Lease was executed; and

                                             (iii)        bound to comply with the casualty and condemnation restoration provisions included in the Lease provided that Successor Landlord receives the insurance or condemnation proceeds;

                               (i)        liable for obligations under the Lease with respect to any off-site property or facilities for the use of Tenant (such as off-site leased space or parking) unless Successor Landlord acquires in the Foreclosure, the right, title or interest to the off-site property.

                   7.        Lender will have the right, but not the obligation, to cure any default by Borrower, as landlord, under the Lease. Tenant will notify Lender of any default that would entitle Tenant to terminate the Lease or abate the Rent and any notice of termination or abatement will not be effective unless Tenant has so notified Lender of the default and Lender has had a 30-day cure period (or such longer period as may be necessary if the default is not susceptible to cure within 30 days) commencing on the latest to occur of the date on which (i) the cure period under the Lease expires; (ii) Lender receives the notice required by this paragraph; and (iii) Successor Landlord obtains possession of the Property if the default is not susceptible to cure without possession.

                   8.        All notices, requests, or consents required or permitted to be given under this Agreement must be in writing and sent by certified mail, return receipt requested or by nationally recognized overnight delivery service providing evidence of the date of delivery, with all charges prepaid, addressed to the appropriate party at the address set forth above.

                   9.        Any claim by Tenant against Successor Landlord under the Lease or this Agreement will be satisfied solely out of Successor Landlord’s interest in the Property and Tenant will not seek recovery against or out of any other assets of Successor Landlord. Successor Landlord will have no liability or responsibility for any obligations under the Lease that arise subsequent to any transfer of the Property by Successor Landlord.

47

                   10.        This Agreement is governed by and will be construed in accordance with the laws of the state or commonwealth in which the Property is located.

                   11.        Lender and Tenant waive trial by jury in any proceedings brought by, or counterclaim asserted by, Lender or Tenant relating to this Agreement.

                   12.        If there is a conflict between the terms of the Lease and this Agreement, the terms of this Agreement will prevail as between Successor Landlord and Tenant.

                   13.        This Agreement binds and inures to the benefit of Lender and Tenant and their respective successors, assigns, heirs, administrators, executors, agents and representatives.

                   14.        This Agreement contains the entire agreement between Lender and Tenant with respect to the subject matter of this Agreement, may be executed in counterparts that together constitute a single document and may be amended only by a writing signed by Lender and Tenant.

The balance of this page was intentionally left blank.

48

IN WITNESS WHEREOF, Lender and Tenant have executed and delivered this Agreement as of the ____________ day of _______________, 200__.

Signed, sealed and delivered in the presence of:	LENDER:
	(Insert name of Lender)
(Signature of first witness on this line)
	By:
(Legibly print name of first witness on this line)
	Name:
(Signature of second witness on this line)
	Title:
(Legibly print name of second witness on this line)
	Date:	200___

	TENANT:
	(Insert name of Tenant)
(Signature of first witness on this line)
	By:
(Legibly print name of first witness on this line)
	Name:
(Signature of second witness on this line)
	Title:
(Legibly print name of second witness on this line)
	Date:	200___

49

STATE OF FLORIDA                    )
COUNTY OF MIAMI-DADE       )

        The foregoing instrument was acknowledged before me this ___________ day of ____________, 2004, by JEROME FLEEMAN as President of GATEWAY BUSINESS CENTRE MANAGEMENT, INC., a Florida corporation, as General Partner of GATEWAY BUSINESS CENTRE, LTD., a Florida limited partnership, on behalf of the partnership. He  is personally known to me, or  produced a valid Florida driver’s license or  ________________________________________________________ as identification.

My Commission Expires:
	Notary Public	(SEAL)
	(Legibly print name of notary public on this line)

STATE OF ______________
COUNTY OF ______________

The foregoing instrument was acknowledged before me this ________ day of _________, 2004, by _________________________________ as ________________ President of MEDICAL TECHNOLOGY SYSTEMS, INC., a __________________ corporation, on behalf of the corporation.  He  She is  personally known to me, or  produced a valid _______________ driver's license, or  _______________________________________ as identification.

My Commission Expires:
	Notary Public	(SEAL)
	(Legibly print name of notary public on this line)

50

EX-10.38

CO-MARKETING AGREEMENT

        This Co-Marketing Agreement (this “Agreement”) is made effective _________, 2004 (the “Effective Date”), between Cardinal Health 103, Inc., Cardinal Health 106, Inc. and Cardinal Health 110, Inc. (individually and collectively, “Cardinal Health”), with its principal place of business at 7000 Cardinal Place, Dublin, Ohio 43017, Attn: Mas Kang, facsimile number (614) 757-5331, and Medical Technology Systems, Inc. (“MTS”), with its principal place of business at 12920 Automobile Boulevard, Clearwater, Florida 33762, Attn: Todd Siegel, facsimile number (727) 576-6311. Each of Cardinal Health 103, Inc., Cardinal Health 106, Inc. and Cardinal Health 110, Inc. shall be jointly and severally liable for the obligations of Cardinal Health under this Agreement.

Recitals

        WHEREAS, MTS manufactures, markets and sells the equipment and supplies to be used in packaging pharmaceutical products set forth on Exhibit A (collectively, the “Products”), which are the subject of this Agreement.

        WHEREAS, Cardinal Health is a pharmaceutical wholesaler with hospital/managed care, alternate care, group purchasing organization and retail customers.

        WHEREAS, MTS desires Cardinal Health to provide certain marketing and sales services with respect to the Products, and Cardinal Health desires to provide such services, all as more fully described below.

        NOW, THEREFORE, the parties hereby agree as follows:

         §1.        Exclusive Appointment; Acceptance of Appointment.

                      a.         Upon the terms and conditions set forth in this Agreement, MTS hereby appoints Cardinal Health as its exclusive marketer for the Products solely to the entities set forth on Exhibit B attached hereto (hereinafter referred to as, “Strategic Customers”). In addition, MTS shall grant to Cardinal Health a first right of refusal to market, sell and distribute under the terms of this Agreement (i.e., add to Exhibit A) any MTS product not currently covered by this Agreement or any product that MTS develops during the Term (as hereinafter defined) of this Agreement for a period of thirty (30) days after notice from MTS that such product is available for general release; provided, however, this right of first refusal shall only apply to products that are substantially similar to the Products, are intended for use by the same type of customers as the Strategic Customers and do not compete with any product manufactured or marketed by Cardinal Health or any of its affiliates.

                      b.        Cardinal Health hereby accepts such appointment and shall, at its own expense (except as otherwise set forth in this Agreement), use its best efforts to promote, market and sell the Products to the Strategic Customers.

                      c.        Notwithstanding anything to the contrary that may be contained in this Agreement, but subject to the proposal process described in Section 6, MTS may market, sell and/or distribute the Products to Strategic Customers to which Cardinal Health presents a proposal but fails, within one hundred eighty (180) days after first providing such proposal, to enter into an agreement with Cardinal Health to obtain the Products, or the Strategic Customer provides written notice of rejection of the proposal prior to the expiration of such one hundred eighty (180) day period; provided, however, the pricing offered by MTS to such Strategic Customer for the Products shall not be more favorable than the pricing offered to Cardinal Health under this Agreement. Cardinal Health shall provide to MTS immediate notice of a Strategic Customer’s rejection of a proposal.

                      d.        In the event that a Strategic Customer terminates its relationship with Cardinal Health and Cardinal Health removes the Products provided to such Strategic Customer, MTS may not, for a period of six (6) months from the date of such termination, market, sell or distribute the Products to such Strategic Customer. For a period of thirty (30) days from the date of termination of the agreement between Cardinal Health and the Strategic Customer, MTS shall have the right to purchase from Cardinal Health the Products removed from such Strategic Customer for an amount equal to (i) the fair market value of such Products (based on a five (5) year straight-line depreciation formula), or (ii) Cardinal Health’s remaining obligation on such Products, whichever is greater.

                      e.        During the Term of this Agreement, neither party shall enter into an agreement with a competitor of the other party to market, sell, provide and/or obtain the Products, or new products developed by a party during the term of this Agreement that are substantially similar to the Products. A list of each party’s competitors is set forth on Exhibit C attached hereto. Notwithstanding the foregoing, Cardinal Health retains the right to provide services similar to those provided by Cardinal Health under this Agreement to Affiliates or subsidiaries of Cardinal Health that may manufacture or supply products similar to the Products or that compete with the Products. Further notwithstanding the foregoing, MTS or its Affiliates may enter into an agreement with a competitor of Cardinal Health to sell packaging supplies and labels, and other products that are not substantially similar to the Products or are not intended for use by the same type of customers as the Strategic Customers. Except as otherwise set forth in this Agreement, during the Term of this Agreement, MTS shall not, directly or indirectly, solicit or engage in negotiations or discussions with, disclose any of the terms of this Agreement to, accept any offer from, furnish any information to, or otherwise cooperate, assist or participate with, any person or organization (other than Cardinal Health and its representatives and Affiliates) regarding the provision to MTS of the services as described herein. For the purposes of this Agreement, “Affiliate” means, with respect to any entity, any other entity Controlling, Controlled by or under common Control with such entity, and “Control” and its derivatives means the legal, beneficial or equitable ownership, directly or indirectly, of at least fifty percent (50%) of the aggregate of all voting equity interests in an entity or equity interests having the right to at least fifty percent (50%) of the profits of an entity or, in the event of dissolution, to at least fifty percent (50%) of the assets of an entity and, in the case of a partnership, also includes the holding by an entity of the position of sole general partner.

2

          §2.        Term and Termination.

                      a.        This Agreement shall commence as of the Effective Date and continue for a period of five (5) years (the “Initial Term”), unless earlier terminated in accordance with the provisions hereof. Thereafter, this Agreement will automatically renew for one (1)-year periods (“Renewal Term”) unless written notice of non-renewal is provided by either party at least ninety (90) days prior to the end of the Initial Term or the applicable Renewal Term. The Initial Term and any Renewal Term(s) shall be collectively referred to as the “Term.”

                      b.        In the event either party breaches any of its representations, warranties, certifications or obligations under this Agreement, and such breach remains uncured for thirty (30) days after receipt by the non-breaching party of written notice thereof, then in addition to any and all other rights and remedies it may have, the non-breaching party may terminate this Agreement immediately upon written notice.

                      c.        Notwithstanding the foregoing, either party may terminate this Agreement at any time without cause upon providing not less than ninety (90) days prior written notice thereof to the other party, provided that in the event that Cardinal Health exercises its right to terminate the Agreement pursuant to this Section 2(c), the restrictions on MTS in Sections 1(d), (e) and (f) shall expire sixty (60) days after Cardinal Health provides such notice to MTS.

                      d.        In the event of a Change in Control (as hereinafter defined) of MTS, Cardinal Health may, in its sole discretion, terminate this Agreement immediately upon written notice to MTS. “Change in Control” shall mean: (i) a change in the record or beneficial ownership of securities of MTS representing fifty percent (50%) or more of (A) the economic interest in MTS or (B) the voting power in the election of directors of MTS; (ii) the sale or other transfer of all or substantially all of the assets of MTS (including without limitation the sale or other transfer of assets or earning power aggregating more than fifty percent (50%) of the assets or earning power of MTS) or the merger or other consolidation of MTS into any other person or entity, with the result of such merger or other consolidation being that MTS is not the survivor; (iii) a liquidation or dissolution of MTS; or (iv) a transaction or series of related transactions having, directly or indirectly, the same effect as any of the foregoing.

          §3.        Product Sales.

                      a.        Cardinal Health’s affiliate, Cardinal Health 111, Inc., will purchase the Products from MTS at the prices set forth on Exhibit D attached hereto (unless otherwise agreed in writing by MTS), pursuant to mutually agreed upon terms and conditions as set forth in the Product purchase agreement(s) between Cardinal Health 111, Inc. and MTS for sale or lease to the Strategic Customers (each such agreement, a “Product Purchase Agreement”). Cardinal Health retains the sole right to determine the terms and conditions, including, but not limited to, pricing, under which to sell, license and/or lease the Products to the Strategic Customers; provided, however, the terms and conditions (excluding price and payment terms) of such sale, license or lease shall at, a minimum, match the terms and conditions required of Cardinal Health 111, Inc. by MTS in the Product Purchase Agreement.

3

                      b.        Except as otherwise set forth on Exhibit D or as otherwise mutually agreed between the parties, MTS represents and warrants that, as of the Effective Date of this Agreement, the Product prices set forth on Exhibit D are not greater than the prices offered to or paid by other customers of MTS (excluding the MTS National Accounts as hereinafter defined) for the Products. If at any time during the Term of this Agreement, MTS offers or enters into an agreement with any other person or entity, excluding those MTS customers (the “MTS National Accounts”) specified on Exhibit C, purchasing the Products at prices more favorable than those set forth on Exhibit D, this Agreement shall be amended to adjust the Product prices set forth on Exhibit D prospectively to match the more favorable prices. MTS and Cardinal Health shall review these MTS National Accounts and the circumstances surrounding their exclusion from this “best price” warranty to determine their continued applicability.

                      c.        Strategic Customers shall receive priority from MTS with regard to field and customer service calls and installation scheduling as, and to the extent, set forth in the Product Purchase Agreement.

                      d.        Unless otherwise specified in an applicable Product Purchase Agreement:

                                 1.        Payment terms for the OnDemand® system are 33% of the purchase price is due upon execution of the Product Purchase Agreement, 33% of the purchase price is due upon delivery, and the remaining 34% of the purchase price is due thirty (30) days after installation. Payments for all other Products are due 30 days after shipment. Cardinal Health shall be responsible for all freight charges. The Products will be shipped to Cardinal Health or the Strategic Customer, F.O.B. shipping point, unless otherwise provided in a Product Purchase Agreement.

                                 2.        If Cardinal Health fails to make any payment due under the Product Purchase Agreement on or before the due date, then (without prejudice to its other rights and remedies) MTS may charge Cardinal Health interest (both before and after judgement) on the undisputed amount unpaid, at the annual rate of 18% or the maximum rate permitted by law, whichever is less, from time to time until payment is made in full. Time for payment shall be of the essence. Cardinal Health shall provide notice of any disputed amounts to MTS within ten (10) days of receipt of the invoice, including a reasonable explanation of Cardinal Health’s good-faith basis for the dispute.

                                 3.        Cardinal Health shall be responsible for all federal, state, provincial, municipal and value added or other taxes which are now or may hereafter be required in connection with or imposed upon or are in relation to the price payable in connection with the ownership, lease, license, bailment, rental or use of the Products or any component thereof.

         § 4.       Training.

                      a.        MTS shall provide to Cardinal Health, at no charge and on mutually agreed dates and locations, on-site and/or off-site Product training sessions for Cardinal Health’s sales personnel. Cardinal Health shall assume all expenses, including travel and lodging, for Cardinal Health personnel attending such training sessions.

4

                      b.        MTS shall provide, at its own expense, periodic site visits and additional “refresher” training to Strategic Customers that utilize an OnDemand or MTS Series Product as may be further set forth in the Product Purchase Agreement(s).

          §5.        Sales Materials and Other Marketing.

                      a.        Cardinal Health shall develop and print, at its own cost and expense, all sales literature, promotional materials and similar items necessary for the promotion of the Products (the “Sales Materials”) based on information provided by MTS (the “Sales Information”). Prior to each use thereof, Cardinal Health shall submit all Sales Materials to MTS for its review and approval, such approval not to be unreasonably withheld. Cardinal Health shall modify any Sales Materials that MTS notifies Cardinal Health in writing does not conform, in any material respect, to MTS marketing standards within five (5) business days of receiving notice of such non-conformity from MTS. MTS shall inform Cardinal Health if any material changes occur which warrant changes in the Sales Materials so that said Sales Materials continue to remain compliant with this Section 5.

                      b.        MTS warrants and represents that, to the best of its knowledge, the Sales Information, as originally provided by MTS, and the Sales Materials directly developed from such Sales Information without modification or combination, when approved by MTS, are true and accurate and do not infringe on any third party’s intellectual property right (including patent, trademark, service mark, copyright, trade dress, trade secret and other proprietary rights).

                      c.        Cardinal Health warrants and represents that, to the best of its knowledge, the Sales Materials, as originally provided to MTS for approval, and excluding the Sales Information as originally provided by MTS, are true and accurate and do not infringe on any third party’s intellectual property right (including patent, trademark, service mark, copyright, trade dress, trade secret and other proprietary rights).

                      d.        Except with regard to MTS Property or Proprietary Rights (as hereinafter defined), MTS shall have no proprietary right in the Sales Materials prepared by Cardinal Health. MTS shall have no right to use the Sales Materials prepared by Cardinal Health without Cardinal Health’s prior written consent. To the extent permitted by this Agreement, each party shall: (i) use all Sales Materials and Sales Information provided by the other party solely for purposes of performing their respective obligations hereunder; (ii) take all steps necessary to ensure that no person or entity has or will have unauthorized access to any of the Sales Materials and Sales Information; and (iii) not reproduce, modify or translate, or permit to be reproduced, modified or translated, any of the Sales Materials and Sales Information provided hereunder, or any portion thereof.

                      e.        Cardinal Health and MTS will each provide opportunities to the other to participate in trade shows and other industry meetings, as applicable. Each party will be responsible for its expenses incurred in attending such events, including, but not limited to, admission fees, travel and lodging.

5

                      f.        Cardinal Health and MTS will co-develop additional marketing materials (i.e., testimonials, effectiveness studies) and press releases or other market communications as may be mutually agreed upon.

                      g.        Cardinal Health shall not make any promises or representations or give any warranties, guarantees or indemnities in respect of the Products except such as may be expressly authorized in writing by MTS.

          §6.        Strategic Customer Proposals.

                      a.        In order to add additional Strategic Customers to Exhibit A, each party may identify potential customers for the Products and suggest them as proposed Strategic Customers (each, a “Proposed Strategic Customer”) by entering the Proposed Strategic Customer in MTS’ lead tracking system. The proposing party will provide the other party with contact and other information and/or use commercially reasonable good faith efforts to arrange telephone conferences and meetings with the Proposed Strategic Customer to facilitate the parties’ evaluation of the Proposed Strategic Customer’s against mutually agreed qualification criteria for such Proposed Strategic Customer’s use of the Products. If the Proposed Strategic Customer meets such criteria, the Proposed Strategic Customer will be considered a “Strategic Customer” for the purposes of this Agreement. If the Proposed Strategic Customer does not meet such criteria, the Proposed Strategic Customer will be considered outside the scope of this Agreement.

                      b.        The Program Managers (as hereinafter defined) shall use commercially reasonable, good faith efforts to jointly develop selling strategies and timelines for each Strategic Customer. Cardinal Health shall have primary responsibility for developing and presenting proposals for Strategic Customers; provided, however, MTS shall provide information and support in the development and presentation of such proposals as reasonably requested by Cardinal Health. The content and structure, including, not limited to the price of the Products, shall be determined solely by Cardinal Health. In the event MTS has a proposal pending with any Strategic Customer prior to execution of this Agreement, MTS shall provide Cardinal Health with a copy of that proposal, including applicable Product pricing.

                      c.        MTS shall provide to Cardinal Health, for purposes of developing the proposals, an estimate of the fees associated with MTS’ freight, installation, facility, interface, service, supplies and other life-cycle costs associated with the Products. MTS shall not provide this information directly to the Strategic Customer, unless authorized by Cardinal Health. In addition, MTS shall, at its own expense, perform and/or provide all site inspections, sales support, customer demonstrations, and facility visits in support of Cardinal Health’s proposal.

                      d.        Only Cardinal Health’s Senior Vice President – Alternate Care Sales, Executive Vice President – Health Systems Sales and Marketing (in conjunction with local field sales management) shall be authorized to present proposals that include MTS’ OnDemand® system. Only Cardinal Health sales management (i.e., Business Development Managers, Leader® Regional Managers, Sales Managers and Regional Sales Directors) shall be authorized to present proposals that include the MTS 350, 400 and 500 systems. Only Cardinal Health Sales Directors (or their authorized designees) shall be authorized to present proposals that include the Autobond®, Gemini, Surebond and Deblistering systems.

6

                      e.        Cardinal Health shall promptly notify MTS in writing and in advance of all proposals to Strategic Customers and Prospective Strategic Customers, and all related meetings with such entities, and give MTS a reasonable opportunity to attend any such proposal presentation or meeting. Cardinal Health shall also provide MTS with quarterly sales forecasts, progress reports and sales reports with respect to sales initiatives for such Strategic Customers and Prospective Strategic Customers.

          §7.        Steering Committee and Program Managers.

                      a.        A steering committee shall be formed that consists of both Cardinal Health and MTS senior-level representatives (the “Steering Committee”). The Steering Committee shall meet on a quarterly basis, or as otherwise mutually agreed, at a mutually agreed upon location to establish goals and objectives of this Agreement and monitor performance under this Agreement, including but not limited to, sales and sales pipeline reporting; sales, service and customer issues; modifications to Exhibit B (Strategic Customers), Exhibit C (Competitors) and Exhibit D (Product Pricing); review of new programs, products and services; review of any other changes that would affect this Agreement; and review of MTS product forecasts for the Products.

                      b.        Each party shall designate an employee to act as program manager (the “Program Manager”). The Program Managers shall serve as the primary point of contact under this Agreement on a day to day basis, and perform such other duties as may be mutually agreed upon.

          §8.        Reserved.

         §9.        Injunctive Relief. Each party acknowledges and agrees that the other party’s remedies at law for any violation or attempted violation by such party of any of its obligations under this Agreement would be inadequate and agrees that, in the event of any such violation or attempted violation, such other party shall be entitled to seek a temporary restraining order, temporary and permanent injunctions, and other equitable relief, without the necessity of posting any bond or proving any actual damage, in addition to all other rights and remedies which may be available to such other party from time to time.

          §10.      Alternative Dispute Resolution. The parties shall use reasonable efforts to amicably settle, as appropriate, all disputes, controversies, or differences, which may arise between them. The parties agree that any dispute, controversy or difference that arises in connection with the Agreement, excluding those relating to a breach of Section 12, Confidential Information, of this Agreement, noncompliance with applicable law, or for which either party has the right to and desires to terminate this Agreement, shall first be presented to the respective presidents of MTS and Cardinal Health, or their designees, for resolution. If no resolution is reached, then such dispute shall be settled by three (3) arbitrators; one to be selected by MTS, one to be selected by Cardinal Health and the third to be selected by the two (2) arbitrators, in a binding, non-reviewable and non-appealable alternate dispute resolution process to be conducted in accordance with the rules of the American Arbitration Association. The existence of the dispute, the dispute resolution process and the arbitrators’ award shall be maintained confidential, provided that the arbitrators’ award may be entered as a final judgment in any court having jurisdiction. The arbitration shall take place in Atlanta, Georgia or such other mutually agreeable location, and shall apply the governing law of this Agreement. This process shall be the sole mechanism and forum of such controversy or dispute, unless otherwise expressly set forth in this Agreement. The provisions of this Section 10 shall not apply to those instances in which either party is entitled to seek injunctive relief pursuant to the terms of this Agreement and desires to do so.

7

          §11.      Proprietary Rights.

                      a.         Cardinal Health acknowledges that MTS and/or its licensor(s) is the owner of all rights, title, and interests in and to all proprietary materials and information (including Sales Information) that may be provided to Cardinal Health under this Agreement (collectively, the “MTS Property”), including without limitation all related patent, copyright, trademark, and other intellectual property rights (collectively, the “Proprietary Rights”). The MTS Property (in all its tangible and intangible manifestations), the Proprietary Rights, and all existing or new enhancements, developments, concepts, methods, techniques, know-how, processes, adaptations, derivative works, ideas, and expressions of ideas relating to the MTS Property are and will remain the exclusive property of MTS or its licensor(s). Except as expressly provided in this Agreement, Cardinal Health will have no right, title, or interest in the MTS Property or any Proprietary Rights. Cardinal Health will not make any claim or representation of ownership of the MTS Property or any right or interest therein (except a license, if any, granted to Cardinal Health to perform its obligations under this Agreement) , or permit or facilitate the performance of any act that is in violation of this Agreement or which might jeopardize the Proprietary Rights. Nothing in this Agreement constitutes a waiver of any rights of MTS under the U.S. or international patent, copyright or trademark laws or any other Federal, state or other law.

                      b.        Upon termination of all or any portion of this Agreement for any reason, Cardinal Health’s rights with respect to MTS Property which is related to the terminated portion of this Agreement will automatically expire, and Cardinal Health shall immediately return such MTS Property to a return location specified by MTS.

          §12.      Confidential Information.

                      a.        Neither party shall, in any manner or at any time, directly or indirectly, disclose any of the other party’s Confidential Information (defined below) to any person, firm, association, organization or entity, or use, or permit or assist any person, firm, association, organization, or entity (other than the other party or its Permitted Recipients, as defined below) to use, any such Confidential Information, excepting only disclosures (1) required by law, as reasonably determined by the party disclosing such Confidential Information (the “Disclosing Party”) or otherwise deemed advisable by its legal counsel, or (2) made on a confidential basis to the Disclosing Party’s shareholders, directors, officers, employees (limited to those who need to know such Confidential Information in connection with the fulfillment by the Disclosing Party of its obligations under this Agreement), and legal, accounting, financial, investment and other professional advisors (collectively, the “Permitted Recipients”); provided that each party shall (A) make its Permitted Recipients aware of the requirements of this Agreement, (B) take reasonable steps to prohibit disclosure of such Confidential Information by any Permitted Recipient to any other person or entity except another Permitted Recipient, including without limitation at least such steps as that Party customarily takes to protect its own Confidential Information, and (C) be responsible and liable for any disclosure or use of such Confidential Information by any of its Permitted Recipients, except disclosures or uses permitted by this Agreement.

8

                      b.        For purposes of this Agreement, “Confidential Information” of a party shall mean all terms and conditions contained in this Agreement, all trade secrets, proprietary data, patient information, Strategic Customer data, and other information of a confidential nature relating directly or indirectly to that party or its business, including without limitation financial, tax, accounting, pricing and other information regarding business operations or structure; information relating to proprietary systems and processes; information relating to relationships with customers, suppliers, employees, independent contractors and other third parties; business plans, ideas, concepts, policies and procedures; marketing and advertising methods or practices; client lists and information regarding fees and prices for services or products; and any and all other information which that party is obligated to treat as confidential pursuant to any law or any agreement or course of dealing by which that party is bound; provided that Confidential Information shall not include the existence of this Agreement and information which (i) is or becomes generally known or available to the public or within the industry to which such information relates and did not become so known through the breach of this Agreement by either party, (ii) is lawfully acquired from a third party without any breach of any confidentiality restriction, (iii) is already in the possession of a party at the time it is disclosed to that party by the other party, or (iv) was or is independently developed by or for the other party without reference to the Confidential Information as evidenced by the receiving party’s written records.

                      c.        Upon the written request of either party at any time, the other party shall promptly either, in the requesting party’s sole discretion, deliver to the requesting party or destroy all documents and other materials which contain any Confidential Information of the requesting party and which are in the other party’s possession or under its reasonable control.

          §13.     Independent Contractor. The relationship between the parties is that of independent contractors. This Agreement does not establish or create any employment, franchise, partnership, joint venture, agency or other similar legal relationship between the parties, an employer-employee relationship between MTS and any employee of Cardinal Health, or an express or implied license grant by either party to the other party under any patent, trademark, copyright, trade secret, or other intellectual property right except for the limited rights necessary for the other party to satisfy its obligations under this Agreement. Neither party shall have any authority or power to bind the other party, to create any liability against the other party, or to incur any obligations on behalf of the other party in any way or for any purpose, except as expressly authorized in or pursuant to this Agreement, and neither party shall hold itself out as having any such authority.

          §14.      Representations and Warranties. Each party represents and warrants to the other party that it has the right to enter into this Agreement. TO THE FULLEST EXTENT PERMITTED UNDER APPLICABLE LAW, AND EXCEPT FOR THE EXPRESS WARRANTIES SET FORTH IN THIS AGREEMENT, EACH PARTY DISCLAIMS ALL OTHER WARRANTIES, TERMS OR CONDITIONS, EXPRESS OR IMPLIED, EITHER IN FACT OR BY OPERATION OF LAW, INCLUDING, WITHOUT LIMITATION, ANY WARRANTIES, TERMS OR CONDITIONS REGARDING MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE, NON-INFRINGEMENT, OR SATISFACTORY QUALITY.

9

          §15.      Indemnification.

                      a.        Each party (the “indemnitor”) shall defend, indemnify and hold harmless the other party, its subsidiaries and affiliates, and their directors, officers, employees, and agents (individually and collectively, the “indemnitee”), from and against all third-party claims against, and any related losses, liabilities or damages (including reasonable attorneys’ fees and expenses) that are incurred by the indemnitee as a result of bodily injury, death or physical damage to real or tangible personal property (excluding software or systems), to the extent such injury, death or damage is caused by the negligent act or willful misconduct of the indemnitor in the performance of the indemnitor’s responsibilities in connection with this Agreement.

                      b.        MTS shall further defend, indemnify and hold harmless Cardinal Health, its subsidiaries and affiliates, and their directors, officers, employees, and agents from and against all third-party claims against, and any related losses, liabilities or damages (including reasonable attorneys’ fees and expenses) that are incurred by Cardinal Health, directly or indirectly, as a result of or arising from (i) any failure by MTS to perform and observe fully all obligations and conditions to be performed or observed by MTS under this Agreement, (ii) any breach by MTS of any representation or warranty contained in this Agreement, (iii) any intellectual property infringement actions (including patent, trademark, service mark, copyright, trade dress, trade secret and other proprietary rights) brought by a third party in connection with the Sales Information as originally provided to Cardinal Health by MTS, and (iv) any inaccuracy in the Sales Information as originally provided by MTS to Cardinal Health for the Sales Materials. Notwithstanding the foregoing, MTS shall have no indemnification obligations under this Section 15(b) to the extent that any such obligation arises from or is attributable to: (1) compliance with any designs, specifications or instructions Cardinal Health hereafter specifically requests MTS to comply with; (2) any alteration or replacement by Cardinal Health or any third party of any Sales Materials as approved by MTS, or any Sales Information MTS provides to Cardinal Health (unless MTS makes such alteration or replacement); or (3) the use of the Sales Information or Sales Materials in combination with other materials not provided by MTS.

                      c.        Cardinal Health shall further defend, indemnify and hold harmless MTS, its subsidiaries and affiliates, and their directors, officers, employees, and agents from and against all third-party claims against, and any related losses, liabilities or damages (including reasonable attorneys’ fees and expenses) that are incurred by MTS, directly or indirectly, as a result of or arising from (i) any failure by Cardinal Health to perform and observe fully all obligations and conditions to be performed or observed by Cardinal Health under this Agreement, (ii) any breach by Cardinal Health of any representation or warranty contained in this Agreement, (iii) any intellectual property infringement actions (including patent, trademark, service mark, copyright, trade dress, trade secret and other proprietary rights) brought by a third party in connection with Cardinal Health’s marketing, distribution and/or use of the Sales Materials, except to the extent such action is related to the Sales Information originally provided by MTS; and (iii) Cardinal Health’s misuse or alteration of the Sales Materials as approved by MTS.

10

                      d.        The indemnitor’s obligation to indemnify and hold harmless the indemnitee pursuant to this Section 15 is subject to the indemnitee (i) having given indemnitor prompt written notice of the claim or of the commencement of the related action, as the case may be, (ii) permitting the indemnitor to exclusively defend, compromise, settle or appeal any such damage claim or judgment, (iii) providing the indemnitor with all available information, assistance and cooperation, at the indemnitor’s expense, to enable the indemnitor to defend, compromise, settle or appeal any such damage claim or judgment, and (iv) being able to participate in the defense or appeal, at its own expense (such expense not being indemnified) with attorneys of its own choice. The indemnitee shall not enter into any settlement of the claim without the indemnitor’s prior written consent, such consent not to be unreasonably withheld.

          §16.     Limitations on Liability.

                      a.        UNDER NO CIRCUMSTANCES WILL EITHER PARTY, EACH PARTY’S AFFILIATES, OR THEIR RESPECTIVE OFFICERS, PARTNERS, DIRECTORS, OR EMPLOYEES, OR THIRD PARTY PROVIDERS, BE LIABLE FOR ANY INDIRECT, INCIDENTAL, SPECIAL, CONSEQUENTIAL (EXCLUDING THOSE CONSEQUENTIAL DAMAGES ARISING FROM EACH PARTY’S INDEMNIFICATION OBLIGATIONS AS TO THIRD PARTY CLAIMS AS SET FORTH IN SECTION 15 ABOVE), EXEMPLARY OR PUNITIVE DAMAGES, INCLUDING, WITHOUT LIMITATION, LOST PROFITS AND LOST DATA, REGARDLESS OF WHETHER A PARTY IS ADVISED OF THE POSSIBILITY OF SUCH DAMAGES OR WHETHER SUCH DAMAGES COULD HAVE BEEN FORESEEN OR PREVENTED BY EITHER PARTY.

                      b.        FURTHER, EXCEPT WITH RESPECT TO EACH PARTY’S INDEMNIFICATION OBLIGATIONS SET FORTH IN SECTION 15, AND EXCLUDING THOSE DAMAGES ARISING OUT OF A BREACH OF A PARTY’S CONFIDENTIALITY OBLIGATIONS AS SET FORTH IN SECTION 12, IN NO EVENT WILL THE AGGREGATE LIABILITY OF EITHER PARTY, EACH PARTY’S AFFILIATES OR THEIR RESPECTIVE OFFICERS, PARTNERS, DIRECTORS, EMPLOYEES AND THIRD PARTY PROVIDERS TO THE OTHER PARTY ARISING OUT OF OR IN CONNNECTION WITH THIS AGREEMENT EXCEED TWO MILLION DOLLARS ($2,000,000).

          §17.     Non-Solicitation. During the Term of this Agreement, and for a period of one (1) year thereafter, neither party will, directly or indirectly, solicit for employment any employee of the other party or any of the other party’s affiliates. However, this will not prohibit either party from employing persons who (i) approach the hiring party on their own initiative or in response to public advertising by the hiring party without any direct or indirect solicitation or encouragement from the hiring party, or (ii) are solicited on behalf of the hiring party by persons involved in employment searches who have no access to the Agreement and who conduct the solicitation on their own initiative without direction on the basis of any agreement.

11

          §18.      Insurance.

                       a.        Each party hereto shall, at all times, maintain the following insurance coverages during the term of this Agreement:

                                  1.        Workers’ Compensation insurance with statutory limits on its employees;

                                  2.        Employer’s Liability — $1,000,000 per accident;

                                  3.        Commercial General Liability — $1,000,000 per occurrence;

                                  4.        Product and Completed Operations Liability — $5,000,000 per occurrence;

                                  5.        Business Auto Liability including Hired and Non-Owned Autos — $1,000,000 per accident.

                      b.        Each party shall furnish the other party with certificates of insurance evidencing the above coverages upon request. Such certificates or policies shall be in a form and underwritten by a carrier and/or placed through such party’s standard broker. Cardinal Health may self-insure any or a portion of the required insurance.

          §19.     Notices. All notices and other communications under this Agreement to either party shall be in writing and shall be deemed given when (a) delivered personally to that party, (b) telecopied (which is confirmed) to that party at the telecopy number for that party set forth at the beginning of this Agreement, (c) mailed by certified mail (return receipt requested) to that party at the address for that party set forth at the beginning of this Agreement, or (d) delivered to Federal Express, UPS, or any similar express delivery service for delivery the next business day to that party at that address. Either party may change its address or telecopy number for notices under this Agreement by giving the other party notice of such change.

          §20.      Taxes; Compliance With Laws.

                      a.        Cardinal Health will retain sole responsibility for collecting and remitting any sales, use, excise, gross receipts, or other federal, state, or local taxes or other assessments and related interest and penalties related thereto with respect to the sales made by and services rendered by Cardinal Health hereunder.

                      b.        Each party represents and warrants to the other that it complies with and shall comply with federal and state laws and regulations applicable to its respective business in performing its obligations hereunder.

          §21.     Announcements. Neither party shall issue any press release or other public announcement, verbally or in writing, referring to the other party or any entity which it controls, is controlled by or under common control of such party, without the consent of such other party. Nothing contained herein shall limit the right of either party to issue a press release or public announcement if, in the opinion of such party’s counsel, such press release or public announcement is required pursuant to state or federal securities laws, rules or regulations, or other applicable laws, in which case the party required to make the press release or public announcement shall use its commercially reasonable efforts to obtain the approval of the other party as to the form, nature and extent of the press release or public announcement prior to issuing the press release or making the public announcement.

12

          §22.      Force Majeure. The parties’ obligations under this Agreement will be excused (other than payment obligations) if and to the extent that any delay or failure to perform such obligations is due to fire or other casualty, product or material shortages, strikes or labor disputes, transportation delays, change in business conditions (other than insignificant changes), manufacturer out-of-stock or delivery disruptions, acts of God, seasonal supply disruptions, or other causes beyond the reasonable control of the affected party, provided that the effects of such causes could not have been reasonably circumvented or avoided by, such party.

          §23.      Non-Waiver. The failure of either party to enforce any provision of this Agreement will not be considered a waiver of any future right to enforce such provision.

          §24.      Complete Agreement. This Agreement contains the entire agreement between the parties and supersedes all other agreements and understandings between the parties with respect to the subject matter of this Agreement. No alterations, additions, or other changes to this agreement shall be made or be binding unless made in writing and signed by both parties.

          §25.      Governing Law; Invalid Provisions; Severability. This Agreement shall be governed by and construed in accordance with the laws of the State of New York. If this Agreement, or one or more of the provisions hereof, is held invalid, illegal, or unenforceable within any governmental jurisdiction or subdivision thereof, this Agreement or any such provision or provisions will not as a consequence thereof be deemed to be invalid, illegal, or unenforceable in any other governmental jurisdiction or subdivision thereof. If any provision of this Agreement is invalid, illegal or unenforceable, such invalidity, illegality or unenforceability will not affect any other provision of this Agreement. This Agreement will be construed as if such invalid, illegal or unenforceable provision had never been contained herein; and there will be deemed substituted such other mutually agreed upon provision as will most nearly accomplish the intent of MTS and Cardinal Health to the extent permitted by applicable law. If any part of this Agreement is determined to be invalid or declared null and void by any court of competent jurisdiction, then such part will be reformed, if possible, to conform to the law and, in any event, the remaining part of this Agreement will remain in full force and effect.

          §26.      Successors; Assignment. This Agreement shall be binding upon, inure to the benefit of, and be enforceable by and against the parties and their respective successors and assigns. Neither this Agreement nor any of the rights, interests, or obligations under this Agreement shall be transferred or assigned by either of the parties without the prior written consent of the other party, which consent shall not be unreasonably withheld.

[SIGNATURE PAGE FOLLOWS]

13

MEDICAL TECHNOLOGY SYSTEMS, INC.		CARDINAL HEALTH 103, INC.
By:	________________________________	By:	________________________________
Name:	________________________________	Name:	________________________________
Title:	________________________________	Title:	________________________________
Date:	________________________________	Date:	________________________________
		CARDINAL HEALTH 106, INC.
		By:	________________________________
		Name:	________________________________
		Title:	________________________________
		Date:	________________________________
		CARDINAL HEALTH 110, INC.
		By:	________________________________
		Name:	________________________________
		Title:	________________________________
		Date:	________________________________

14

EXHIBIT A

Products

OnDemand™ System Products

Item #	Product Description
OD4-A-S	Fully Automated Single Dose
OD4-SA-S	Semi Automated Single Dose
OD4-SA-SS	Semi Automated Select Seal
OD4-SA-U	Semi Automated Unit Dose
OD4-SA-C7	Semi Automated Care 7
OD4-SA-M28T	Semi Automated Multi Dose
OD4-SA-M28R	Semi Automated Multi Dose

MTS Pre-Pack Equipment Products

Item #	Product Description
100-15	Gemini Sealer
100-19	4-UP Autobond Sealer
100-20	3-UP Autobond Sealer
100-21	2-UP Autobond Sealer
100-35	MTS-350
100-40	MTS-400
100-60	Deblister Machine
100-73	Surebond Sealer
100-80	MTS-500
100-84	Rena Conveyor
100-85	Label Printer Applicator

15

EXHIBIT C

Competitors

Cardinal Health Competitors

• AmerisourceBergen
• McKesson
• Morris Dickson
• Walsh
• Dohmen
• Harvard
• Kinray
• Rochester Drug
• Owens & Minor
• Omnicell
• Other businesses whose primary source of revenue, 50% or greater, are derived from drug wholesaling services.

MTS Competitors

• Rx Systems
• Drug Package
• AutoMed
• Shorewood
• Jones Packaging
• Useful Products
• Opus
• Medicine on Time
• Specialty Carts
• Artromick (excluding medical carts)
• Euclid

MTS National Accounts

• Omnicare - Covington, KY
• PharMerica - Tampa, FL
• Neighborcare - Baltimore, MD
• Kindred - Louisville, KY

EX-10.39

SECOND AMENDMENT TO LOAN AND SECURITY AGREEMENT

        THIS SECOND AMENDMENT TO LOAN AND SECURITY AGREEMENT (“Amendment”) is made effective this 18th day of June, 2004 by and among LASALLE BUSINESS CREDIT, LLC, successor by merger to LaSalle Business Credit, Inc., as Agent (“Agent”) for STANDARD FEDERAL BANK NATIONAL ASSOCIATION (“Lender”), MEDICAL TECHNOLOGY SYSTEMS, INC. (“MTS”) and MTS PACKAGING SYSTEMS, INC. (“Packaging”, and with MTS, each a “Borrower” and collectively, the “Borrowers”.

BACKGROUND

        A.     Agent, Lender and Borrowers previously entered into that certain Loan and Security Agreement dated June 26, 2002 (as amended by that certain First Amendment to Loan and Security Agreement dated July 8th, 2003 and as the same may be further amended from time to time, the “Loan Agreement”).

        B.     Agent, Lender and Borrowers desire to amend the Loan Agreement in accordance with the terms and conditions set forth herein.

        C.     Capitalized terms used herein and not otherwise defined shall have the meanings provided for such terms in the Loan Agreement.

        NOW THEREFORE, the parties hereto, intending to be legally bound hereby, agree as follows:

        1.     Definitions.

(a) The definition of “Business Day” set forth in Section 1 of the Loan Agreement is hereby deleted in its entirety and replaced with the following:

““Business Day” shall mean any day other than a Saturday, a Sunday or (i) with respect to all matters, determinations, fundings and payments in connection with LIBOR Rate Loans, any day on which banks in London, England or Chicago, Illinois are required or permitted to close, and (ii) with respect to all other matters, any day that banks in Philadelphia, Pennsylvania are required or permitted to close.”

(b) The definition of “Debt Service Coverage Ratio” set forth in Section 1 of the Loan Agreement is hereby deleted in its entirety and replaced with the following:

““Debt Service Coverage Ratio” shall mean, for any Person, with respect to any period of determination, the ratio of (i) such Person’s net income after taxes for such period, excluding any after-tax gains or losses on the sale of assets (other than the sale of Inventory in the ordinary course of business), any other after-tax extraordinary gains or losses and, during Borrowers’ fiscal year ending March 31, 2005 only, the Original Issue Discount, the Deferred Financing Costs and the Leasehold Write-Off, plus depreciation and amortization deducted in determining net income for such period, plus tax benefits which offset any income tax expense provisions deducted in determining net income for such period, minus Unfinanced Capital Expenditures for such period plus the after-tax increase in LIFO reserves, or minus the after tax decrease in LIFO reserves, to (ii) such Person’s current principal maturities of long-term debt and capitalized leases paid or scheduled to be paid during such period, plus any prepayments on indebtedness owed to any other Person (exclusive of trade payables and Revolving Loans) and paid during such period, plus, any Permitted Dividends paid during such period.”

(c) The definition of “Maximum Loan Limit” set forth in Section 1 of the Loan Agreement is hereby deleted in its entirety and replaced with the following:

““Maximum Loan Limit” shall mean Ten Million Dollars ($10,000,000.00), plus the Overadvance Amount.”

(d) The definition of “Maximum Revolving Loan Limit” set forth in Section 1 of the Loan Agreement is hereby deleted in its entirety and replaced with the following:

““Maximum Revolving Loan Limit” shall mean Eight Million Five Hundred Thousand Dollars $8,500,000.00).”

(e) The definition of “Minimum Net Availability” set forth in Section 1 of the Loan Agreement is hereby deleted in its entirety and replaced with the following:

““Minimum Net Availability” shall mean, at any time of determination, an amount equal to (a) the lesser of: (i) the Maximum Revolving Loan Limit; and (ii) the Revolving Loan Limit available to the Borrowers at such time; plus the Availability Block, minus (b) the sum of: (i) all sums due and owing by the Borrowers to the Borrowers’ trade creditors which are outstanding beyond trade terms usually and customarily afforded to the Borrowers by their trade creditors (as determined by Agent from time to time in the reasonable exercise of its discretion); plus (ii) the outstanding principal balance of all Revolving Loans and Letter of Credit Obligations; plus (iii) all taxes due to any federal, state or local taxing authority due and not yet paid.”

(f) The definition of “Tangible Net Worth” set forth in Section 1 of the Loan Agreement is hereby deleted in its entirety and replaced with the following:

““Tangible Net Worth” shall mean, with respect to a Person, the sum of (i) such Person’s shareholders’ equity, defined in accordance with GAAP, less (ii) the book value (to the extent included in such shareholders’ equity) of all assets reflected as goodwill (which shall in no event include trademarks, patents or other intellectual property or capitalized development costs), plus (iii) plus the amount of any LIFO reserve, all as determined under GAAP, consistently applied.”

(g) The definition of “Term Loans” set forth in Section 1 of the Loan Agreement is hereby deleted in its entirety and replaced with the following:

2

““Term Loans” shall mean, collectively, Term Loan A, Term Loan B and Term Loan C.”

(h) Section 1 of the Loan Agreement is hereby amended by adding the following definitions alphabetically where they would otherwise appear:

““Availability Block” shall mean (a) commencing June 18, 2004 and at all time through and including September 30, 2005, an amount equal to Five Hundred Thousand Dollars ($500,000.00) and (b) commencing October 1, 2005 and at all times thereafter, an amount equal to Zero Dollars ($0).

“Deferred Financing Costs” shall mean an amount equal to the lesser of (i) Four Hundred Thousand Dollars ($400,000.00) or (ii) the amount of deferred financing costs incurred by Borrowers prior to June 17, 2004 and actually expensed by Borrowers, as required by GAAP.

“Interest Period” shall mean any continuous period of thirty (30), sixty (60) or ninety (90) days, as selected from time to time by Borrowers.

“Leasehold Write-Off” shall mean an amount equal to the lesser of (i) Two Hundred Seventy-Five Thousand Dollars ($275,000.00) or (ii) the amount actually expensed by Borrowers in connection with the relocation of Borrowers’ headquarters from 12920 Automobile Boulevard, Clearwater, FL to 2003 Gandy Boulevard North, St. Petersburg, FL.

“LIBOR Rate” shall mean, with respect to any LIBOR Rate Loan for any Interest Period, a rate per annum equal to the offered rate for deposits in United States dollars for a period equal to such Interest Period as it appears on Telerate page 3750 as of 11:00 a.m. (London time) two Business Days prior to the first day of such Interest Period. “Telerate page 3750” means the display designated as “Page 3750” on the Telerate Service (or such other page as may replace page 3750 of that service or such other service) as may be nominated by the British Bankers’ Association as the vendor for the purpose of displaying British Bankers’ Association interest settlement rates for United States dollar deposits).

“LIBOR Rate CapEx Loan” shall mean a Capital Expenditure Loan bearing interest with reference to the LIBOR Rate.

“LIBOR Rate Revolving Loan” shall mean a Revolving Loan bearing interest with reference to the LIBOR Rate.

“LIBOR Rate Term C Loan” shall mean any portion of Term Loan C bearing interest with reference to the LIBOR Rate.

“LIBOR Rate Loans” shall mean the Loans bearing interest with reference to the LIBOR Rate, including, without limitation, each LIBOR Rate CapEx Loan, each LIBOR Rate Revolving Loan and each LIBOR Rate Term C Loan.

3

“Original Issue Discount” shall mean an amount equal to the lesser of (i) Seven Hundred Forty-One Thousand Dollars ($741,000.00) or (ii) the actual amount of the original issue discount expensed by Borrowers in connection with the repayment in full of the Subordinated Debt.

“Overadvance Amount” shall mean for each period listed in Column A below, an amount up to the amount listed in Column B below for such period:

Column A	Column B
June 18, 2004 through July 31, 2004	$     3,000,000.00
August 1, 2004 through August 31, 2004	$     2,900,000.00
September 1, 2004 through September 30, 2004	$     2,800,000.00
October 1, 2004 through October 31, 2004	$     2,700,000.00
November 1, 2004 through November 30, 2004	$     2,500,000.00
December 1, 2004 through December 31, 2004	$     2,300,000.00
January 1, 2005 through January 31, 2005	$     2,100,000.00
February 1, 2005 through February 28, 2005	$     1,800,000.00
March 1, 2005 through March 31, 2005	$     1,500,000.00
April 1, 2005 through April 30, 2005	$     1,200,000.00
May 1, 2005 through May 31, 2095	$     1,000,000.00
June 1, 2005 through June 30, 2005	$        800,000.00
July 1, 2005 through July 31, 2005	$        600,000.00
August 1, 2005 through August 31, 2005	$        400,000.00
September 1, 2005 through September 30, 2005	$        200,000.00
October 1, 2005 and at all times thereafter	$                       0

“Prime Rate Loans” shall means the Loans bearing interest with reference to the Prime Rate.

“Tax” shall mean, in relation to any LIBOR Rate Loans and the applicable LIBOR Rate, any tax, levy, impost, duty, deduction, withholding or charges of whatever nature (i) required to be paid by Lender and/or (ii) to be withheld or deducted from any payment otherwise required hereby to be made by Borrower to Lender; provided, that the term “Tax” shall not include any taxes imposed upon the net income of Lender.”

        2.     Revolving Loans. Sections 2(a) is hereby deleted in its entirety and replaced with the following:

(a) Revolving Loans. Subject to the terms and conditions of this Agreement and the Other Agreements, during the Term, Agent on behalf of Lender shall make revolving loans and advances (the “Revolving Loans”) to one or more Borrowers in an aggregate amount up to the lesser of: (x) the Maximum Revolving Loan Limit minus the Letter of Credit Obligations or (y) the sum of the following sublimits (the “Revolving Loan Limit”) minus the Letter of Credit Obligations:

4

(i) Up to eighty-five percent (85%) of the face amount (less maximum discounts, credits and allowances which may be taken by or granted to Account Debtors in connection therewith in the ordinary course of each Borrower’s business) of Eligible Accounts of the Borrowers; plus

(ii) Up to the lesser of: (A) the sum of (without duplication) sixty percent (60%) of the lower of cost or market value on a FIFO basis of the Eligible Inventory of each Borrower; and (B) Two Million Five Hundred Thousand Dollars ($2,500,000); plus

(iii) the Overadvance Amount; minus

(iv) the Availability Block; minus

(v) such reserves as Lender elects, in its reasonable discretion, to establish from time to time.

All Revolving Loans shall be deemed to be advanced, first, under the Overadvance Amount portion of the Revolving Loan Limit and, second, under the remainder of the Revolving Loan Limit. The aggregate unpaid principal balance of the Revolving Loans made to all Borrowers, plus the outstanding Letter of Credit Obligations of the Borrowers shall not at any time exceed the lesser of (i) the Revolving Loan Limit and (ii) the Maximum Revolving Loan Limit (as each of such amounts may be increased or decreased by Agent, in its sole discretion). If at any time the outstanding Revolving Loans made to all Borrowers exceed either the Revolving Loan Limit or the Maximum Revolving Loan Limit, or any portion of the Revolving Loans plus the outstanding Letter of Credit Obligations exceed any applicable sublimit within the Revolving Loan Limit, the Borrowers shall immediately, and without the necessity of demand by Agent, pay to Agent such amount as may be necessary to eliminate such excess, and Agent shall apply such payment to the outstanding Revolving Loans in such order as Agent shall determine in its sole discretion; provided, however, that if such excess results from any establishment of reserves by Agent or from the imposition of any modification to the eligibility criteria set forth in the definitions of Eligible Accounts and Eligible Inventory or in this Section 2(a) in such a manner that items heretofore eligible thereunder are rendered ineligible, Borrowers shall have five (5) days to eliminate such excess.

Each Borrower hereby authorizes Agent, in its sole discretion, to charge any accounts of the Borrowers maintained at LaSalle Bank or advance Revolving Loans to make any payments of principal, interest, fees, costs or expenses required to be made under this Agreement or the Other Agreements. All Revolving Loans shall, in Agent’s sole discretion, be evidenced by one or more promissory notes in form and substance satisfactory to Agent. However, if such Revolving Loans are not so evidenced, such Revolving Loans may be evidenced solely by entries upon the books and records maintained by Agent.

5

A request for a Revolving Loan shall be made or shall be deemed to be made, each in the following manner: Borrower shall give Agent same day notice, no later than 12:00 P.M. (Philadelphia time) for such day, of its request for a Revolving Loan as a Prime Rate Loan, and at least three (3) Business Days prior notice of its request for a Revolving Loan as a LIBOR Rate Loan, in which notice Borrower shall specify the amount of the proposed borrowing and the proposed borrowing date; provided, however, that no such request for a Revolving Loan may be made at a time when there exists an Event of Default and no such request for a Revolving Loan as a LIBOR Rate Loan may be made at any time when there exists an event which, with the passage of time or giving of notice, will become an Event of Default. Each check or request for payment against the control disbursement account maintained by Borrowers at LaSalle Bank shall constitute a request for a Revolving Loan as a Prime Rate Loan. As an accommodation to the Borrowers, Agent may permit telephone requests for Revolving Loans and electronic transmittal of instructions, authorizations, agreements or reports to Agent by Borrowers. Unless such Borrower specifically directs Agent in writing not to accept or act upon telephonic or electronic communications from it, Agent shall have no liability to such Borrower for any loss or damage suffered by such Borrower as a result of Agent’s honoring of any requests, execution of any instructions, authorizations or agreements or reliance on any reports communicated to it telephonically or electronically and purporting to have been sent to Agent by such Borrower, and Agent shall have no duty to verify the origin of any such communication or the authority of the Person sending it (but such request must purport to be sent by an Authorized Officer).

Each Borrower hereby irrevocably authorizes Agent to disburse the proceeds of each Revolving Loan requested by such Borrower, or deemed to be requested by such Borrower, as follows: the proceeds of each Revolving Loan requested under Section 2(a) shall be disbursed by Agent in lawful money of the United States of America in immediately available funds, in the case of the initial borrowing, in accordance with the terms of the written disbursement letter from Borrower, and in the case of each subsequent borrowing, by wire transfer or Automated Clearing House (ACH) transfer to such bank account as may be agreed upon by such Borrower and Agent from time to time, or elsewhere if pursuant to a written direction from such Borrower.”

        3.     Capital Expenditure Loans. Section 2(d) of the Loan Agreement is hereby deleted in its entirety and replaced with the following:

6

"(d) Capital Expenditure Loans. Subject to the terms and conditions of this Agreement and the Other Agreements, after the initial Loans are advanced hereunder, but in no event after the date which is six months prior to the last day of the Term, Agent shall make one (1) advance to the Borrowers of up to eighty percent (80%) of the purchase price (exclusive of sales taxes, delivery charges and other “soft” costs related to such purchase) of Equipment which (i) has been purchased by either Borrower on or after May 1, 2004 with the working capital of such Borrower or (ii) is to be purchased with the proceeds of such advance, which Equipment is acceptable to Agent in its reasonable discretion, and upon which Agent on behalf of Lender shall have a first priority perfected security interest; provided, that (i) the maximum amount advanced hereunder for such purchases shall not exceed Three Hundred Thousand Dollars ($300,000.00), (ii) at least five (5) Business Days prior to any such advance hereunder, the Borrowers shall have furnished to Agent an invoice and acceptance letter for the Equipment being purchased and shall have executed such documents and taken such other actions as Agent shall required to assure that Agent has a first priority perfected security interest in such Equipment, and (iii) the Borrowers shall have executed and delivered to Agent a CapEx Note in the form of Exhibit D annexed hereto. The CapEx Line shall not be available for advance at any time during which a Default or Event of Default has occurred unless the Agent in its sole discretion waives such Default or Event of Default in writing.”

        4.     Term Loan C. Section 2 of the Loan Agreement is hereby amended by adding the following as Section 2(c)A thereto:

“(c)A Term Loan C Subject to the terms and conditions of this Agreement and the Other Agreements, Lender shall make a term loan to the Borrowers in an amount equal to One Million Two Hundred Thousand Dollars ($1,200,000.00) (“Term Loan C”). Term Loan C shall be advanced on June 18, 2004.”

        5.     Repayment of the Capital Expenditure Loan. Section 2(e)(iv) of the Loan Agreement is hereby deleted in its entirety and replaced with the following:

“(iv)The principal of the Capital Expenditure Loan shall be repaid in (A) consecutive monthly installments, payable on the first day of each month during the period beginning on and including the first day of the month next succeeding the month in which such Capital Expenditure Loan is made, each in an amount equal to (I) Four Thousand Dollars ($4,000.00) for each payment made on or prior to June 30, 2005, (II) Eight Thousand Dollars ($8,000.00) for each payment made on or prior to June 30, 2006, but after July 1, 2005, (III) Thirteen Thousand Dollars ($13,000.00) for each payment made on or prior to June 30, 2007, but after July 1, 2006 and (B) one final payment of the remaining principal balance thereof, together with all interest and fees accrued and unpaid thereon, on the last day of the Term. If any such payment due date is not a Business Day, then such payment shall be made on the next succeeding Business Day, and such extension of time shall be included in the computation of the amount of interest and fees due hereunder.”

7

        6.     Repayment of Term Loan C. Section 2(e) of the Loan Agreement is hereby amended by adding the following as Section 2(e)(vi) thereto:

“(vi) Repayment of Term Loan C. The principal of Term Loan C shall be repaid in (i) twelve (12) equal and consecutive monthly installments of principal of Sixteen Thousand Dollars ($16,000.00), payable on the first day of each month during the period beginning on and including August 1, 2004 and ending on and including July 31, 2005, (ii) twelve (12) equal and consecutive monthly installments of principal of Thirty-Two Thousand Dollars ($32,000.00), payable on the first day of each month during the period beginning on and including August 1, 2005 and ending on and including July 31, 2006, (iii) eleven (11) equal and consecutive monthly installments of principal of Fifty-Two Thousand Dollars ($52,000.00), payable on the first day of each month during the period beginning on and including August 1, 2007 and ending on and including June 30, 2007 and (ii) one final payment of the remaining principal balance thereof, together with all interest and fees accrued and unpaid thereon, on the last day of the Term. If any such payment due date is not a Business Day, then such payment shall be made on the next succeeding Business Day, and such extension of time shall be included in the computation of the amount of interest and fees due hereunder.”

        7.     Interest Rate. Section 4(a) of the Loan Agreement is hereby deleted in its entirety and replaced with the following:

(a) Interest Rate. Subject to the terms and conditions set forth herein, each Loan shall bear interest as follows:

(i) Each Revolving Loan (other than Revolving Loans supported by the Overadvance Amount) shall bear interest at the per annum rate of interest set forth in subsection (A) or (B) below:

(A) the Prime Rate in effect from time to time.

(B) two and one quarter of one percent (2.25%) in excess of the LIBOR Rate for the applicable Interest Period selected by Borrowers by irrevocable notice (in writing, by telecopy, telex, telegram, electronic mail or cable) given to Agent not less than three (3) Business Days prior to the first day of each respective Interest Period; provided that: (I) each such period occurring after such initial period shall commence on the day on which the immediately preceding period expires; (II) the final Interest Period shall be such that its expiration occurs on or before the end of the Term; and (III) if for any reason Borrowers shall fail to timely select a period, then such Revolving Loans shall continue as, or revert to, Prime Rate Loans, such rate to remain fixed for such Interest Period.

8

(ii) Each Revolving Loan (other than Revolving Loans supported by the Overadvance Amount) shall bear interest at the per annum rate of interest set forth in subsection (A) or (B) below:

(A) one percent (1%) per annum in excess of the Prime Rate in effect from time to time.

(B) three and one quarter of one percent (3.25%) in excess of the LIBOR Rate for the applicable Interest Period selected by Borrowers by irrevocable notice (in writing, by telecopy, telex, telegram, electronic mail or cable) given to Agent not less than three (3) Business Days prior to the first day of each respective Interest Period; provided that: (I) each such period occurring after such initial period shall commence on the day on which the immediately preceding period expires; (II) the final Interest Period shall be such that its expiration occurs on or before the end of the Term; and (III) if for any reason Borrowers shall fail to timely select a period, then such Revolving Loans shall continue as, or revert to, Prime Rate Loans, such rate to remain fixed for such Interest Period.

(iii) Intentionally Deleted.

(iv) Intentionally Deleted.

(v) Term Loan C shall bear interest at the per annum rate of interest set forth in subsection (A) or (B) below:

(A) one-half of one percent (.5%) per annum in excess of the Prime Rate

(B) two and three quarter of one percent (2.75%) in excess of the LIBOR Rate for the applicable Interest Period selected by Borrowers by irrevocable notice (in writing, by telecopy, telex, telegram, electronic mail or cable) given to Agent not less than three (3) Business Days prior to the first day of each respective Interest Period; provided that: (I) each such period occurring after such initial period shall commence on the day on which the immediately preceding period expires; (II) the final Interest Period shall be such that its expiration occurs on or before the end of the Term; and (III) if for any reason Borrowers shall fail to timely select a period, then such portion of Term Loan C shall continue as, or revert to, Prime Rate Loans, such rate to remain fixed for such Interest Period.

(vi) Each Capital Expenditure Loan shall bear interest at the per annum rate of interest set forth in subsection (A) or (B) below:

(A) one-half of one percent (.5%) per annum in excess of the Prime Rate in effect from time to time.

9

(B) two and three quarter of one percent (2.75%) in excess of the LIBOR Rate for the applicable Interest Period selected by Borrowers by irrevocable notice (in writing, by telecopy, telex, telegram, electronic mail or cable) given to Agent not less than three (3) Business Days prior to the first day of each respective Interest Period; provided that: (I) each such period occurring after such initial period shall commence on the day on which the immediately preceding period expires; (II) the final Interest Period shall be such that its expiration occurs on or before the end of the Term; and (III) if for any reason Borrowers shall fail to timely select a period, then such Capital Expenditure Loans shall continue as, or revert to, Prime Rate Loans, such rate to remain fixed for such Interest Period.

All such interest to be payable on Prime Rate Loans shall be payable on the first Business Day of each month in arrears. All such interest to be payable on LIBOR Rate Loans shall be payable on the first Business Day of each month in arrears and on the last Business Day of such Interest Period. Said rates of interest shall increase or decrease by an amount equal to each increase or decrease in the Prime Rate, effective on the effective date of each such change in the Prime Rate. Upon the occurrence of an Event of Default and during the continuance thereof, each Loan shall bear interest at the rate of two percent (2%) per annum in excess of the interest rate otherwise payable thereon, which interest shall be payable on demand. All interest shall be calculated on the basis of a 360-day year.”

        8.     Other LIBOR Provisions. Section 4 of the Loan Agreement is hereby amended by adding the following as Section 4(d) thereto:

(d) Other Libor Provisions.

(i) Subject to the provisions of this Agreement, Borrower shall have the option (A) as of any date, to convert all or any part of the Prime Rate Loans to, or request that new Loans be made as, LIBOR Rate Loans of various Interest Periods, (B) as of the last day of any Interest Period, to continue all or any portion of the relevant LIBOR Rate Loans as LIBOR Rate Loans; (C) as of the last day of any Interest Period, to convert all or any portion of the LIBOR Rate Loans to Prime Rate Loans; and (D) at any time, to request new Loans as Prime Rate Loans; provided, that Loans may not be continued as or converted to LIBOR Rate Loans, if the continuation or conversion thereof would violate the provisions of this Agreement or if an Event of Default or an event which, with the passage of time or giving of notice, will become an Event of Default, has occurred.

10

(ii) Lender’s determination of LIBOR as provided above shall be conclusive, absent manifest error. Furthermore, if Lender determines, in good faith (which determination shall be conclusive, absent manifest error), prior to the commencement of any Interest Period that (A) U.S. Dollar deposits of sufficient amount and maturity for funding the Loans are not available to Lender in the London Interbank Eurodollar market in the ordinary course of business, or (B) by reason of circumstances affecting the London Interbank Eurodollar market, adequate and fair means do not exist for ascertaining the rate of interest to be applicable to the Loans requested by Borrower to be LIBOR Rate Loans or the Loans bearing interest at the rates set forth in Section 4(a)(i)(B), Section 4(a)(ii)(B), Section 4(a)(v)(B) or Section 4(a)(iv)(B) of this Agreement shall not represent the effective pricing to Lender for U.S. Dollar deposits of a comparable amount for the relevant period (such as for example, but not limited to, official reserve requirements required by Regulation D to the extent not given effect in determining the rate), Lender shall promptly notify Borrower and (1) all existing LIBOR Rate Loans shall convert to Prime Rate Loans upon the end of the applicable Interest Period, and (2) no additional LIBOR Rate Loans shall be made until such circumstances are cured.

(iii) If, after the date hereof, the introduction of, or any change in any applicable law, treaty, rule, regulation or guideline or in the interpretation or administration thereof by any governmental authority or any central bank or other fiscal, monetary or other authority having jurisdiction over Lender or its lending offices (a “Regulatory Change”), shall, in the opinion of counsel to Lender, make it unlawful for Lender to make or maintain LIBOR Rate Loans, then Lender shall promptly notify Borrower and (A) the LIBOR Rate Loans shall immediately convert to Prime Rate Loans on the last Business Day of the then existing Interest Period or on such earlier date as required by law and (B) no additional LIBOR Rate Loans shall be made until such circumstance is cured.

(iv) If, for any reason, a LIBOR Rate Loan is paid prior to the last Business Day of any Interest Period or if a LIBOR Rate Loan does not occur on a date specified by Borrower in its request (other than as a result of a default by Lender), Borrower agrees to indemnify Lender against any loss (including any loss on redeployment of the deposits or other funds acquired by Lender to fund or maintain such LIBOR Rate Loan) cost or expense incurred by Lender as a result of such prepayment.

(v) If any Regulatory Change (whether or not having the force of law) shall (A) impose, modify or deem applicable any assessment, reserve, special deposit or similar requirement against assets held by, or deposits in or for the account of or loans by, or any other acquisition of funds or disbursements by, Lender; (B) subject Lender or the LIBOR Rate Loans to any Tax or change the basis of taxation of payments to Lender of principal or interest due from Borrower to Lender hereunder (other than a change in the taxation of the overall net income of Lender); or (C) impose on Lender any other condition regarding the LIBOR Rate Loans or Lender’s funding thereof, and Lender shall determine (which determination shall be conclusive, absent any manifest error) that the result of the foregoing is to increase the cost to Lender of making or maintaining the LIBOR Rate Loans or to reduce the amount of principal or interest received by Lender hereunder, then Borrower shall pay to Lender, on demand, such additional amounts as Lender shall, from time to time, determine are sufficient to compensate and indemnify Lender from such increased cost or reduced amount.

11

(vi) Lender shall receive payments of amounts of principal of and interest with respect to the LIBOR Rate Loans free and clear of, and without deduction for, any Taxes. If (A) Lender shall be subject to any Tax in respect of any LIBOR Rate Loans or any part thereof or, (B) Borrower shall be required to withhold or deduct any Tax from any such amount, the LIBOR Rate applicable to such LIBOR Rate Loans shall be adjusted by Lender to reflect all additional costs incurred by Lender in connection with the payment by Lender or the withholding by Borrower of such Tax and Borrower shall provide Lender with a statement detailing the amount of any such Tax actually paid by Borrower. Determination by Lender of the amount of such costs shall be conclusive, absent manifest error. If after any such adjustment any part of any Tax paid by Lender is subsequently recovered by Lender, Lender shall reimburse Borrower to the extent of the amount so recovered. A certificate of an officer of Lender setting forth the amount of such recovery and the basis therefor shall be conclusive, absent manifest error.

(vii) Each request for LIBOR Rate Revolving Loan shall be in an amount not less than Five Hundred Thousand and No/100 Dollars ($500,000.00), and in integral multiples of Fifty Thousand and No/100 Dollars ($50,000.00). Each request for LIBOR Rate CapEx Loan shall be in an amount not less than Fifty Thousand and No/100 Dollars ($50,000.00), and in integral multiples of, One Thousand and No/100 Dollars ($1,000.00). Each request for a LIBOR Rate Term C Loan shall be in an amount not less than One Hundred Thousand and No/100 Dollars ($100,000.00), and in integral multiples of, One Thousand and No/100 Dollars ($1,000.00).

(viii) Unless otherwise specified by Borrower, all Loans shall be Prime Rate Loans.

(ix) No more than six (6) Interest Periods may be in effect with respect to outstanding LIBOR Rate Revolving Loans and LIBOR Rate Term C Loans at any one time. No more than one (1) Interest Period may be in effect with respect to outstanding LIBOR Rate CapEx Loans at any one time.”

        9.       Term. The reference contained in Section 10(i) to “July 1, 2005” is hereby deleted and replaced with “July 1, 2007".

        10.     Prepayment Premium. The last sentence of Section 10(i) is hereby deleted in its entirety and replaced with the following:

12

“If, during the Term of this Agreement, the Revolving Loan facility is terminated by Borrowers or this Agreement is terminated as a result of the occurrence of an Event of Default, then the Borrowers agree to repay and satisfy in full all of the Liabilities, and additionally, as a prepayment fee, the Borrowers shall pay to Agent an amount equal to (i) three percent (3%) of the Maximum Loan Limit, if such prepayment occurs at anytime on or prior to July 1, 2005 and (ii) two percent (2%) of the Maximum Loan Limit if such prepayment occurs at any time prior to the date thirty (30) days prior to the last day of the Term but after July 1, 2005.”

        11.     Use of Proceeds. Section 12(g) of the Loan Agreement is hereby deleted in its entirety and replaced with the following:

“ (g)  Use of Proceeds. All monies and other property obtained by any Borrower from Agent pursuant to this Agreement shall be used solely as follows: (a) the proceeds of the initial Loans shall be used to refinance all existing indebtedness of each Borrower or any Guarantor owing to South Trust Bank; (b) a portion of Term Loan C shall be used to repay Borrowers’ outstanding obligations in under Term Loan A and (c) the proceeds of the remainder of Term Loan C and all other Loans shall be used for working capital and general corporate purposes.”

        12.     Financial Covenants. Section 14 of the Loan Agreement is hereby deleted in its entirety and replaced with the following::

14. FINANCIAL COVENANTS. MTS and its Subsidiaries shall maintain and keep in full force and effect each of the financial covenants set forth below:

(a)  Tangible Net Worth. MTS and its Subsidiaries on a consolidated basis shall maintain at all times during each time period set forth below a Tangible Net Worth of not less than the amount set forth below opposite each such time period:

13

Period	Tangible Net Worth
As of March 31, 2004	$800,000 plus the greater of (i) $4,600,000 and (ii) 95% of Tangible Net Worth at March 31, 2003 (the "2004 Tangible Net Worth Requirement")
As of April 1, 2004 and at all times through and including June 29, 2004	$7,478,000.00
As of June 30, 2004 and at all times through and including September 29, 2004	$6,678,000.00
As of September 30, 2004 and at all times through and including March 30, 3005	$ 6,705,000.00
As of March 31, 2005	$7,105,000.00 (the "2005 Tangible Net Worth Requirement")
As of April 1, 2005 and at all times through and including September 29, 2005	the greater of (i) the 2005 Tangible Net Worth Requirement and (ii) 95% of Tangible Net Worth at March 31, 2005
As of September 30, 2005 and at all times through and including March 30, 2006	(i) the 2005 Tangible Net Worth Requirement and (ii) 95% of Tangible Net Worth at March 31, 2005
As of March 31, 2006	$800,000 plus the greater of (i) the 2005 Tangible Net Worth Requirement and (ii) 95% of Tangible Net Worth at March 31, 2005 (the "2006 Tangible Net Worth Requirement")
As of April 1, 2006 and at all times through and including March 30, 2007	the greater of (i) the 2006 Tangible Net Worth Requirement and (ii) 95% of Tangible Net Worth at March 31, 2006
As of March 31, 2007	$800,000 plus the greater of(i) the 2006 Tangible Net Worth Requirement and (ii) 95% of Tangible Net Worth at March 31, 2006 (the "2007 Tangible Net Worth Requirement")
As of April 1, 2007 and at all times thereafter	the greater of (i) the 2007 Tangible Net Worth Requirement and (ii) 95% of Tangible Net Worth at March 31, 2007

(b)  Debt Service Coverage Ratio. MTS and its Subsidiaries on a consolidated basis will maintain a Debt Service Coverage Ratio for each time period set forth below of not less than the ratio set forth below opposite each such time period:

14

Measuring Period	Debt Service Coverage Ratio
Fiscal quarter ending June 30, 2004	1.25:1.00
Two fiscal quarters ending September 30, 2004	1.25:1.00
Three fiscal quarters ending December 31, 2004	1.25:1.00
Four fiscal quarters ending March 31, 2005	1.25:1.00
Fiscal quarter ending June 30, 2005 and as of the end of each fiscal quarter      thereafter, in each case together with the three preceding fiscal quarters	1.25:1.00

(c)  Capital Expenditure Limitations. MTS and its Subsidiaries on a consolidated basis shall not make Capital Expenditures in excess of (i) Three Million Dollars ($3,000,000.00) during the Fiscal Year ending March 31, 2005 and (ii) One Million Eighty Hundred Thousand Dollars ($1,800,000.00) during any Fiscal Year thereafter.

(d)  Availability. Borrowers will maintain a Minimum Net Availability of not less than Seven Hundred Fifty Thousand Dollars ($750,000); provided, however, that Minimum Net Availability may be less than Seven Hundred Fifty Thousand Dollars ($750,000) for a total of five (5) days during each calendar month.”

        13.     Deletion of Material Adverse Effect Provisions

(a)  Section 12(b)(vii) of the Loan Agreement is hereby deleted in its entirety and replaced with the following:

“(vii) Default. Promptly advise Agent of the occurrence of any Default or Event of Default hereunder or under any of the Subordinated Debt Documents or any of the Preferred Stock Documents.”

(b)  Section 15(c) of the Loan Agreement is hereby deleted in its entirety and replaced with the following:

"(c)  Breaches or Amendments of Other Obligations. A default or event of default or breach under, or other failure of any Obligor to perform, keep or observe any of the covenants, conditions, promises, agreements or obligations of such Obligor (after the expiration of any applicable cure or grace periods) under: (i) any of the Subordinated Debt Documents or Preferred Stock Documents shall be amended or modified in any respect prohibited hereunder without Agent’s prior written consent; or (ii) any other agreement with any Person, if such failure is reasonably likely to have a Material Adverse Effect.”

(c)  Section 15(p) of the Loan Agreement is hereby deleted in its entirety and replaced with the following:

“(p)  Intentionally Deleted.”

15

(d)  Section 17(o) of the Loan Agreement is hereby deleted in its entirety and replaced with the following:

“(o)  Intentionally Deleted.”

        14.     Change of Address. The reference to “c/o LaSalle Business Credit, Inc., 1735 Market Street, 6^th Floor, Philadelphia, PA 19103, Attention: Jeffrey M. Joslin, facsimile number: (267) 386-8844” set forth in Section 19 of the Loan Agreement is hereby deleted in its entirety and replaced with the “c/o LaSalle Business Credit, LLC, 2 Commerce Square, Suite 2610, Philadelphia, PA 19103".

        15.     Notes. Contemporaneously with the execution of this Amendment, Borrower shall execute and deliver to Agent an Amended and Restated Revolving Note in the face amount of Eight Million Five Hundred Thousand Dollars ($8,500,000.00) (the “Amended and Restated Note”) and Term Note C in the face amount of One Million Two Hundred Thousand Dollars ($1,200,000.00) (the “Term Note C”), each of which shall be in form and content acceptable to Agent.

        16.     Merger and Name Change

(a) Borrowers have informed Agent that Borrowers are contemplating the following actions: (i) an amendment to the articles of incorporation of MTS in order to change the name of MTS to “MTS Medication Technologies” (the “Name Change”) and (ii) subsequent to the Name Change, the merger of Packaging with and into MTS (the “Merger”). MTS, a Delaware corporation, will be the corporation surviving the Merger. Agent and Lender hereby consent to the Name Change and the Merger and, solely for the purpose of avoiding the occurrence of a Default or an Event of Default which could be caused by the Name Change and/or the Merger, waive Borrowers’ compliance with those provisions of the Loan Agreement and the Other Agreements which would prohibit the Name Change and/or the Merger. Agent’s and Lender’s consent and waiver is contingent upon the execution and delivery to Agent of the following documents:

(i) Copy of the authorizing resolutions regarding the Name Change, certified to be true and correct by the Secretary of MTS;

(ii) Copy of the articles of amendment to the articles of incorporation of MTS, certified to be true and correct by the Secretary of MTS;

(iii) Copy of the authorizing resolutions regarding the Merger, certified to be true and correct by the Secretary of MTS and Packaging, as applicable;

(iv) Evidence that the state of formation of the surviving company is the State of Delaware.

(v) Copy of the articles of merger, certified to be true and correct by the Secretary of MTS and Packaging; and

(vi) Copy of the by-laws of the company surviving the merger, certified to be true and correct by the Secretary of such company.

(b) The foregoing consent and waiver is given solely in connection with the Name Change and the Merger and shall not be deemed to be an agreement, obligation or commitment by Agent or Lender to consent to any other transactions which would be prohibited by the terms and conditions of the Loan Agreement or any of the Other Agreements.

16

        17.     Conditions Precedent. In addition to all of the other terms and conditions set forth herein, this Amendment is contingent upon the following:

(a) Immediately after giving effect to the repayment in full of the Subordinated Indebtedness, the Borrowers shall have Minimum Net Availability of not less than Seven Hundred Fifty Thousand Dollars ($750,000); and

(b) Agent shall have received satisfactory confirmation of the amount required to repay the Subordinated Indebtedness in full as of the date hereof.

        18.     Amendment/References. The Loan Agreement and the Other Agreements are hereby amended to be consistent with the terms of this Amendment. All references in the Loan Agreement and the Other Agreements to (a) the “Liabilities” shall include, without limitation, all sums due in connection with Term Loan C, (b) the “Loan Agreement” shall mean the Loan Agreement as amended hereby; (c) the “Loans” shall include, without limitation, Term Loan C and (d) the “Other Agreements” shall include, without limitation, this Amendment, the Amended and Restated Note, Term Note C and all other instruments or agreements executed pursuant to or in connection with the terms hereof.

        19.     Amendment Fee. Contemporaneously with the execution hereof, and in addition to all other sums due from Borrowers to Agent and/or Lender, Borrowers shall pay to Agent an amendment fee in an amount equal to Ninety-Five Thousand Dollars ($95,000.00) (the “Amendment Fee”). The Amendment Fee may be debited from any account of either Borrower maintained with Agent, Lender or LaSalle Bank or charged to the Revolving Loan.

        20.     Release. Borrowers and each Guarantor acknowledge and agree that it has no claims, suits or causes of action against Agent or Lender and hereby remises, releases and forever discharges Agent, Lender, their officers, directors, shareholders, employees, agents, successors and assigns from any claims, suits or causes of action whatsoever, in law or equity, which either Borrower or any Guarantor has or may have arising from any act, omission or otherwise, at any time up to and including the date of this Amendment.

        21.     Additional Documents; Further Assurances. Borrowers shall take such other actions and execute and deliver to Agent, or to cause to be executed and delivered to Agent, at the sole cost and expense of Borrowers, from time to time, all documents, agreements, statements, certificates and information as Agent shall reasonably request to evidence or effect the terms of the Loan Agreement, as amended, or any of the Other Agreements, as amended, or to enforce or protect Agent’s interest in all Collateral or to evidence or effect the Name Change and/or the Merger. All such documents, agreements, statements, certificates and information shall be in form and content acceptable to Agent.

        22.     Further Agreements and Representations. Each Borrower does hereby:

(a) ratify, confirm and acknowledge that, as amended hereby, the Loan Agreement and all Other Agreements are valid, binding and in full force and effect;

(b) covenant and agree to perform all obligations of such Borrower contained herein, in the Loan Agreement and in the Other Agreements, as amended hereby;

(c) acknowledge and agree that as of the date hereof, such Borrower has no defense, set-off, counterclaim or challenge against the payment of any sums owing under the Loan Agreement or any of the Other Agreements or the enforcement of any of the terms or conditions thereof;

17

(d) represent and warrant that no Default or Event of Default exists under the Loan Agreement;

(e) acknowledge and agree that nothing contained herein and no actions taken pursuant to the terms hereof is intended to constitute a novation of the Loan Agreement or any of the Other Agreements, and does not constitute a release, termination or waiver of any of the liens, security interests, rights or remedies granted to Agent therein, which liens, security interests, rights and remedies are hereby ratified, confirmed, extended and continued as security for the Liabilities as amended; and

(f) acknowledge and agree that such Borrower’s failure to comply with or perform any of its covenants, agreements or obligations contained in this Amendment shall constitute an Event of Default under the Loan Agreement and each of the Other Documents as amended.

        23.     Fees, Costs, Expenses and Expenditures. Each Borrower agrees to pay all of Agent’s expenses in connection with the review, preparation, negotiation, documentation and closing of this Amendment and the consummation of the transactions contemplated hereunder, including, without limitation, fees, disbursements, expenses and disbursements of counsel retained by Agent and all fees related to filings, recording of documents and searches, whether or not the transactions contemplated hereunder are consummated.

        24.     Inconsistencies. To the extent of any inconsistency between the terms and conditions of this Amendment and the terms and conditions of the Loan Agreement or the Other Agreements, the terms and conditions of this Amendment shall prevail. All terms and conditions of the Loan Agreement and the Other Agreements not inconsistent herewith shall remain in full force and effect and are hereby ratified and confirmed by Borrowers.

        25.     Binding Effect. This Amendment shall be binding upon and inure to the benefit of the parties hereto and their successors and assigns.

        26.     Governing Law. This Amendment shall be governed by and construed in accordance with the laws of the Commonwealth of Pennsylvania.

        27.     Headings. The headings of the articles, sections, paragraphs and clauses of this Amendment are inserted for convenience only and shall not be deemed to constitute a part of this Amendment.

[SIGNATURES ON FOLLOWING PAGE]

18

        IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be executed effective as of the day and year first above written.

MEDICAL TECHNOLOGY SYSTEMS, INC.

By:

Name/Title:

MTS PACKAGING SYSTEMS, INC.

By:

Name/Title:

LASALLE BUSINESS CREDIT, LLC, successor by merger to

LaSalle Business Credit, Inc., as Agent for Standard

Federal Bank National Association

By:

Name/Title:

STANDARD FEDERAL BANK NATIONAL ASSOCIATION

By:

Name/Title:

21

RATIFICATION AND CONFIRMATION OF GUARANTY

        The undersigned, intending to be legally bound hereby, (1) acknowledge and agree to the foregoing Amendment, (2) agree to be bound by the foregoing Amendment and (3) agree that those certain Continuing Unconditional Guaranty Agreements from each of the undersigned to Agent dated June 26, 2002 are in full force and effect.

MEDICATION MANAGEMENT TECHNOLOGIES, INC.

By:

Name/Title:

MEDICATION MANAGEMENT SYSTEMS, INC.

By:

Name/Title:

MEDICAL TECHNOLOGY LABORATORIES, INC.

By:

Name/Title:

20

EX-10.40

TERM NOTE C

Executed as of the ___ day of June, 2004 and delivered in Philadelphia, PA. Amount $1,200,000.00

        FOR VALUE RECEIVED AND INTENDING TO BE LEGALLY BOUND, the Undersigned (jointly and severally, if more than one) promises to pay to the order of STANDARD FEDERAL BANK, NATIONAL ASSOCIATION (hereinafter, together with any holder hereof, called “Lender”), at the main office of Agent (as hereinafter defined), the principal sum of One Million Two Hundred Thousand Dollars ($1,200,000.00). The Undersigned (jointly and severally, if more than one) further promises to pay interest on the outstanding principal amount hereof on the dates and at the rates provided in the Loan Agreement from the date hereof until payment in full hereof.

        This Note is referred to in and was delivered pursuant to that certain Loan and Security Agreement dated June 26, 2002 among LaSalle Business Credit, Inc. (“Agent”), Lender, the Undersigned and the Guarantors named therein (as amended by that certain First Amendment to Loan and Security Agreement dated July 18, 2003, that certain Second Amendment to Loan and Security Agreement dated of even date herewith and as it may be further amended, modified or supplemented from time to time, together with all exhibits thereto, the “Loan Agreement”), and evidences the Undersigned’s Liabilities in respect of Term Loan C. All terms which are capitalized and used herein (which are not otherwise defined herein) shall have the meaning ascribed to such terms in the Loan Agreement.

        Principal hereunder and interest thereon shall be payable pursuant to the terms of the Loan Agreement.

        The Undersigned (and each one of them, if more than one) hereby authorizes the Agent to charge any account of the Undersigned (and each one of them, if more than one) for all sums due hereunder. If payment hereunder becomes due and payable on a Saturday, Sunday or legal holiday under the laws of the United States or the Commonwealth of Pennsylvania, the due date thereof shall be extended to the next succeeding Business Day, and interest shall be payable thereon at the rate specified during such extension. Credit shall be given for payments made in the manner and at the times provided in the Loan Agreement. It is the intent of the parties that the rates of interest and other charges to the Undersigned under this Note shall be lawful; therefore, if for any reason the interest or other charges payable hereunder are found by a court of competent jurisdiction, in a final determination, to exceed the limit which Agent or Lender may lawfully charge the Undersigned, then the obligation to pay interest or other charges shall automatically be reduced to such limit and, if any amount in excess of such limit shall have been paid, then such amount shall be refunded to the Undersigned.

        The Undersigned (and each one of them, if more than one) waives the benefit of any law that would otherwise restrict or limit Agent or Lender in the exercise of its right, which is hereby acknowledged, to set-off against the Liabilities, without notice and at any time hereafter, any indebtedness matured or unmatured owing from Lender or Agent to the Undersigned (or any one of them). The Undersigned (and each one of them, if more than one) waives every counterclaim (other than those that are not permitted to be brought in separate actions) or setoff which the Undersigned (or any one of them) may now have or hereafter may have to any action by Agent and/or Lender in enforcing this Note and/or any of the other Liabilities, or in enforcing Agent’s and/or Lender’s rights in the Collateral and ratifies and confirms whatever Agent and/or Lender may do pursuant to the terms hereof and of the Loan Agreement and with respect to the Collateral and agrees that neither Agent nor Lender shall be liable for any error in judgment or mistakes of fact or law, except for gross negligence or willful misconduct.

        The Undersigned, any other party liable with respect to the Liabilities and any and all endorsers and accommodation parties, and each one of them, if more than one, waive any and all presentment, demand, notice of dishonor, protest, and all other notices and demands in connection with the enforcement of Agent’s and Lender’s rights hereunder.

        The loans evidenced hereby have been made and this Note has been delivered at Philadelphia, Pennsylvania. THIS NOTE SHALL BE GOVERNED AND CONTROLLED BY THE INTERNAL LAWS OF THE COMMONWEALTH OF PENNSYLVANIA AS TO INTERPRETATION, ENFORCEMENT, VALIDITY, CONSTRUCTION, EFFECT, AND IN ALL OTHER RESPECTS, INCLUDING WITHOUT LIMITATION, THE LEGALITY OF THE INTEREST RATES AND OTHER CHARGES, and shall be binding upon the Undersigned (and each one of them, if more than one) and the Undersigned’s legal representatives, successors and assigns (and each one of them, if more than one). If this Note contains any blanks when executed by the Undersigned (or any one of them, if more than one), the Agent or Lender is hereby authorized, without notice to the Undersigned (or any one of them, if more than one) to complete any such blanks according to the terms upon which the loan or loans were granted. Wherever possible, each provision of this Note shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Note shall be prohibited by or be invalid under such law, such provision shall be severable, and be ineffective to the extent of such prohibition or invalidity, without invalidating the remaining provisions of this Note. If more than one party shall execute this Note, the term “Undersigned” as used herein shall mean all parties signing this Note, and each one of them, and all such parties, their respective legal representatives, successors and assigns, shall be jointly and severally obligated hereunder.

        To induce the Lender to make the loan evidenced by this Note, the Undersigned (and each one of them, if more than one) (i) irrevocably agrees that, subject to Agent’s and/or Lender’s sole and absolute election, all actions arising directly or indirectly as a result or in consequence of this Note or any other agreement with the Agent, or the Collateral, shall be instituted and litigated only in courts having situs in the City of Philadelphia, Pennsylvania; (ii) hereby consents to the exclusive jurisdiction and venue of any State or Federal Court located and having its situs in said city; and (iii) waives any objection based on forum non-conveniens. IN ADDITION, LENDER, AGENT AND THE UNDERSIGNED (OR ANY ONE OF THEM, IF MORE THAN ONE) HEREBY WAIVE TRIAL BY JURY IN ANY ACTION OR PROCEEDING WHICH PERTAINS DIRECTLY OR INDIRECTLY TO THIS NOTE, THE LIABILITIES, THE COLLATERAL, ANY ALLEGED TORTIOUS CONDUCT BY THE UNDERSIGNED (OR ANY ONE OF THEM, IF MORE THAN ONE) OR LENDER OR AGENT OR WHICH IN ANY WAY, DIRECTLY OR INDIRECTLY, ARISES OUT OF OR RELATES TO THE RELATIONSHIP BETWEEN THE UNDERSIGNED ON THE ONE HAND (OR ANY ONE OF THEM IF MORE THAN ONE), AND LENDER OR AGENT ON THE OTHER. In addition, the Undersigned agrees that all service of process shall be made as provided in the Loan Agreement.

2

        As used herein, all provisions shall include the masculine, feminine, neuter, singular and plural thereof, wherever the context and facts require such construction and in particular the word “Undersigned” shall be so construed.

        IN WITNESS WHEREOF, the Undersigned has executed this Note on the date above set forth.

MEDICAL TECHNOLOGY SYSTEMS, INC.

By:

Name/Title:

Address:

MTS PACKAGING SYSTEMS, INC.

By:

Name/Title:

Address:

EX-10.41

AMENDED AND RESTATED REVOLVING CREDIT NOTE

Executed as of the Amount _______ day of June, 2004 and delivered in Philadelphia, PA. Amount $8,500,000.00

        FOR VALUE RECEIVED AND INTENDING TO BE LEGALLY BOUND, the Undersigned (jointly and severally, if more than one) promises to pay to the order of STANDARD FEDERAL BANK, NATIONAL ASSOCIATION (hereinafter, together with any holder hereof, called “Lender”), at the main office of Agent (as hereinafter defined), the principal sum of Eight Million Five Hundred Thousand Dollars ($8,500,000.00) plus the aggregate unpaid principal amount of all loans and advances made by Lender or Agent to the Undersigned (or any one of them, if more than one) pursuant to and in accordance with Subsection 2(a) of the Loan Agreement (as hereinafter defined) in excess of such amount, or, if less, the aggregate unpaid principal amount of all loans and advances made by Lender to the Undersigned (or any one of them, if more than one) pursuant to and in accordance with Subsection 2(a) of the Loan Agreement. The Undersigned (jointly and severally, if more than one) further promises to pay interest on the outstanding principal amount hereof on the dates and at the rates provided in the Loan Agreement from the date hereof until payment in full hereof.

        This Note is referred to in and was delivered pursuant to that certain Loan and Security Agreement dated June 26, 2002 among LaSalle Business Credit, Inc. (“Agent”), Lender, the Undersigned and the Guarantors named therein (as amended by that certain First Amendment to Loan and Security Agreement dated July 18, 2003, that certain Second Amendment to Loan and Security Agreement dated of even date herewith and as it may be further amended, modified or supplemented from time to time, together with all exhibits thereto, the “Loan Agreement”), and evidences the Undersigned’s Liabilities in respect of Revolving Loans. All terms which are capitalized and used herein (which are not otherwise defined herein) shall have the meaning ascribed to such terms in the Loan Agreement.

        The outstanding principal balance hereunder and all accrued and unpaid interest thereon shall be due and payable in full when and as provided for in the Loan Agreement.

        The Undersigned (and each one of them, if more than one) hereby authorizes the Agent to charge any account of the Undersigned (and each one of them, if more than one) for all sums due hereunder. If payment hereunder becomes due and payable on a Saturday, Sunday or legal holiday under the laws of the United States or the Commonwealth of Pennsylvania, the due date thereof shall be extended to the next succeeding Business Day, and interest shall be payable thereon at the rate specified during such extension. Credit shall be given for payments made in the manner and at the times provided in the Loan Agreement. It is the intent of the parties that the rates of interest and other charges to the Undersigned under this Note shall be lawful; therefore, if for any reason the interest or other charges payable hereunder are found by a court of competent jurisdiction, in a final determination, to exceed the limit which Agent or Lender may lawfully charge the Undersigned, then the obligation to pay interest or other charges shall automatically be reduced to such limit and, if any amount in excess of such limit shall have been paid, then such amount shall be refunded to the Undersigned.

        The Undersigned (and each one of them, if more than one) waives the benefit of any law that would otherwise restrict or limit Agent or Lender in the exercise of its right, which is hereby acknowledged, to set-off against the Liabilities, without notice and at any time hereafter, any indebtedness matured or unmatured owing from Agent or Lender to the Undersigned (or any one of them). The Undersigned (and each one of them, if more than one) waives every counterclaim (other than those that are not permitted to be brought in separate actions) or setoff which the Undersigned (or any one of them) may now have or hereafter may have to any action by Agent and/or Lender in enforcing this Note and/or any of the other Liabilities, or in enforcing Agent’s and/or Lender’s rights in the Collateral and ratifies and confirms whatever Agent and/or Lender may do pursuant to the terms hereof and of the Loan Agreement and with respect to the Collateral and agrees that neither Agent nor Lender shall be liable for any error in judgment or mistakes of fact or law except for gross negligence or willful misconduct.

        The Undersigned, any other party liable with respect to the Liabilities and any and all endorsers and accommodation parties, and each one of them, if more than one, waive any and all presentment, demand, notice of dishonor, protest, and all other notices and demands in connection with the enforcement of Agent’s and Lender’s rights hereunder.

        The loans evidenced hereby have been made and this Note has been delivered at Philadelphia, Pennsylvania. THIS NOTE SHALL BE GOVERNED AND CONTROLLED BY THE INTERNAL LAWS OF THE COMMONWEALTH OF PENNSYLVANIA AS TO INTERPRETATION, ENFORCEMENT, VALIDITY, CONSTRUCTION, EFFECT, AND IN ALL OTHER RESPECTS, INCLUDING WITHOUT LIMITATION, THE LEGALITY OF THE INTEREST RATES AND OTHER CHARGES, and shall be binding upon the Undersigned (and each one of them, if more than one) and the Undersigned’s legal representatives, successors and assigns (and each one of them, if more than one). If this Note contains any blanks when executed by the Undersigned (or any of them, if more than one), the Agent or Lender is hereby authorized, without notice to the Undersigned (or any of them, if more than one) to complete any such blanks according to the terms upon which the loan or loans were granted. Wherever possible, each provision of this Note shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Note shall be prohibited by or be invalid under such law, such provision shall be severable, and be ineffective to the extent of such prohibition or invalidity, without invalidating the remaining provisions of this Note. If more than one party shall execute this Note, the term “Undersigned” as used herein shall mean all parties signing this Note, and each one of them, and all such parties, their respective legal representatives, successors and assigns, shall be jointly and severally obligated hereunder.

        To induce the Lender to make, or continued to make, the loan evidenced by this Note, the Undersigned (and each one of them, if more than one) (i) irrevocably agrees that, subject to Agent’s and Lender’s sole and absolute election, all actions arising directly or indirectly as a result or in consequence of this Note or any other agreement with the Agent, or the Collateral, shall be instituted and litigated only in courts having situs in the City of Philadelphia, Pennsylvania; (ii) hereby consents to the exclusive jurisdiction and venue of any State or Federal Court located and having its situs in said city; and (iii) waives any objection based on forum non-conveniens. IN ADDITION, AGENT, LENDER AND THE UNDERSIGNED (OR ANY ONE OF THEM, IF MORE THAN ONE) HEREBY WAIVE TRIAL BY JURY IN ANY ACTION OR PROCEEDING WHICH PERTAINS DIRECTLY OR INDIRECTLY TO THIS NOTE, THE LIABILITIES, THE COLLATERAL, ANY ALLEGED TORTIOUS CONDUCT BY THE UNDERSIGNED (OR ANY ONE OF THEM, IF MORE THAN ONE), AGENT OR LENDER OR WHICH IN ANY WAY, DIRECTLY OR INDIRECTLY, ARISES OUT OF OR RELATES TO THE RELATIONSHIP BETWEEN THE UNDERSIGNED, ON THE ONE HAND (OR ANY ONE OF THEM, IF MORE THAN ONE), AND AGENT AND LENDER ON THE OTHER. In addition, the Undersigned agrees that all service of process shall be made as provided in the Loan Agreement.

        As used herein, all provisions shall include the masculine, feminine, neuter, singular and plural thereof, wherever the context and facts require such construction and in particular the word “Undersigned” shall be so construed.

        This Amended and Restated Revolving Credit Note constitutes the increase, amendment and restatement of that certain Revolving Credit Note dated June 26, 2002 in the face amount of Five Million Dollars ($5,000,000.00) executed by the Undersigned payable to the order of Lender (the “Prior Note”), and, as such, is secured by all liens, security interests, assignments, pledges, rights and remedies securing the Prior Note, and evidences all indebtedness previously advanced and unpaid under the Prior Note. Nothing contained herein shall be deemed to constitute a novation, termination, waiver, release, satisfaction, accord or accord and satisfaction of the Prior Note or any indebtedness evidenced thereby.

        IN WITNESS WHEREOF, the Undersigned, has executed this Note on the date above set forth.

MEDICAL TECHNOLOGY SYSTEMS, INC.

By:

Name/Title:

Address:

MTS PACKAGING SYSTEMS, INC.

By:

Name/Title:

Address: