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

FORM 10-K

||X| | Annual
Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
|--- | ------------------------------------------------------------------------------------

| | For fiscal year ended March 31, 2006
| | ------------------------------------

# OR

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

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

Commission File Number:   
0-16594

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

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

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

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

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

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

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

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

Indicate by check mark if the Registrant
is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act   .  
 [  ]   Yes       [X]    No

Indicate by check mark if the Registrant is not
required to file reports pursuant to Section 13 of Section 15(d) of the Act.   [  ] 
  Yes      [X]    No

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|

Indicate by check mark whether the
Registrant is a large accelerated  filer, an accelerated  filer, or a  non-accelerated  filer.  See
definition of  "accelerated  filer and large  accelerated  filer" in Rule 12b-2 of the Exchange Act.  (Check One):
   Large Accelerated Filer     [  ]        
Accelerated Filer     [  ]        
Non-Accelerated Filer     [X]

Indicate  by check mark  whether the  Registrant
is a shell  company (as defined in Rule 12b-2 of the Act).   .  
 [  ]   Yes       [X]    No

Aggregate market value of voting Common
Stock held by non-affiliates was approximately $23,300,000 as of September 30, 2005

The number of shares outstanding of
the Registrant's  Common Stock,  $.01 par value, was 6,025,089 as of July 6, 2006.

# Documents Incorporated
by Reference

Portions of
the Registrant's definitive Proxy Statement, to be filed in connection with the
Registrant's 2006 Annual Meeting of Stockholders, is incorporated by reference into Part
III, Items 10, 11, 12, 13 and 14 of this filing.

---

# MTS MEDICATION
TECHNOLOGIES, INC.

# INDEX

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

i.

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# PART I

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

You
should specifically consider the various factors identified in this 10-K, including the
matters set forth in Item 1. Business; Item 3. Legal Proceedings;
Item 7. Managements Discussion and Analysis of Financial Condition and Results
of Operations; Item 9A. Controls and Procedures; and the Notes to
Consolidated Financial Statements that could cause actual results to differ materially
from those indicated in any forward-looking statements. Other factors that could
contribute to or cause such differences include, but are not limited to, unanticipated
increases in operating costs, labor disputes, capital requirements, increases in borrowing
costs, product demand, pricing, market acceptance, intellectual property rights and
litigation, risks in product and technology development and other risk factors detailed in
our SEC filings.

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

In
this 10-K, unless otherwise indicated, the terms we, us,
our, registrant, MTSP, MTS Limited and
Med Tech refer to MTS Medication Technologies, Inc. (MTS),
and its subsidiaries.

# ITEM 1.     BUSINESS

Introduction

We
were incorporated in Delaware in March 1984. We are a holding company that operates
through our subsidiaries, MTS Packaging Systems, Inc. (MTSP), MTS
Medication Technologies International, Ltd. (MTS Limited) and BAF
Printers, Ltd. (BAF). BAF is a wholly owned subsidiary of MTS Limited. MTS
primarily manufactures and sells consumable medication punch cards, packaging equipment
and ancillary products throughout the United States, Canada and the United Kingdom. Our
customers are predominantly institutional pharmacies that supply nursing homes, assisted
living and correctional facilities with prescription medications for their patients. MTS
manufactures its proprietary consumable punch cards and most of our packaging equipment in
our own facilities. This manufacturing process uses integrated equipment for manufacturing
the consumable medication punch cards. The consumable medication punch cards and packaging
equipment are designed to provide a cost effective method for pharmacies to dispense
medications. MTSs medication dispensing systems and products provide innovative
methods for dispensing medications in disposable packages. MTS Limited distributes
products for MTS in the United Kingdom. BAF manufactures and sells prescription bags and
labels in the United Kingdom. We currently serve more than 4,500 institutional pharmacies
in the long-term care and correctional facility markets, both domestically and
internationally.

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

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Products

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

In
February 2006, we acquired BAF, a manufacturer of prescription bags and labels sold to
pharmacies in the United Kingdom.

Our
customers use MTSs equipment for dispensing medication in consumable 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, and
promotes medication compliance.

We
offer our customers a wide variety of equipment that includes machines that are used for
manual or semi-automated filling of punch cards and sophisticated automated machines, such
as our OnDemand® system, which can be interfaced with the pharmacys inventory
control and filling systems.

The
retail price of MTSs equipment 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 $300 per 1,000 cards and blisters, depending upon the size,
design and volume of cards ordered by a customer. MTS has placed approximately 3,000
medication-dispensing systems with pharmacy clientele since our inception. MTS also sells
prescription labels and ancillary supplies designed to complement sales of consumable
medication punch cards.

Recent Developments

In
February 2006, we acquired BAF, a manufacturer of prescription bags and labels sold to
pharmacies in the United Kingdom. In February 2006, the Company acquired all of the
outstanding shares of BAF Printers, Ltd. in Leeds, England. The acquisition was made to
assist the Company with its plans to expand operations in the United Kingdom. The total
purchase was $2,349,000 and included $1,034,000 of cash paid, $1,148,000 of assumed
liabilities and $167,000 of transaction fees and expenses. The purchase price was funded
with the proceeds of an advance on the Companys revolving line of credit. The
acquisition was accounted for under the purchase method of accounting and accordingly, the
purchase price was allocated based on the fair value of the assets acquired and
liabilities assumed.

In
September 2005, we introduced a new product used to dispense emergency, first dose
medication and narcotics in a nursing home. MedLocker replaces very primitive
dispensing methods currently used in nursing homes for these applications. The MedLocker
system interfaces with the other medication dispensing systems used at the nursing home
and sells for approximately $15,000.

Research and Development

We
expended approximately $432,000, $139,000 and $161,000 on research and development
activities for each of the fiscal years ended March 31, 2006, 2005 and 2004, respectively.
In addition, we directed our product development efforts primarily towards the completion
of several new versions of our OnDemand machines and the development of MedLocker during
the fiscal year ended March 31, 2006. We capitalized approximately $546,000 of product
development costs during the fiscal year ended March 31, 2006. The majority of these
expenditures were made for the OnDemand system and MedLocker project.

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Manufacturing Processes

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

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

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

Markets and Customers

The
primary customers for MTSs proprietary packaging equipment and the related
consumable 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.

MTSs
products are sold throughout the United States primarily through its sales organization
and some independent sales representatives. In addition, MTS Limited and BAF distribute
products in the United Kingdom. Sales to countries outside the United States represent
less than 11% of the total revenue in fiscal 2006. In the fiscal year ended March 31,
2006, sales to our two largest institutional pharmacy customers, Omnicare, Inc.® and
PharMerica, Inc., represented approximately 22% of the Companys total net sales. In
addition, we sell our consumable products to drug wholesalers who in turn resell the
products to pharmacies. Sales to three major wholesalers, McKesson, Cardinal Health and
Amerisource Bergen®, represented approximately 19% of our net sales in the fiscal year
ended March 31, 2006.

Financial Information
About Segments

While
the services provided, the manufacturing process, the class of customers and the order
fulfillment process is similar across manufacturing locations, we evaluate our business
performance on a geographic basis. Accordingly, our reportable operating segments consist
of two geographic regions  the United States and United Kingdom  to reflect
how we manage our business. See Note 20 to the Consolidated Financial Statements 
Segment Information.

Competition

The
pharmacy customers of MTS supply prescribed medications to nursing homes, correctional
facilities and assisted living facilities, which are the primary market for MTSs
products. This market is highly competitive, and there are a few barriers to entry. 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 may not be 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.

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

Proprietary Technology

In
June 2003, we purchased the rights to certain proprietary technology that had previously
been available through a license agreement with the Siegel Family Trust. Our CEO, Todd E.
Siegel, is the Trustee of the Siegel Family Trust. The proprietary technology is supported
by certain patents, which expire at various times through 2008.

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

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

Government Regulations

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

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.

Geographic Information

The
geographic information set forth in Note 20 to the Consolidated Financial Statements,
Segment Information, is hereby incorporated by reference into this Part I,
Item 1.

Employees

None
of our employees are covered by a collective bargaining agreement. We consider our
relationship with our employees to be good. We employ 175 people in the United States and
25 people are employed in the United Kingdom.

Risk Factors

You
should be aware that the risks and uncertainties described below are not the only ones
affecting us or that could affect us in the future. Any of the risks and uncertainties
described below could have a material adverse effect on our business, results of
operations and financial condition.

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

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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 purchase 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.

We need to improve our
disclosure controls and procedures and internal control over financial reporting to
comply with SEC reporting requirements; public reporting obligations have put
significant demands on our financial, operational and management resources.

The
Public Company Accounting Oversight Board (PCAOB) defines a material weakness
as a single deficiency, or a combination of deficiencies, that results in more than a
remote likelihood that a material misstatement of the annual or interim financial
statements will not be prevented or detected.

As
of March 31, 2006, we reported two control deficiencies that, in the aggregate,
constituted a material weakness in internal control over preparation, review and
presentation and disclosure of our consolidated financial statements. Specifically, our
control deficiencies included: (i) a lack of an adequate number of personnel with
experience in financial reporting and control procedures necessary for SEC registrants;
and (ii) a lack of effective controls over revenue recognition associated with
certain shipments. These control deficiencies, in the aggregate, could result in a
misstatement to accounts and disclosures that is material to the annual or interim
financial statements that would not be prevented or detected.

These
material weaknesses will need to be addressed as part of the evaluation of our internal
controls over financial reporting pursuant to the Sarbanes-Oxley Act of 2002 and may
impair our ability to comply with Section 404 of the Sarbanes-Oxley Act of 2002.

While
we have taken the actions described under Item 9A. Controls and
Procedures to address the material weaknesses, additional measures may be necessary
and these actions may not be sufficient to address the issues identified by us or to
ensure that our internal controls over financial reporting are effective. If we are unable
to correct existing or future material weaknesses in internal controls over financial
reporting in a timely manner, we may not be able to record, process, summarize and report
financial information within the time periods specified in the rules and forms of the SEC.
This failure could harm our business and the market value of our securities and affect our
ability to access the capital markets. In addition, there could be a negative reaction in
the financial markets due to a loss of confidence in reliability of future financial
statements and SEC filings.

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.

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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 net sales, therefore, a reduction in sales to any one of our
customers could cause a significant decline in our net sales.

For
the fiscal year ended March 31, 2006, our 10 largest customers accounted for approximately
55% of our net sales, and our two largest customers accounted for approximately 22% of our
net sales. In addition, the three major drug wholesalers represent 19% of our net sales.
We are dependent upon the continued growth, viability and financial stability of our
customers whose industries have experienced consolidation, pricing and regulatory
pressures. We expect to continue to depend upon a relatively small number of customers for
a significant percentage of our net sales. Consolidation among our customers may further
reduce the number of customers that generate a significant percentage of our net sales and
exposes us to increased risks relating to dependence on a small number of customers. A
significant reduction in sales to any of our customers or a customer exerting significant
pricing and margin pressures on us, could 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 be assured that such suppliers will be
able to meet our future demand for raw materials, or that shortages of these raw materials
will not arise in the future. The failure of such suppliers to deliver such raw materials
on a timely basis could have a material adverse effect on our business, financial
condition and results of operations.

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

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

- hire, retain and expand our qualified technical personnel;
- maintain technological leadership;
- develop and market products that meet changing customer needs; and
- successfully anticipate or respond to technological changes in manufacturing processes on a cost-effective and timely basis.

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

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

We
manufacture substantially all of the products we sell. As a result, any prolonged
disruption in the operations of our manufacturing facility, whether due to technical or
labor difficulties, destruction of or damage to any facility or other reasons, could have
a material adverse effect on our business, financial condition and results of operations.
In this regard, our principal manufacturing facility is located in St. Petersburg, Florida
and is thus exposed to the risks of damage from certain weather conditions including,
without limitation: hurricanes, windstorms, and floods. If our facilities were to be out
of production for an extended period, our business, results of operations and financial
condition could 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. However, they are still vulnerable to hurricanes,
other storms, flood, fire, terrorist acts, earthquakes, power loss, telecommunications
failures, physical or software break-ins, computer viruses and similar events. If our
critical information systems fail or are otherwise unavailable, we would have to
accomplish these functions manually, which could temporarily impact our ability to
identify business opportunities quickly and to bill for services efficiently. In addition,
we depend on third party vendors for certain functions whose future performance and
reliability cannot be assured.

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 adversely
affect us.

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

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

We are prohibited from
paying dividends on our common stock.

We
have not paid any dividends on our common stock and do not anticipate declaring or paying
any dividends in the foreseeable future. The terms of our loan agreements prohibit us from
paying dividends on our common stock without the consent of our lenders.

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

As
of March 31, 2006, we had 6,017,005 shares of common stock outstanding. In addition, the
following shares of our common stock are issuable upon exercise or conversion of currently
outstanding securities:

- 1,048,600 shares of common stock are issuable upon exercise of currently outstanding common stock purchase options having
exercise prices ranging from $1.45 to $12.45;
- 5,900 shares of common stock are issuable upon exercise of currently outstanding common
stock purchase warrants having an exercise price of $1.88; and
- 847,457 shares of common stock are issuable upon conversion of 2,000 shares of
Series A Convertible Preferred Stock (the Series A Preferred Stock),
having an exercise price of $2.36.

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

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 be assured 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 be assured you that we
will not experience such losses in the future. We maintain insurance against product
liability claims, but we cannot be certain that such coverage will be adequate to cover
any liabilities that we may incur, or that such insurance will continue to be available on
terms acceptable to us. A successful claim brought against us in excess of available
insurance coverage, or any claim that results in significant adverse publicity against us,
could harm our business.

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

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

8

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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 be assured that the steps
taken by us will be adequate to deter misappropriation of our proprietary rights or that
third parties will not independently develop substantially similar products, services and
technology. Furthermore, there can be no assurance that our products will not infringe
upon the intellectual property rights of third parties. We may not be able to avoid
infringement of third party intellectual property rights and may have to obtain a license,
defend an infringement action, or challenge the validity of the intellectual property
rights in court. Failure to obtain or maintain intellectual property rights of our
products, for any reason, could have a material adverse effect on us.

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

As
a public company, we are subject to certain federal regulations and the rules and
regulations of the SEC, including without limitation, the Sarbanes-Oxley Act of 2002,
which effects tighter accounting, corporate fraud and securities laws. The SEC has also
adopted 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 adopted by the SEC.

Our stock price may be
volatile.

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

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

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

9

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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 1B.    UNRESOLVED
STAFF COMMENTS

Not
applicable.

# ITEM 2.    PROPERTIES

We
currently lease approximately 132,500 square feet consisting of office space and
air-conditioned manufacturing and warehousing space at 2003 Gandy Boulevard North, Suite
800, St. Petersburg, Florida. The lease term is for 12 years ending September 30, 2016.
Our corporate administrative offices and the primary manufacturing facilities for MTS are
at this location. The monthly lease payments are currently $51,845 plus tax and increase
to $80,275 plus tax in the final year. In addition, we are obligated to pay annual
operating expenses (i.e., insurance, property taxes and common area maintenance fees). The
Company has applied the provisions of FASB Statement 13, Accounting for
Leases to account for the lease payments. Accordingly, the total lease payments
that will be made over the term of the lease are being recorded as an expense on a
pro-rata basis, adjusted for the consumer price index, over the term of the lease as
opposed to recording the amount of lease payments actually made. As a result, the
difference between the actual lease payments made and the amount of expense recorded is
carried as a liability on our balance sheet. The amount of this liability was $237,000 and
$143,000 at March 31, 2006 and 2005, respectively.

In
addition, we were paid $400,000 by our landlord when we executed our lease. This payment
was provided to us as an incentive to enter into the lease. We recorded this amount as a
long-term liability on our balance sheet and are amortizing the benefit of this amount to
offset rent expense over the term of the lease.

10

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MTS
also leases approximately 5,200 square feet at approximately $3,200 per month for office
and warehouse space at 21530 Drake Road, Cleveland, Ohio. The lease expires on March 31,
2007.

MTS
Medication Technologies International, Ltd. currently leases approximately 1,600 square
feet of office and warehouse space at Unit 6A/6B Dalton Court, Blackburn Interchange,
Lower Darwen, Blackburn, Lancashire, England. The lease is for a term of three years, and
the monthly lease payments are approximately $3,400. The lease expires on May 20, 2009 and
is cancellable at any time with six months notice.

When
we acquired BAF, we entered into a premises lease with the previous owners of BAF for
approximately 12,000 square feet of office and manufacturing space. The lease is for a
term of three years beginning on February 22, 2006, and the monthly lease payments are
approximately $4,500. In addition, we are obligated to pay annual operating expenses
(i.e., insurance, utilities and property taxes).

# ITEM 3.    LEGAL PROCEEDINGS

We
are involved in certain claims and legal actions arising in the ordinary course of
business. There can be no assurance that these matters will be resolved on terms
acceptable to us. We believe the ultimate disposition of these matters will not 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.

11

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# PART II

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

Price Range of Our
Securities

Our
common stock is trading on the American Stock Exchange (AMEX) under the symbol
MPP. The table below sets forth the range of high and low sales prices and/or
bid information for our common stock for the periods indicated, as reported by the AMEX.

|2007 Fiscal
      Year                      |  | High |   | Low  
|------------------------------------------- |  | ---- | - | -----
|                                            |  |      |   |      
|First
      Quarter                         |  |      | $ | 6.80 
|Second
      Quarter (through July 6, 2006) |  |      | $ | 6.15 
|                                            |  |      |   |      
|
|                                            |  |      |   |      
|                                            |  |      |   |      
|First
      Quarter                         |  |      | $ | 6.51 
|Second
      Quarter                        |  |      | $ | 5.95 
|Third
      Quarter                         |  |      | $ | 5.05 
|Fourth
      Quarter                        |  |      | $ | 6.00 
|                                            |  |      |   |      
|
|                                            |  |      |   |      
|                                            |  |      |   |      
|First
      Quarter                         |  |      | $ | 14.95
|Second
      Quarter                        |  |      | $ | 7.40 
|Third
      Quarter                         |  |      | $ | 8.34 
|Fourth
      Quarter                        |  |      | $ | 8.10 

As
of July 6, 2006, there were approximately 887 holders of record of our common stock and
the closing price of our common stock reported on the AMEX was $6.15.

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 without the consent of our lenders. 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 holders of the Series A Preferred Stock are
entitled to vote with the holders of the common stock based upon the number of shares of
common stock that would result from a conversion of the Series A Preferred Stock into
common stock. 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.

12

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Equity Compensation Plan
Information

The
following table sets forth certain information relating to our equity compensation plans
as of March 31, 2006.

|Equity Compensation Plan Information                               
|-------------------------------------------------------------------
|
|
|
|
|
|
|
|Equity compensation plans not
        approved by security holders:
|
|Stock Incentive Plan                                               
|
|Equity compensation plans not
        approved by security holders:
|
|Total                                                              
|

On
February 24, 2005, in response to the recently published accounting standard, Statement of
Financial Accounting Standards No. 123 (revised 2004), Share-Based Payment(SFAS 123R), the Compensation Committee of the Companys Board of
Directors approved accelerating the vesting of options to acquire 205,000 shares of the
Companys stock, which accounted for all outstanding options with an exercise price
of $6.50 per share or greater. All of these options were in-the-money and all were held by
two executive officers and one employee. An option was considered in-the-money if the
stated option exercise price was less than $6.55, the closing price of the Companys
common stock on the day the Compensation Committee approved the acceleration. The
accelerated vesting was effective as of the close of business on February 24, 2005. The
acceleration of these options resulted in a charge in the Companys quarter ended
March 31, 2005 of approximately $10,250. The decision to accelerate vesting of these
options was made primarily to avoid recognizing compensation cost in the statement of
earnings in future financial statements upon the effectiveness of SFAS 123R. It is
estimated that the maximum future compensation expense that will be avoided, based on the
Companys implementation date for FAS 123R of April 1, 2006, is approximately
$582,000, all of which is related to options held by two executive officers and one
employee of the Company.

The
Company recorded compensation expense of $29,000 and $352,000 in the fiscal years ended
March 31, 2006 and March 31, 2005, respectively, that related to restricted stock grants
awarded to its chief operating officer and chief financial officer.

Purchases of Equity
Securities

We
did not repurchase any of our equity securities during fiscal 2006.

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Table of Contents

# ITEM 6.    SELECTED
FINANCIAL DATA

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

|                                                             | Years Ended March 31,                            
|------------------------------------------------------------ | -------------------------------------------------
|
|
|
|                                                             | (In Thousands; Except Earnings Per Share Amounts)
|
|Income Statement Data:                                       |                                                  
|
|Net Sales                                                    |                                                  
|
|Cost of Sales and Other Expenses                             |                                                  
|
|Net Income Before Taxes                                      |                                                  
|
|Income Tax Expense                                           |                                                  
|
|Non-Cash Constructive Dividend Related to                    |                                                  
|Beneficial Conversion Feature of Convertible Preferred Stock |                                                  
|
|Convertible Preferred Stock Dividends                        |                                                  
|
|Net Income Available to Common Stockholders                  |                                                  
|
|Net Income Per Basic Common Share                            |                                                  
|
|Net Income Per Diluted Common Share                          |                                                  
|

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

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Table of Contents

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

# OVERVIEW

We
experienced growth of approximately 6% in net sales in fiscal year ended March 31, 2006.
Our revenue grew due to increased sales of our consumable punch card product lines and
increased sales of our prepackaging machines. We believe the revenue increase in our
consumable products is primarily the result of: (1) increased penetration of independent
pharmacies; (2) growth in market demands due to the aging demographics of the United
States population; (3) a continued shift toward punch card usage; and (4) growth in
international markets. Independent pharmacies are those that are not affiliated with
pharmacies that are national in scope, but rather rely on the relationships they have with
nursing homes and assisted living facilities in a small geographic or demographic region.

Our
gross margin remained approximately the same as the previous year. Our SG&A expenses
increased by approximately 10.5% primarily as a result of new sales and marketing efforts,
the addition of personnel to accommodate the growth in our business and expenses incurred
for compliance with audit, tax and securities regulation.

Our
interest expense decreased in the fiscal year ended March 31, 2006 compared to the fiscal
year that ended March 31, 2005 because we had less debt.

Depreciation
increased primarily as a result of a one-time charge of $399,000, which we recorded in
September 2005 that resulted from a physical inventory count performed on our fixed
assets.

The
information set forth below represents selected quarterly results of operations for each
of the quarters in fiscal years ended March 31, 2006 and 2005.

|                                             | Fiscal Year Ended March 31, 2006        
|-------------------------------------------- | ----------------------------------------
|
|
|
|
|
|                                             | (In Thousands; Except Per Share Amounts)
|
|
|Income Statement Data:                       |                                         
|Net Sales                                    |                                         
|Gross Profit                                 |                                         
|Net  Income Available to Common Stockholders |                                         
|Net Income Per Basic Common Share            |                                         
|
|Net Income Per Diluted Common Share          |                                         
|

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

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In
June 2006, the Company restated its previously issued quarterly financial statements to
correct for an error in applying its accounting policies related to revenue recognition
for certain shipments made to customers during the quarters ended September 30, 2005 and
December 31, 2005.

The
Company determined that certain shipments, primarily those that were made to wholesale
distributors, have been made FOB destination and title and risk of loss did not transfer
until the product was received by the customer. Therefore, the Company concluded that
revenue was not recognized in accordance with Staff Accounting Bulletin No. 104, which
states that revenue should not be recognized until title and risk of loss have
transferred. The effect on its audited consolidated financial statements for the prior
years was not material to the results of operations for those fiscal years.

The
effect of the restatement was to decrease revenue by approximately $853,000, decrease cost
of sales by approximately $521,000, decrease income tax expense by approximately $125,000
and decrease net income by approximately $207,000 or $.03 per diluted common share for the
three and six months ended September 30, 2005. In addition, the restatement resulted in a
decrease of approximately $853,000 in accounts receivable, an increase of approximately
$521,000 in inventory and an approximately $125,000 increase in deferred tax benefits as
of September 30, 2005.

Also,
the effect of the restatement was to increase revenue by approximately $838,000, increase
cost of sales by approximately $512,000, increase income tax expense by approximately
$123,000 and increase net income by approximately $203,000 or $.03 per diluted common
share for the three months ended December 31, 2005. The cumulative effect of the
restatements of the financial statements for the periods ended September 30, 2005 and
December 31, 2005 was to decrease revenue by approximately $15,000, decrease cost of sales
by approximately $9,000, decrease income tax expense by approximately $2,000 and decrease
net income by approximately $4,000 or $0.00 per diluted common share for the nine months
ended December 31, 2005.

In
addition, the restatement resulted in a decrease of approximately $15,000 in accounts
receivable, and increase of approximately $9,000 in inventory and a approximately $2,000
increase in deferred tax benefits as of December 31, 2005.

The
following schedules show the effect of the restatement described above on the selected
quarterly results of operations for the quarters ended September 30, 2005 and December 31,
2005.

|                          |                                          |   |        |  |   |       |   |  |   |        |  |   | Cumulative Effect
|------------------------- | ---------------------------------------- | - | ------ |  | - | ----- | - |  | - | ------ |  | - | -----------------
|
|
|
|
|
|
|                          | (In Thousands; Except Per Share Amounts)
|
|Net Sales                 |                                          | $ | 11,338 |  | $ | (853  | ) |  | $ | 10,485 |  | $ | 10,190           
|
|Net Income Available to   |                                          |   |        |  |   |       |   |  |   |        |  |   |                  
|Common Stockholders       |                                          | $ | 450    |  | $ | (207  | ) |  | $ | 243    |  | $ | 423              
|
|Income Per Diluted Common |                                          |   |        |  |   |       |   |  |   |        |  |   |                  
|Share                     |                                          | $ | 0.07   |  | $ | (0.03 | ) |  | $ | 0.04   |  | $ | 0.07             

16

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Table of Contents

# FISCAL YEAR 2006
COMPARED TO FISCAL YEAR 2005

# Results of Operations

Net Sales

Net
sales for the fiscal year ended March 31, 2006, increased 5.7% to $42.5 million from $40.2
million in the prior year. Net sales increased in fiscal 2006 primarily as a result of an
increase in consumable punch cards sold to existing and new customers in the United
States, an increase in consumable punch cards and machines sold in the United Kingdom and
the sales of prepackaging machines in the United States. These increases were partially
offset by a decline in sales of our OnDemand systems.

Cost of Sales

Cost
of sales for the fiscal year ended March 31, 2006, increased 5.9% to $26.3 million from
$24.8 million in the prior year. Cost of sales as a percentage of net sales increased to
61.9% from 61.8% in the prior year. The increase in the cost of sales percentage resulted
primarily from the fact that we experienced increases in our direct costs of materials and
labor used in the manufacturing of our consumable products and prepackaging machines and
higher factory overhead costs primarily associated with new personnel added in
maintenance, supervision and quality control. We were able to partially offset those
increases by raising our selling prices. As a result, our product margin on these
products, as a percentage of net sales, remained fairly stable.

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

SG&A
expenses for the fiscal year ended March 31, 2006, increased 10.5% to $10.7 million
compared to $9.7 million in 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 and costs associated with our United Kingdom operations.

In
addition, selling costs associated with variable compensation programs, (i.e.,
commissions) increased in fiscal 2006 due to higher net sales. Also, we increased our
marketing efforts by attending more tradeshows and created more sales literature to
support our sales personnel. Our administrative costs increased in fiscal 2006 due
primarily to expenses related to insurance, auditing, tax services and securities law compliance.

Depreciation and
Amortization Expense

Depreciation
and amortization expense for the fiscal year ended March 31, 2006, increased 20.1% to $2.3
million compared to $1.9 million in the prior year. The increase resulted primarily from
the fact that in our second quarter of fiscal 2006, we recorded a charge of $399,000
related to a physical inventory count that we performed of fixed assets after we moved to
our new facility.

Interest Expense

Interest
expense for the fiscal year ended March 31, 2006 decreased 47.5% to $322,000 compared to
$613,000 the prior year. The decrease resulted primarily from lower debt levels in fiscal
2006 compared to fiscal 2005 and was partially offset by higher interest rates on variable
rate debt.

Amortization of Financing
Costs and Original Issue Discount

Amortization
of financing costs and original issue discount for the fiscal year ended March 31, 2006
decreased to $36,000 compared to $1,303,000 in the prior year. This decrease resulted
primarily from the fact that in the previous year, we repaid a $4,000,000 subordinated
note. At that time, the remaining original issue discount ($741,000) and financing costs
associated with that note ($420,000) were completely written off.

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Other Income

We
had no other income in fiscal 2006. In fiscal 2005, we realized $400,000 of other income
when we determined that a liability associated with a former wholly owned subsidiary would
not be payable.

Income Tax Expense

Income
tax expense for the fiscal year ended March 31, 2006, increased 23.9% to $1,194,000
compared to $964,000 the prior year. The increase resulted from higher pretax net income
in fiscal 2006 compared to the prior year. Our effective tax rate in fiscal 2006 was 42.0%
compared to 42.7% in fiscal 2005. The decrease results primarily from the fact that in
fiscal 2005, we wrote off the original issue discount associated with the subordinated
debt, which we repaid. The remaining amount of original issue discount for tax purposes
was different than the amount we had recorded on our balance sheet. When we wrote off the
original issue discount, the deduction on our tax return was lower than the expense
recorded in our statement of earnings, and therefore, this permanent difference resulted
in a higher effective tax rate. In addition, our state and local income taxes increased in
2006 compared to fiscal 2005 when we established a reserve for potential obligations to
various states.

Series A Preferred Stock
Dividends

The
terms of our Series A Preferred Stock include the payment of quarterly dividends at the
rate of 11% per annum. The amount of preferred stock dividends that accrued during each of
the fiscal years 2006 and 2005 was $222,000 and $220,000, respectively. 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, 2006 and 2005 were paid in cash.

# FISCAL YEAR 2005
COMPARED TO FISCAL YEAR 2004

# Results of Operations

Net Sales

Net
sales for the fiscal year ended March 31, 2005, increased 17.0% to $40.2 million from
$34.4 million the prior year. Net sales increased in fiscal 2005 primarily as a result of
an increase in consumable punch cards sold to existing and new customers in the United
States, an increase in consumable punch cards and machines sold in the United Kingdom and
the sale of 10 OnDemand systems in the United States. Selling prices for consumable punch
cards were stable during fiscal 2005.

Cost of Sales

Cost
of sales for the fiscal year ended March 31, 2005, increased 18.7% to $24.8 million from
$20.9 million the prior year. Cost of sales as a percentage of net sales increased to
61.8% from 60.9% for the prior year. The increase in the cost of sales percentage resulted
primarily from the fact that OnDemand machine sales increased over the prior year, and the
product margin on OnDemand machines is less than the product margin on consumable punch
card products. In addition, overhead costs increased primarily due to additional
personnel, benefit costs associated with employees that were added to support the
increased production of consumable punch cards and the production and support of the
OnDemand machines and increased costs associated with the new facility occupied in October
2004.

During
the fiscal years ended March 31, 2005 and 2004, we wrote off approximately $122,000 and
$100,000, respectively, in obsolete inventory primarily related to discontinued packaging
and equipment. In addition, the inventory valuation allowance related to obsolete and slow
moving inventory was increased by $10,000. We will continue to evaluate our inventory
valuation allowance and adjust it accordingly.

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Selling, General and
Administrative Expenses

SG&A
expenses for the year ended March 31, 2005, increased 29.8% to $9.7 million compared to
$7.5 million the prior year. The increase resulted primarily from the costs associated
with additional personnel and benefit costs for employees that were added to support our
overall growth, costs associated with our United Kingdom operations and higher marketing
expenditures. In fiscal 2005, we also incurred $279,000 associated with the move of the
Company in October 2004 and $365,000 for the stock grant given to the Companys CFO.
During the fiscal years ended March 31, 2005 and 2004, we charged off approximately
$45,000 and $103,000, respectively, in uncollectable accounts receivable and increased our
estimated bad debt reserve by $12,000 and $49,000, respectively. We regularly review the
adequacy of our bad debt reserve by specific customer account analysis as well a review of
historical trends.

Depreciation and
Amortization Expense

Depreciation
and amortization expense for the fiscal year ended March 31, 2005, increased 42.5% to $1.9
million compared to $1.3 million in the prior year. The increase resulted primarily due to
accelerating the amortization of leasehold improvements made to our previous facility as a
result of terminating our lease and increases related to product development and plant,
property and equipment costs.

Interest Expense

Interest
expense for the fiscal year ended March 31, 2005 decreased 28.0% to $613,000 compared to
$851,000 the prior year. The decrease resulted from lower interest rates due to the
repayment of the $4,000,000 subordinated note in June 2004 and lower debt levels as a
result of positive cash flow in fiscal 2005. The $4,000,000 subordinated note had an
interest rate of 14% and the current interest rate payable on the funds borrowed to repay
the subordinate note is the London InterBank Offering Rate (LIBOR) (currently
3.16%) plus 3.25%.

Amortization of
Financing Costs and Original Issue Discount

Amortization
of financing costs and original issue discount for fiscal year ended March 31, 2005
increased to $1,303,000 compared to $612,000 in the prior year. This increase resulted
primarily from the repayment of the $4,000,000 subordinated note in June 2004. At that
time, the remaining original issue discount ($741,000) and financing costs associated with
that note ($420,000) were completely written off.

Other Income

Medical
Technology Laboratories, Inc. (MTL), formerly a wholly owned subsidiary of MTS (MTLs
assets were sold to a third party in 2000), accrued approximately $400,000 for unpaid
taxes assessed by the Agency for Health Care Administration (AHCA) on clinical
laboratories in the state of Florida. The tax was disputed and the Company received no
further notification from the state. The statue of limitations on the collection of the AHCA tax has expired.
Accordingly, the reserve was reversed to other income in the fiscal year ending March 31, 2005.

Income Tax Expense

Income
tax expense for the fiscal year ended March 31, 2005, decreased 19.0% to $964,000 compared
to $1,190,000 the prior year. The decrease resulted from lower pretax net income in fiscal
2005 compared to the prior year. The increase in the effective tax rate for fiscal 2005
compared with fiscal 2004 resulted from the non-deductible expenses related to the
permanent difference between the carrying value of the subordinated debt for book and tax
purposes due to the repayment of the subordinated debt in June 2004.

19

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Series A Preferred
Stock Dividends

The terms
of our Series A Preferred Stock include the payment of quarterly dividends at the rate of
11% per annum. The amount of preferred stock dividends that accrued during each of the
fiscal years 2005 and 2004 was $220,000. The dividends are payable in cash or shares of
Series A Preferred Stock at our option and are cumulative. All dividends accrued in the
fiscal years ended March 31, 2005 and 2004 were paid in cash.

# LIQUIDITY AND CAPITAL
RESOURCES

Our
operations provided cash of $6.0 million in the fiscal year ended March 31, 2006, compared
to $5.0 million the prior year. The increase resulted primarily from the fact that we
improved the turnover rate of our inventory in fiscal 2006 compared to fiscal 2005. In
addition, we experienced significant increases in accrued liabilities for legal and
professional fees, as well as employee incentive compensation plans at the end of fiscal
2006 compared to the end of fiscal 2005.

Investing
activities used $2.9 million during the fiscal year ended March 31, 2006, compared to $2.6
million the prior year. The increase resulted primarily from the fact that we expended
approximately $1.2 million to acquire BAF Printers, Ltd. in the United Kingdom. Our
expenditures for equipment in fiscal 2006 decreased by approximately $898,000 compared
with fiscal 2005 because in fiscal 2005 we purchased new equipment and furniture and
fixtures when we relocated our office and manufacturing facility.

Financing
activities used $3.0 million during the fiscal year ended March 31, 2006 compared to $2.1
million the prior year. The increase in cash used for financing activities resulted
primarily from the fact that we used our free cash flow to reduce our borrowings on our
revolving line of credit.

We
had working capital of $7.9 million at March 31, 2006, compared to $9.9 million at March
31, 2005. The decrease in working capital resulted primarily from increases in accrued
liabilities related to legal and professional fees and employee incentive compensation
plans at the end of fiscal 2006 compared to the end of fiscal 2005. In addition, the
amount of our long-term debt that is payable in the following fiscal year increased at the
end of fiscal 2006 compared to the end of fiscal 2005 due to the normal amortization
schedule of term loans.

We
currently do not have any material commitments for capital expenditures.

We do
not maintain significant cash balances because available cash is used to pay down our
revolving line of credit. Cash on hand of $447,000 and $373,000 at March 31, 2006 and
2005, respectively, is held in banks located in the United Kingdom. We view the excess
availability on our line of credit as our cash reserve. At March 31, 2006, we had
approximately $5.4 million available on our revolving line of credit.

In
June 2004, we completed a debt refinancing and repaid the entire amount, $4,000,000, of
its subordinated note and term loan with a bank with the proceeds of an additional senior
term loan and advances on its revolving line of credit. In April 2004, the subordinated
note holders exercised their rights to acquire 566,517 shares of common stock under the
terms of the warrant agreements and sold the common stock. All of our obligations under
the warrant agreement were extinguished at the time the investor sold the common stock and
the debt was repaid. Upon the repayment of the subordinated note, we incurred a prepayment
penalty of $120,000. As part of the refinancing, we extended the maturity date of the
revolving loan to June 2007, increased the maximum revolving loan limit from $5.0 million
to $8.5 million, entered into a new secured equipment loan for $1.2 million and obtained a
new $300,000 line of credit to fund future purchases of equipment. At the time the
subordinated note was repaid, we recorded a one-time non-cash expense to extinguish the
unamortized original issue discount of approximately $741,000 and wrote-off the deferred
financing costs of approximately $420,000 that were incurred when the subordinated debt
was acquired.

In
February 2006, we amended our secured loan agreement to allow for the acquisition of BAF,
increase the equipment line of credit from $300,000 to $1,000,000, modified certain
financial covenants and increased the borrowing base limit related to eligible inventory.

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

The
revolving line of credit allows for borrowings based upon advance rates that are applied
to our eligible accounts receivable and inventory at the prime rate, currently 8%, or
LIBOR plus 2.25%. The equipment secured loan is repayable over a three-year period with
interest at the prime rate plus 0.5% or LIBOR plus 2.75%.

The
revolving line of credit and term loans contain provisions that require us to maintain
certain financial covenants that, among other things, require the maintenance of minimum
tangible net worth and debt service coverage ratios, limit the amount of capital
expenditures and require lender approval for certain matters. We were in compliance with
all provisions of the loan agreements as of March 31, 2006.

Our
short-term and long-term liquidity is primarily dependent on our ability to generate cash
flow from operations. Inventory levels may change based upon our success in selling our
OnDemand systems. Increases in net sales may result in corresponding increases in accounts
receivable. Cash flow from operations and borrowing availability on the revolving line of
credit is anticipated to support anticipated increases 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 working capital and capital
expenditure requirements.

# OFF-BALANCE SHEET
ARRANGEMENTS

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

- any obligation under certain guarantee contracts;
- a retained or contingent  interest in assets transferred to an unconsolidated  entity or similar entity or similar arrangement
        that serves as credit, liquidity or market risk support to that entity for such assets;
- any obligation,  including a contingent  obligation,  under a contract that would be accounted for as derivative  instruments;
        and
- any  obligation,  arising  out of a variable  interest  in an  unconsolidated  entity  that is held by, and  material  to, the
        registrant,  where such entity provides financing,  liquidity,  market risk or credit risk support to the registrant,
        or engages in leasing, hedging or research and development services with the registrant.

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

# CONTRACTUAL OBLIGATIONS

Summarized
below are our obligations and commitments to make future payments under certain
contractual obligations as of March 31, 2006:

|                 |                |  |   | Less Than |  | 1  3 |     | 4  5 |   | More Than
|---------------- | -------------- |  | - | --------- |  | ----- | --- | ----- | - | ---------
|
|
|                 | (In Thousands)
|
|Long-Term Debt   |                |  | $ | 3,818     |  | $     | 866 |       | $ | 2,952    
|Capital Leases   |                |  | $ | 349       |  | $     | 140 |       | $ | 166      
|Operating Leases |                |  | $ | 8,906     |  | $     | 946 |       | $ | 1,783    

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# ESTIMATES AND CRITICAL
ACCOUNTING POLICIES

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

Valuation of Accounts
Receivable

Trade
accounts receivable are recorded based upon the invoiced amount, are generally not
interest bearing and are considered past due when full payment is not received by the
specified credit terms. The Company does not typically require collateral when granting
credit; however, customer credit worthiness is reviewed prior to granting credit. The
Company normally estimates the uncollectibility of its accounts receivable. The Company
considers many factors when making its estimates, including analyzing accounts receivable
and historical bad debts, customer concentrations, customer credit worthiness, current
economic trends and changes in its customer payment terms when evaluating the adequacy of
the reserve for uncollectible accounts. We review the status of our accounts monthly,
assessing the customers ability to pay. When a specific account is deemed
uncollectible, the account is written off against the reserve for uncollectible accounts.
As of March 31, 2006 and 2005, the Company has established an allowance for doubtful
accounts of approximately $236,000 and $199,000, respectively, to account for estimated
uncollectible accounts.

Inventory Obsolescence
Valuation Allowance

Inventories
are stated at the lower of cost or market. Cost is determined by the first-in, first-out
(FIFO) method. The elements of costs included in the valuation of inventory
are the direct costs associated with materials purchased, direct labor expended to
manufacture the inventory and an allocation of general overhead expenses incurred to
operate the manufacturing facilities. The 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. As of March
31, 2006 and 2005, the Company has established an inventory valuation allowance of
approximately $192,000 and $205,000, respectively, to account for the estimated loss in
value of inventory due to obsolescence.

Self-Insurance Plan
Reserve

We
established a reserve for unpaid medical claims of approximately $90,000 and $49,000 at
March 31, 2006 and 2005, 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.

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Impairment Valuations

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 is less than the carrying amount of the assets, an
impairment loss is recognized on a discounted cash flow analysis. There were no impairment
losses in 2006, 2005 and 2004.

Product Development

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

Estimated Liabilities

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

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

Warranty

We
establish a reserve for warranty costs we may incur during the warranty period that is
provided for in the OnDemand machine sales agreements (generally six months) with our
customers. Warranty and service costs incurred during the periods ended March 31, 2006,
2005 and 2004, totaled approximately $254,000, $177,000 and $161,000, respectively.

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

The
Company is exposed to the impact of interest rate changes as borrowings under its Senior
Credit Agreement bears interest at variable interest rates. A 1% change in interest rates
up or down would have affected the Companys income statement on an annual basis by
approximately $30,000 at the variable-rate outstanding level of debt at March 31, 2006.

In
addition, the Company is exposed to foreign rate changes of the British Pound as it
impacts the net asset value of its subsidiaries located in the United Kingdom. The Company
believes that the exposure to foreign currency translation gains or losses is minimal.

# ITEM 8.    FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA

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

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# 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

Our
chief executive officer and chief financial officer are responsible for establishing and
maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e)
and 15d-15(e)) for MTS. Accordingly, our chief executive officer and chief financial
officer designed such disclosure controls and procedures, or caused such disclosure
controls and procedures to be designed under their supervision, to ensure that material
information relating to MTS, including our consolidated subsidiaries, is made known to our
chief executive officer and chief financial officer by others within those entities. We
regularly evaluate the effectiveness of disclosure controls and procedures and report our
conclusions about the effectiveness of the disclosure controls quarterly on our Form 10-Q
and annually on our Form 10-K. Based upon the evaluation for the period ended March 31,
2006, for the reasons described below, our chief executive officer and chief financial
officer concluded that our disclosure controls and procedures were not effective, as of
the end of the period ended March 31, 2006 in ensuring that material information relating
to the Company required to be disclosed by the Company in reports that it files or submits
under the Exchange Act is recorded, processed, summarized and reported within the time
periods specified in the SECs rules and forms and that such information is
accumulated and communicated to management, including the chief executive officer and the
chief financial officer, as appropriate, to allow timely decisions regarding required
disclosure. Notwithstanding the material weaknesses described below, our management has
concluded that the Consolidated Financial Statements fairly state, in all material
respects, our financial condition, results of operations and cash flows for the periods
presented in conformity with generally accepted accounting principles.

Based
on the definition of material weakness in the Public Company Accounting
Oversight Boards Auditing Standard No. 2, An Audit of Internal Control Over
Financial Reporting Performed in Conjunction With an Audit of Financial
Statements, restatement of financial statements in prior filings with the SEC is
a strong indicator of the existence of a material weakness in the design or
operation of internal control over financial reporting. We have concluded that we did not
maintain effective controls over the authorization and/or communication of selling terms
provided to customers. We determined that because effective controls regarding the
authorization and/or communication were not in place, the recognition of revenue on
certain shipments was inconsistent with our accounting policies and that a material
weakness existed in our internal control over financial reporting, and disclosed this to
the Audit Committee and to the independent registered public accountants. In addition, we
have determined that a material weakness exists in our internal controls over financial
reporting related to the limited number of accounting personnel in the Company. We
disclosed this to our Audit Committee and to the independent registered public
accountants.

Plan for Remediation of
Material Weaknesses

The
Company has instituted new policies that provide controls to improve the authorization
and/or communication of selling terms provided to customers. Also, the Company has
commenced a search for qualified personnel to fill a newly created position in its
accounting department. This position is expected to be filled in the near future.

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, other than those described above, during the
fiscal year ended March 31, 2006, that has materially affected, or is reasonably likely to
materially affect, those controls.

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Limitations on the
Effectiveness of Controls

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

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

# ITEM 9B.     OTHER
INFORMATION

Not
Applicable.

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# PART III

# ITEM 10.    DIRECTORS AND
EXECUTIVE OFFICERS OF THE REGISTRANT

The
information required by this item is incorporated herein by reference to the information
included in our definitive proxy statement, which will be filed by us within 120 days
after the end of our 2006 fiscal year.

Code of Ethics and
Business Conduct

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

We
intend to satisfy the disclosure requirement under Item 5.05 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 web site, at the address
specified above. Information contained in our web site, 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 2006 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 2006 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 2006 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 2006 fiscal year.

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# PART IV

# ITEM 15.     EXHIBITS AND
FINANCIAL STATEMENT SCHEDULES.

| | (a) | The
following documents are filed as part of this report:
| | --- | ---------------------------------------------------------

| | 1. | Financial
Statements. The consolidated financial statements, and related notes
thereto, of MTS with the independent auditors report thereon are included
in Part IV of this Report on the pages indicated by the Index to Financial
Statements and Schedule beginning on page 30 of this report.
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 2. | 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(b) below. Each management contract or compensatory plan
or arrangement required to be filed as an Exhibit hereto is listed in Exhibit
Nos. 10.2, 10.3, 10.8 and 10.40 of Item 15(b) below.
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (b) | List
of Exhibits. The exhibits listed on the Exhibits Index set forth below
are filed as part of, or incorporated by reference into this report.
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------

| | (c) | Financial
Statement Schedules. See Item 15(a) above.
| | --- | ----------------------------------------------------

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# MTS MEDICATION
TECHNOLOGIES, INC.

# INDEX TO FINANCIAL STATEMENTS

|                                                                                                                                             | Page |        
|-------------------------------------------------------------------------------------------------------------------------------------------- | ---- | -------
|
|Report of Independent
        Registered Public Accounting Firm                                                                              |      | 29     
|                                                                                                                                             |      |        
|Consolidated Financial Statements                                                                                                            |      |        
|                                                                                                                                             |      |        
|Consolidated Balance Sheets as of March 31, 2006 and 2005                                                                                    |      | 30     
|                                                                                                                                             |      |        
|Consolidated Statements of Operations for the Years Ended March 31, 2006, 2005 and 2004                                                      |      | 31     
|                                                                                                                                             |      |        
|Consolidated Statement of Changes in Stockholders' Equity and Comprehensive Income
        for the Years Ended March 31, 2006, 2005 and 2004 |      | 32     
|                                                                                                                                             |      |        
|Consolidated Statements of Cash Flows for the Years Ended March 31, 2006, 2005 and 2004                                                      |      | 33     
|                                                                                                                                             |      |        
|Notes to Consolidated Financial Statements                                                                                                   |      | 34 - 55
|                                                                                                                                             |      |        
|Exhibit 23 - Consent of Independent Registered Public Accountants                                                                            |      | 60     

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.

28

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REPORT OF INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors
and Shareholders of MTS Medication Technologies, Inc.

We
have audited the accompanying consolidated balance sheets of MTS Medication Technologies,
Inc. (a Delaware corporation) as of March 31, 2006 and 2005, and the related consolidated
statements of operations, changes in stockholders equity and comprehensive income,
and cash flows for each of the three years in the period ended March 31, 2006.  These
financial statements are the responsibility of the Companys management.  Our
responsibility is to express an opinion on these financial statements based on our audits.

We
conducted our audits in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are free of
material misstatement. The Company is not required to have, nor were we engaged to perform
an audit of its internal control over financial reporting. Our audit included
consideration of internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Companys internal control over
financial reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements, assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.

In
our opinion, the consolidated financial statements referred to above present fairly, in
all material respects, the financial position of MTS Medication Technologies, Inc. and
subsidiaries as of March 31, 2006 and 2005, and the results of their operations and their
cash flows for each of the three years in the period ended March 31, 2006 in conformity
with accounting principles generally accepted in the United States of America.

|                        |  | 
|----------------------- |  | 
|/s/ GRANT THRONTON, LLP |  | 
|Tampa, Florida          |  | 
|                        |  | 
|June 26, 2006           |  | 

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# MTS MEDICATION
TECHNOLOGIES, INC. AND SUBSIDIARIESCONSOLIDATED BALANCE SHEETSMARCH 31, 2006 AND 2005
(In Thousands)

# ASSETS

|                            | 2006 |  | 2005
|--------------------------- | ---- |  | ----
|
|
|Current Assets:             |      |  |     
|Cash                        |      |  | $   
|Accounts Receivable, Net    |      |  |     
|Inventories, Net            |      |  |     
|Prepaids and Other          |      |  |     
|Deferred Tax Asset          |      |  |     
|
|Total Current Assets        |      |  |     
|
|Property and Equipment, Net |      |  |     
|Goodwill                    |      |  |     
|Other Intangible Assets     |      |  |     
|Other Assets, Net           |      |  |     
|
|Total Assets                |      |  | $   
|

# LIABILITIES AND
STOCKHOLDERS' EQUITY

|Current Liabilities:                                |  |  |   |        |   |  |   |        |  
|--------------------------------------------------- |  |  | - | ------ | - |  | - | ------ | -
|Accounts Payable and Accrued Liabilities            |  |  | $ | 5,589  |   |  | $ | 4,021  |  
|Current Maturities of Long-Term Debt                |  |  |   | 698    |   |  |   | 431    |  
|Current Maturities of Related Party Note Payable    |  |  |   | 308    |   |  |   | 290    |  
|
|Total Current Liabilities                           |  |  |   | 6,595  |   |  |   | 4,742  |  
|
|Long-Term Debt, Less Current Maturities             |  |  |   | 2,727  |   |  |   | 5,492  |  
|Related Party Note Payable, Less Current Maturities |  |  |   | 434    |   |  |   | 742    |  
|Lease Incentive                                     |  |  |   | 317    |   |  |   | 350    |  
|Deferred Tax Liability                              |  |  |   | 576    |   |  |   | 492    |  
|
|Total Liabilities                                   |  |  |   | 10,649 |   |  |   | 11,818 |  
|
|Stockholders' Equity:                               |  | 
|Preferred Stock                                     |  |  |   | 2      |   |  |   | 2      |  
|Common Stock                                        |  |  |   | 60     |   |  |   | 59     |  
|Capital In Excess of Par Value                      |  |  |   | 13,887 |   |  |   | 13,634 |  
|Accumulated Other
        Comprehensive Income      |  |  |   | 91     |   |  |   | 152    |  
|Accumulated Deficit                                 |  |  |   | (1,279 | ) |  |   | (2,931 | )
|Treasury Stock                                      |  |  |   | (328   | ) |  |   | (328   | )
|
|Total Stockholders' Equity                          |  |  |   | 12,433 |   |  |   | 10,588 |  
|
|Total Liabilities and Stockholders' Equity          |  |  | $ | 23,082 |   |  | $ | 22,406 |  
|

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

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# MTS MEDICATION
TECHNOLOGIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED MARCH 31, 2006, 2005 AND 2004 (In Thousands; Except
Per Share Amounts)

|                                            | 2006 |  | 2005 |        | 2004
|------------------------------------------- | ---- |  | ---- | ------ | ----
|
|
|Net Sales                                   |      |  | $    | 42,522 |     
|Costs and Expenses:                         |      | 
|Cost of Sales                               |      |  |      | 26,311 |     
|Selling, General and Administrative         |      |  |      | 10,711 |     
|Depreciation and Amortization               |      |  |      | 2,296  |     
|
|Total Costs and Expenses                    |      |  |      | 39,318 |     
|
|Operating Profit                            |      |  |      | 3,204  |     
|
|Other (Income) Expenses                     |      | 
|Interest Expense                            |      |  |      | 322    |     
|Amortization of:                            |      | 
|Financing Costs                             |      |  |      | 36     |     
|Original Issue Discount                     |      |  |      |       |     
|Other (Income)                              |      |  |      |       |     
|
|Total Other Expenses                        |      |  |      | 358    |     
|
|Income Before Taxes                         |      |  |      | 2,846  |     
|
|Income Tax Expense                          |      |  |      | 1,194  |     
|
|Net Income                                  |      |  |      | 1,652  |     
|Convertible Preferred Stock Dividends       |      |  |      | 222    |     
|
|Net Income Available to Common Stockholders |      |  | $    | 1,430  |     
|
|Net Income Per Basic Common Share           |      |  | $    | 0.24   |     
|
|Net Income Per Diluted Common Share         |      |  | $    | 0.23   |     
|

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

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# MTS MEDICATION
TECHNOLOGIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN
STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME YEARS ENDED MARCH 31, 2006, 2005 AND 2004(In
Thousands; Except Shares)

|                                         | Preferred Stock |       | Common Stock |    |  |           | Accumulated |     |  |         |   |  |     |   | 
|---------------------------------------- | --------------- | ----- | ------------ | -- |  | --------- | ----------- | --- |  | ------- | - |  | --- | - | 
|
|
|
|
|Balance March 31, 2003                   |                 | 2,000 |              | $2 |  | 4,393,683 |             | $44 |  | $11,880 |   |  | $0  |   | 
|Stock Options and Warrants Exercised     |                 |       |              |    |  | 469,497   |             | 5   |  | 507     |   |  |     |   | 
|Tax Benefit from Stock Options Exercised |                 |       |              |    |  |           |             |     |  | 178     |   |  |     |   | 
|Convertible Preferred Stock Dividend     |                 |       |              |    |  |           |             |     |  | (220    | ) |  |     |   | 
|Comprehensive Income:                    |                 |       |              |    |  |           |             |     |  |         |   |  |     |   | 
|Net Income                               |                 |       |              |    |  |           |             |     |  |         |   |  |     |   | 
|Foreign Currency Translation Adjustment  |                 |       |              |    |  |           |             |     |  |         |   |  | 81  |   | 
|
|Comprehensive Income                     |                 |       |              |    |  |           |             |     |  |         |   |  |     |   | 
|
|Balance March 31, 2004                   |                 | 2,000 |              | 2  |  | 4,863,180 |             | 49  |  | 12,345  |   |  | 81  |   | 
|Stock Options and Warrants Exercised     |                 |       |              |    |  | 923,100   |             | 9   |  | 642     |   |  |     |   | 
|Stock Grant Issued                       |                 |       |              |    |  | 50,000    |             | 1   |  | 351     |   |  |     |   | 
|Acceleration of Option Vesting           |                 |       |              |    |  |           |             |     |  | 10      |   |  |     |   | 
|Tax Benefit from Stock Options Exercised |                 |       |              |    |  |           |             |     |  | 506     |   |  |     |   | 
|Convertible Preferred Stock Dividend     |                 |       |              |    |  |           |             |     |  | (220    | ) |  |     |   | 
|Comprehensive Income:                    |                 |       |              |    |  |           |             |     |  |         |   |  |     |   | 
|Net Income                               |                 |       |              |    |  |           |             |     |  |         |   |  |     |   | 
|Foreign Currency Translation Adjustment  |                 |       |              |    |  |           |             |     |  |         |   |  | 71  |   | 
|
|Comprehensive Income                     |                 |       |              |    |  |           |             |     |  |         |   |  |     |   | 
|
|Balance March 31, 2005                   |                 | 2,000 |              | 2  |  | 5,836,280 |             | 59  |  | 13,634  |   |  | 152 |   | 
|Stock Options and Warrants Exercised     |                 |       |              |    |  | 175,785   |             | 1   |  | 259     |   |  |     |   | 
|Stock Grant Issued                       |                 |       |              |    |  | 5,000     |             |     |  | 29      |   |  |     |   | 
|Tax Benefit from Stock Options Exercised |                 |       |              |    |  |           |             |     |  | 187     |   |  |     |   | 
|Convertible Preferred Stock Dividend     |                 |       |              |    |  |           |             |     |  | (222    | ) |  |     |   | 
|Comprehensive Income:                    |                 |       |              |    |  |           |             |     |  |         |   |  |     |   | 
|Net Income                               |                 |       |              |    |  |           |             |     |  |         |   |  |     |   | 
|Foreign Currency Translation Adjustment  |                 |       |              |    |  |           |             |     |  |         |   |  | (61 | ) | 
|
|Comprehensive Income                     |                 |       |              |    |  |           |             |     |  |         |   |  |     |   | 
|
|Balance March 31, 2006                   |                 | 2,000 |              | $2 |  | 6,017,065 |             | $60 |  | $13,887 |   |  | $91 |   | 
|

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

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# MTS MEDICATION
TECHNOLOGIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED MARCH 31, 2006, 2005 AND 2004 (In
Thousands)

|                                                                                  | 2006 |  | 2005 |        | 2004
|--------------------------------------------------------------------------------- | ---- |  | ---- | ------ | ----
|
|
|Operating Activities                                                              |      | 
|Net Income                                                                        |      |  | $    | 1,652  |     
|
|Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities: |      | 
|Depreciation and Amortization                                                     |      |  |      | 2,296  |     
|Amortization of Deferred Financing Costs                                          |      |  |      | 36     |     
|Amortization of Lease Incentive                                                   |      |  |      | (33    | )   
|Lease Incentive Received                                                          |      |  |      |       |     
|Deferred Income Taxes                                                             |      |  |      | 1,033  |     
|Amortization of Original Issue Discount                                           |      |  |      |       |     
|Reserve for Obsolete Inventory                                                    |      |  |      | 174    |     
|Product Development Costs Written Off                                             |      |  |      | 187    |     
|Restricted Stock Grant Awarded                                                    |      |  |      | 29     |     
|Acceleration of Option Vesting                                                    |      |  |      |       |     
|Loss on Disposal of Equipment                                                     |      |  |      | 67     |     
|Changes In Assets and Liabilities, Net of Acquisition:                            |      | 
|Accounts Receivable                                                               |      |  |      | 210    |     
|Inventories                                                                       |      |  |      | (387   | )   
|Prepaids and Other                                                                |      |  |      | (271   | )   
|Accounts Payable and Other Accrued Liabilities                                    |      |  |      | 1,004  |     
|
|Total Adjustments                                                                 |      |  |      | 4,345  |     
|
|Net Cash Provided by Operating Activities                                         |      |  |      | 5,997  |     
|
|Investing Activities                                                              |      | 
|Expended for Acquisition of Business                                              |      |  |      | (1,201 | )   
|Expended for Property and Equipment                                               |      |  |      | (1,054 | )   
|Expended for Product Development                                                  |      |  |      | (546   | )   
|Expended for Patents and Other Assets                                             |      |  |      | (50    | )   
|
|Net Cash Used by Investing Activities                                             |      |  |      | (2,851 | )   
|
|Financing Activities                                                              |      | 
|Payments on Notes Payable and Long-Term Debt                                      |      |  |      | (120   | )   
|Payments on Related Party Note Payable                                            |      |  |      | (289   | )   
|Net (Payments) Advances on Revolving Line of Credit                               |      |  |      | (2,315 | )   
|Expended for Financing Costs                                                      |      |  |      | (26    | )   
|Dividends on Convertible Preferred Stock                                          |      |  |      | (222   | )   
|Exercise of Stock Options                                                         |      |  |      | 260    |     
|Payments on Subordinated Notes                                                    |      |  |      |       |     
|Borrowing on Term Loans                                                           |      |  |      |       |     
|Payments on Term Loans                                                            |      |  |      | (320   | )   
|
|Net Cash Used by Financing Activities                                             |      |  |      | (3,032 | )   
|
|Effect of Exchange Rate Changes on Cash                                           |      |  |      | (40    | )   
|
|Net Increase (Decrease) in Cash                                                   |      |  |      | 74     |     
|Cash at Beginning of Period                                                       |      |  |      | 373    |     
|
|Cash at End of Period                                                             |      |  | $    | 447    |     
|

See Note 21
for supplemental disclosures of other cash flow information.

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

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# NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS MARCH 31, 2006, 2005 AND 2004

# NOTE 1  BACKGROUND
INFORMATION

MTS
Medication Technologies, Inc., a Delaware corporation (the Company or
MTS), was incorporated in March 1984. The Company is a holding company that
operates through its subsidiaries, MTS Packaging Systems, Inc. (MTSP),
MTS Medication Technologies International, Ltd. (MTS Limited) and BAF
Printers, Ltd. (BAF).

MTS
primarily manufactures and sells consumable medication punch cards, packaging equipment
and ancillary products throughout the United States. Its customers are predominantly
pharmacies that supply nursing homes, assisted living and correctional facilities with
prescription medications for their patients. MTS manufactures its proprietary consumable
punch cards and packaging equipment primarily in its own facilities. This manufacturing
process uses integrated equipment for manufacturing the consumable medication punch cards.
The consumable 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 consumable packages. MTS Limited distributes products for MTS in the United
Kingdom. In February 2006, the Company acquired BAF, a United Kingdom based manufacturer
of bags and labels for pharmacies (see Note 11).

# NOTE 2  SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES

Consolidation

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

Use of Estimates

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

Cash

For
purposes of the statement of cash flows, the Company considers all highly liquid debt
instruments purchased with an original maturity of three months or less to be cash
equivalents. As of March 31, 2006 and 2005, the Companys cash and cash equivalents
include the United States dollar equivalent of approximately $447,000 and $373,000,
respectively, maintained in banks in the United Kingdom. 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. The elements of costs included in the valuation of inventory
are the direct costs associated with materials purchased, direct labor expended to
manufacture the inventory and an allocation of general overhead expenses incurred to
operate the manufacturing facilities. The allowance for inventory obsolescence and slow
moving inventory is reviewed on a regular basis. The Company reviews various information
related to the age and turnover of specific inventory items to assist its assessment. As
of March 31, 2006 and 2005, we established an inventory valuation allowance of
approximately $192,000 and $205,000, respectively, to account for the estimated loss in
value of inventory due to obsolescence (see Note 5).

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Warranty

The
Company establishes a reserve for warranty costs it may incur during the warranty period
that is provided for in the OnDemand machine sales agreements with its customers. The
warranty period is generally for a six-month period. Warranty and service costs incurred
during the periods ended March 31, 2006, 2005 and 2004 totaled approximately $254,000,
$177,000 and $161,000, respectively. The reserve is an estimate based on historical
trends, the number of machines under warranty, the cost of replacement parts and the
expected reliability of the Companys products. Warranty and service costs are
charged against the accrual when incurred.

Revenue Recognition

The
Company recognizes revenue on the sale of machines, other than OnDemand machines, and all
consumables when title and risk of loss to the products shipped has transferred to the
customer. 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; and (d) maintenance. These separate deliverables are incidental to the
functionality of the machine. The vendor specific objective evidence (VSOE) of fair value
of the deliverables outlined in (b-d) 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-d). 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.

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.

Revenue
is reported net of rebates and discounts provided to customers. Rebates are generally
determined based upon pricing agreements that offer certain customers incentives to
purchase products from the Company. Discounts are provided from time to time primarily to
compensate customers for inconveniences caused by late shipments, defective product or
pricing errors. Rebates and discounts were $1,502,000, $1,340,000 and $1,165,000 for
fiscal years 2006, 2005 and 2004, respectively. Rebates and discounts are recorded at the
time they are earned by the customer.

There
were two customers whose sales accounted for approximately 22%, 23% and 27% of net sales
for fiscal years 2006, 2005 and 2004, respectively.

Accounts Receivable

Trade
accounts receivable are recorded based upon the invoiced amount, are generally not
interest bearing and are considered past due when full payment is not received by the
specified credit terms. The Company does not typically require collateral when granting
credit; however, customer credit worthiness is reviewed prior to granting credit. 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. The Company reviews the status of its accounts
monthly, assessing the customers ability to pay. When a specific account is deemed
uncollectible, the account is written off against the reserve for uncollectible accounts.
As of March 31, 2006 and 2005, the Company has established an allowance for doubtful
accounts of approximately $236,000 and $199,000, respectively, to account for estimated
uncollectible accounts (see Note 4).

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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 is recorded.
Depreciation and amortization are calculated using the straight-line method based upon the
assets estimated useful lives as follows:

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

The
Company uses accelerated methods of depreciation for tax purposes (see Note 6).

Research and Development
and Product Development Costs

The
Company expenses research and development costs as incurred. The Company incurred
approximately $432,000, $139,000 and $161,000 in research and development costs during
fiscal years 2006, 2005 and 2004, 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 are capitalized until the product is available
for general release to customers. The Company initially classifies the construction costs
of the first units produced for commercial use as product development costs prior to
transferring certain of these costs to inventory. The Company capitalized approximately
$546,000, $606,000 and $451,000 of product development costs during the years ended March
31, 2006, 2005 and 2004, respectively.

All
remaining product development costs are generally amortized on a straight-line basis over
a five (5) year period, the estimated useful life of the related asset. Amortization
expense related to product development costs was approximately $468,000, $362,000 and
$355,000 for the years ended March 31, 2006, 2005 and 2004, respectively.

At
March 31, 2006 and 2005, the Companys capitalized product development costs,
included its OnDemand system, which represented $2,601,000, and $1,843,000, respectively,
of the total gross capitalized product development costs. During the year ended March 31,
2006 and 2005, the Company sold four (4) and ten (10) OnDemand systems, respectively (see
Note 7).

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, the estimated useful
life of the related asset.

Goodwill and Other
Intangible Assets

The
Company follows SFAS No. 142, Goodwill and Other Intangible Assets, and
accordingly will not amortize goodwill, but will annually review it for impairment. Any
impairment charges related to goodwill will not be deductible for tax purposes. Other
intangible assets acquired in the BAF acquisition are amortized on a straight-line basis
over a period ranging from seven to fifteen years, the estimated useful life of the assets
(see Note 11).

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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 is less than the carrying amount of the assets, an
impairment loss is recognized based on a discounted cash flow analysis. There were no
impairment losses in 2006, 2005 and 2004.

Earnings Per Share

Basic
earnings per share are calculated by dividing net income available to common shareholders
by the weighted average number of shares of common stock outstanding for the period and
any warrants outstanding that are exercisable at a de minimus amount. Diluted earnings per
share is calculated by dividing net income before preferred stock dividends 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 outstanding
convertible preferred stock (see Note 17).

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 basis. 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 (see Note 15).

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 pro forma amounts
indicated below:

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|                                                                                 | 2006 |  | 2005 |       | 2004
|-------------------------------------------------------------------------------- | ---- |  | ---- | ----- | ----
|
|
|Net Income Available to Common
        Stockholders as Reported                  |      |  | $    | 1,430 |     
|
|Less:                                                                            |      | 
|
|Stock Based Employee Compensation Cost
        Under the Fair Value Based Method |      |  |      | 988   |     
|
|Net Income (Loss) Pro Forma                                                      |      |  | $    | 442   |     
|
|Net Income Per Common Share  Basic as
        Reported                          |      |  | $    | 0.24  |     
|
|Net Income (Loss) Per Common Share  Basic Pro Forma                             |      |  | $    | 0.07  |     
|
|Net Income Common Per Share  Diluted as Reported                                |      |  | $    | 0.23  |     
|
|Net Income (Loss) Per Common Share  Diluted Pro Forma                           |      |  | $    | 0.09  |     
|
|Weighted Average Shares Outstanding  Basic                                      |      |  |      | 5,962 |     
|
|Weighted Average Shares Outstanding  Diluted                                    |      |  |      | 7,190 |     

The
fair value of each option grant is estimated on the date of grant using the Black-Scholes
options-pricing model with the following weighted-average assumptions used for grants in
fiscal years 2006, 2005 and 2004, respectively, no dividend yield for all years, expected
volatility of 94, 112 and 133 percent; risk-free interest rates of 4.0, 3.0 and 3.0
percent, and three-year expected lives for all years.

On
February 24, 2005, in response to the recently published accounting standard, Statement of
Financial Accounting Standards No. 123 (revised 2004), Share-Based Payment(SFAS 123R), the Compensation Committee of the Companys Board of
Directors approved accelerating the vesting of options to acquire 205,000 shares of the
Companys stock, which accounted for all outstanding options with an exercise price
of $6.50 per share or greater. All of these options were in-the-money and all were held by
two executive officers and one employee. An option was considered in-the-money if the
stated option exercise price was less than $6.55, the closing price of the Companys
common stock on the day the Compensation Committee approved the acceleration. The
accelerated vesting was effective as of the close of business on February 24, 2005. The
acceleration of these options resulted in a charge in the Companys quarter ended
March 31, 2005 of approximately $10,250. The decision to accelerate vesting of these
options was made primarily to avoid recognizing compensation cost in the statement of
earnings in future financial statements upon the effectiveness of SFAS 123R. It is
estimated that the maximum future compensation expense that will be avoided, based on the
Companys implementation date for FAS 123R of April 1, 2006, is approximately
$582,000, all of which is related to options held by two executive officers and one
employee of the Company. Options granted in the fiscal year ended March 31, 2006 vested on
the grant date.

The
above pro forma disclosures may not be representative of the affects on reported net
income (loss) for future years, due to vesting periods, if any, the number of options
granted, the share price, and the fact that the Company may continue to grant additional options to
employees. For options granted with graded vesting, the Company amortizes compensation
cost using the straight line method over the vesting period.

The
Company recorded compensation expense of $29,000 and $352,000 in the fiscal years ended
March 31, 2006 and March 31, 2005, respectively, that related to restricted stock grants
awarded to its chief operating officer and chief financial officer.

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.

38

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In
May 2003, SFAS 150, Accounting for Certain Financial Instruments with
Characteristics of Both Liabilities and Equitywas issued. This statement
establishes standards for how an issuer classifies and measures certain financial
instruments with characteristics of both liability and equity. It requires that an issuer
classify a financial instrument that is within its scope as a liability (or an asset in
some circumstances). Many of those instruments were previously classified as equity. The
Company has reviewed the effect that SFAS 150 has on certain financial instruments issued
in June 2002 (see Note 16) and has determined that these financial instruments are
properly classified as equity in its financial statements as of March 31, 2006.

Recent Accounting
Pronouncements

In
December, 2004, the FASB issued FAS No. 123 (revised 2004) (FAS 123(R)),
Share-Based Payment, which is a revision of FAS 123. FAS 123(R) supersedes APB 25
and FAS 123, and amends FAS No. 95, Statement of Cash Flows. This Statement
requires entities to recognize the cost of employee services received in exchange for
awards of equity instruments based on the grant-date fair value of those awards (with
limited exceptions). This Statement eliminates the alternative to use APB 25s
intrinsic value method of accounting that was provided in FAS 123 as originally issued.
Under APB 25, issuing stock options to employees at or above fair value generally resulted
in no recognition of compensation cost.

FAS
123(R) also requires that the Company estimate the number of awards that are expected to
vest and to revise the estimate as the actual forfeitures differ from the estimate. This
standard is effective as of April 1, 2006 for the Company.

FAS
123(R) requires that the benefits of tax deductions in excess of recognized compensation
cost be reported as a financing cash flow, rather than as an operating cash flow, thus
reducing net operating cash flows and increasing net financing cash flows in the periods
after the effective date. The Company cannot estimate what these amounts will be in the
future because they depend on, among other things, when employees exercise stock options.

The
Company follows the disclosure only provisions of FAS 148, and has elected to follow APB
25 and related interpretations in accounting for its employee stock options. The Company
uses the Black-Scholes formula to estimate the value of stock options granted to employees
for disclosure purposes. FAS 123(R) requires that the Company use the valuation technique
that best fits the circumstances.

The
Company expects to use the modified-prospective method whereby compensation cost for the
portion of awards for which the requisite service has not yet been rendered that are
outstanding as of the adoption date will be recognized over the remaining service period.
The compensation cost for that portion of awards will be based on the grant-date fair
value of those awards as calculated for pro forma disclosures using the Black-Scholes
valuation model. All new awards and awards that are modified, repurchased, or cancelled
after the adoption date will be accounted for under the provisions of FAS 123(R). The
amounts reflected in Note 2 may not be representative of the affects on reported net
income (loss) for future years, due to vesting periods, if any, the number of options
granted, the share price, and the fact that the Company may continue to grant additional options to
employees.

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

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

39

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Accounting for the
Transfer Pricing Effect on Inventory

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

Elimination of a
Contingent Liability

Medical
Technology Laboratories, Inc. (MTL), formerly a wholly owned subsidiary of MTS (MTLs
assets were sold to a third party in 2000), accrued approximately $400,000 for unpaid
taxes assessed by the Agency for Health Care Administration (AHCA) on clinical
laboratories in the state of Florida. The tax was disputed and the Company received no
further notification from the state. The statue of limitations on the collection of the
AHCA tax has expired. Accordingly, the reserve was reversed to other income in the fiscal year ending March 31, 2005.

Foreign Currency
Transactions and Translation

For
the Companys foreign subsidiaries that use a currency other than the U.S. dollar as
their functional currency, assets and liabilities are translated at exchange rates in
effect at the balance sheet date, and revenue and expenses are translated at the average
exchange rate for the period. The effects of these translation adjustments are reported in
other comprehensive income. Gains and losses arising from transactions denominated in a
currency other than the functional currency of the entity involved are included in
operating income.

Reclassification of
Certain Amounts

Certain
amounts on the consolidated balance sheet and statement of cash flows as of March 31, 2005
have been reclassified to conform to the March 31, 2006 presentation. The Company does not
believe that the reclassifications have a material effect on the March 31, 2005 financial
statements, both from a quantitative and qualitative perspective.

# NOTE 3 
RESTATEMENT OF HISTORICAL FINANCIAL STATEMENTS

The
Company has restated its previously issued financial statements to correct for an error in
applying its accounting policies related to revenue recognition for certain shipments made
to customers during the three months ended September 30, 2005 and December 31, 2005.

The
Company determined that certain shipments, primarily those that were made to wholesale
distributors, have been made FOB destination and title and risk of loss did not transfer
until the product was received by the customer. Therefore, the Company concluded that
revenue was not recognized in accordance with Staff Accounting Bulletin No. 104, which
states that revenue should not be recognized until title and risk of loss have
transferred. The effect on its audited consolidated financial statements for the prior
years was not material to the results of operations for those fiscal years.

The
effect of the restatement was to decrease revenue by approximately $853,000, decrease cost
of sales by approximately $521,000, decrease income tax expense by approximately $125,000
and decrease net income by approximately $207,000 or $.03 per diluted common share for the
three and six months ended September 30, 2005. In addition, the restatement resulted in a
decrease of approximately $853,000 in accounts receivable, an increase of approximately
$521,000 in inventory and an approximately $125,000 increase in deferred tax benefits as
of September 30, 2005.

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Also,
the effect of the restatement was to increase revenue by approximately $838,000, increase
cost of sales by approximately $512,000, increase income tax expense by approximately
$123,000 and increase net income by approximately $203,000 or $.03 per diluted common
share for the three months ended December 31, 2005. The cumulative effect of the
restatements of the financial statements for the periods ended September 30, 2005 and
December 31, 2005 was to decrease revenue by approximately $15,000, decrease cost of sales
by approximately $9,000, decrease income tax expense by approximately $2,000 and decrease
net income by approximately $4,000 or $0.00 per diluted common share for the nine months
ended December 31, 2005.

In
addition, the restatement resulted in a decrease of approximately $15,000 in accounts
receivable, and increase of approximately $9,000 in inventory and an approximately $2,000
increase in deferred tax benefits as of December 31, 2005.

# NOTE 4  ACCOUNTS
RECEIVABLE

Accounts
receivable are shown net of an allowance for doubtful accounts of $236,000 and $199,000 at
March 31, 2006 and 2005, respectively. The changes in the allowance for doubtful accounts
are summarized as follows:

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

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

Concentration
of Credit Risk  The Company extends credit to customers on terms of payment
generally ranging from net 30 to 60 days without collateral or other forms of security.
The credit worthiness of each customer is routinely assessed and credit is extended based
upon a review of various information that is available. At March 31, 2006 and 2005, three
customers comprised approximately 17% and 32%, respectively, of the total outstanding
accounts receivable, and one of those customers represented 8% and 15%, respectively, of
the total outstanding accounts receivable.

# NOTE 5  INVENTORIES

Inventories
consist of the following:

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

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

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

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

# NOTE 6  PROPERTY
AND EQUIPMENT

Property
and equipment consists of the following:

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

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

Depreciation
of property and equipment and amortization of leasehold improvements was approximately
$1,565,000, $1,242,000 and $767,000 for fiscal years ending March 31, 2006 2005 and 2004,
respectively.

The
Company performed a physical inventory of its property and equipment during the fiscal
year ending March 31, 2006, which resulted in $399,000 of additional depreciation expense.

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# NOTE 7  OTHER
ASSETS

|                                           | Amortization Period |        | March 31, |   | March 31,
|------------------------------------------ | ------------------- | ------ | --------- | - | ---------
|
|
|                                           | (In Thousands)     
|
|Product Development (see Note 2)           |                     | 3  5  |           | $ | 3,243    
|Less:  Accumulated
         Amortization   |                     |        |           |   | (1,703   
|
|                                           |                     |        |           | $ | 1,540    
|
|
|Patents                                    |                     | 5  17 |           | $ | 2,472    
|Less:  
        Accumulated Amortization   |                     |        |           |   | (1,573   
|
|                                           |                     |        |           | $ | 899      
|
|
|Financing Costs (see Note 18)              |                     | 3  5  |           | $ | 132      
|Less:  
          Accumulated Amortization |                     |        |           |   | (64      
|
|                                           |                     |        |           | $ | 68       
|
|
|Other                                      |                     | 5      |           | $ | 103      
|Less:  
          Accumulated Amortization |                     |        |           |   |         
|
|                                           |                     |        |           | $ | 103      
|
|Total Other Assets, Net                    |                     |        |           | $ | 2,610    
|

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

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

| |                                                                                    |  | (In Thousands)
| | ---------------------------------------------------------------------------------- |  | --------------
| |                                                                                    |  |               
| | 2007
        ..................................................................... |  | $             
| | 2008
        ..................................................................... |  | $             
| | 2009
        ..................................................................... |  | $             
| | 2010
        ..................................................................... |  | $             
| | 2011
        ..................................................................... |  | $             

Patent
amortization expense was approximately $260,000, $288,000 and $196,000 for the fiscal
years ended March 31, 2006, 2005 and 2004, respectively.

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# NOTE 8  ACCOUNTS
PAYABLE AND ACCRUED LIABILITIES

Accounts
payable and accrued liabilities are comprised of the following:

Table of Contents

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

# NOTE 9  LONG-TERM
DEBT

Long-term
debt consists of the following:

|                                                                                                                                                    | March 31,      |  | March 31,
|--------------------------------------------------------------------------------------------------------------------------------------------------- | -------------- |  | ---------
|
|
|                                                                                                                                                    | (In Thousands)
|
|
|Revolving line of credit due June
        2007 plus interest payable monthly at 1% above the prime rate (7.75% at March 31, 2006)                   |                |  | $        
|
|Bank term loan payable
        in graduated monthly installments of $32,000 -$52,000 plus interest at 0.50% above the prime rate through June 2007. |                |  |          
|
|Note payable to related party (see Note 14)
        payable in monthly installments of $28,785 including interest at 6.25% through July 2008        |                |  |          
|
|Capital leases expiring at various
        times through fiscal year 2010 at interest rates ranging from 6.29% to 9.5%.                             |                |  |          
|
|Other Notes and Agreements                                                                                                                          |                |  |          
|
|Total Long-Term Debt                                                                                                                                |                |  |          
|
|Less Current Portion (including $308,000
        and $290,000, respectively due to a related party)                                                 |                |  |          
|
|Long-Term Debt Due After One Year                                                                                                                   |                |  | $        
|

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In
June 2004, the Company consummated a debt refinancing and repaid the entire amount,
$4,000,000, of its subordinated note and term loan with a bank with the proceeds of an
additional senior term loan and advances on its revolving line of credit. In April 2004,
the subordinated note holders exercised their rights to acquire 566,517 shares of common
stock under the terms of the warrant agreements and sold the common stock. All of the
Companys obligations under the warrant agreement were extinguished at the time the
investor sold the common stock and the debt was repaid. Upon the repayment of the
subordinated note, the Company incurred a prepayment penalty of $120,000, which is
included as a component of interest expense. As part of the refinancing, the Company
extended the maturity date of the revolving loan to June 2007, increased the maximum
revolving loan limit from $5.0 million to $8.5 million, entered into a new secured
equipment loan for $1.2 million and obtained a new $300,000 line of credit to fund future
purchases of equipment. At the time the subordinated note was repaid, the Company recorded
a one-time non-cash expense to extinguish the unamortized original issue discount of
approximately $741,000 and wrote-off the deferred financing costs of approximately
$420,000 that were incurred when the subordinated debt was acquired.

In
February 2006, the Company amended its secured loan agreement to allow for the acquisition
of BAF, increased the equipment line of credit from $300,000 to $1,000,000, modified
certain financial covenants and increased the borrowing base limit related to eligible
inventory.

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

The
new revolving line of credit allows for borrowings based upon advance rates that are
applied to the Companys eligible accounts receivable and inventory at the prime rate
or LIBOR plus 2.25%, and requires that the Company 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%.

The
new revolving line of credit and bank term loans contain provisions that require the
Company to maintain certain financial covenants that, among other things, require the
maintenance of minimum tangible net worth and debt service coverage ratios, limit the
amount of capital expenditures and require lender approval for certain matters. The
Company was in compliance with all provisions of the loan agreements as of March 31, 2006.

The
following is a schedule by year of the regularly scheduled principal payments required on
the notes payable and long-term debts as of March 31, 2006:

|                                                                  |  | (In Thousands)
|----------------------------------------------------------------- |  | --------------
|                                                                  |  |               
|2007
        .................................................... |  | $             
|2008
        .................................................... |  | $             
|2009
        .................................................... |  | $             
|2010
        .................................................... |  | $             
|2011
        .................................................... |  | $             
|Thereafter
        ..........................................     |  | $             

Interest
expense for the years 2006, 2005 and 2004 amounted to approximately $322,000, $613,000 and
$851,000, respectively.

At
March 31, 2006, the Company had a $1,000,000 line of credit available for purchases of
equipment at an interest rate of prime plus 0.75%. Advances on the line of credit are
repayable over a three-year term. There were no amounts outstanding on this line of credit
at March 31, 2006.

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# NOTE 10  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, 2006.

|                                                                  |  | (In Thousands)
|----------------------------------------------------------------- |  | --------------
|                                                                  |  |               
|2007
        .................................................... |  | $             
|2008
        .................................................... |  | $             
|2009
        .................................................... |  | $             
|2010
        .................................................... |  | $             
|2011
        .................................................... |  | $             
|Thereafter
        ..........................................     |  | $             

The
Company currently leases approximately 132,500 square feet consisting of office space and
air-conditioned manufacturing and warehousing space at 2003 Gandy Boulevard North, Suite
800, St. Petersburg, Florida. The lease term is for 12 years ending September 30, 2016.
The Companys corporate administrative offices and the primary manufacturing
facilities for MTS are at this location. The monthly lease payments are currently $51,845
plus tax and increase to $80,275 plus tax in the final year. In addition, The Company is
obligated to pay annual operating expenses (i.e., insurance, property taxes and common
area maintenance fees). The Company has applied the provisions of FASB Statement 13,
Accounting for Leases to account for the lease payments. Accordingly,
the total lease payments that will be made over the term of the lease are being recorded
as an expense on a pro-rata basis, adjusted for the consumer price index, over the term of
the lease as opposed to recording the amount of lease payments actually made. As a result,
the difference between the actual lease payments made and the amount of expense recorded
is carried as a liability on the Companys balance sheet. The amount of this
liability was $237,000 and $143,000 at March 31, 2006 and 2005, respectively.

In
addition, the Company was paid $400,000 by its landlord when the lease was executed. This
payment was provided as an incentive to enter into the lease. The amount is recorded as a
long-term liability on the balance sheet and is being amortized as a reduction of rent
expense over the term of the lease.

MTS
also leases approximately 5,200 square feet at approximately $3,200 per month for office
and warehouse space at 21530 Drake Road, Cleveland, Ohio. The lease expires on March 31,
2007.

MTS
Medication Technologies International, Ltd. currently leases approximately 1,600 square
feet of office and warehouse space at Unit 6A/6B Dalton Court, Blackburn Interchange,
Lower Darwen, Blackburn, Lancashire, England. The lease is for a term of three years, and
the monthly lease payments are approximately $3,400. The lease expires on May 20, 2009 and
is cancellable at any time with six months notice.

As
part of the BAF acquisition, the Company entered into a premises lease with the previous
owners of BAF for approximately 12,000 square feet of office and manufacturing space. The
lease is for a term of three years beginning on February 22, 2006, and the monthly lease
payments are approximately $4,500. In addition, the Company is obligated to pay annual
operating expenses (i.e., insurance, utilities and property taxes).

Rent
expense amounted to approximately $1,134,000, $788,000 and $533,000 for the years ended
March 31, 2006, 2005 and 2004, respectively.

# NOTE 11 
ACQUISITION OF BAF PRINTERS, LTD.

In
February 2006, the Company acquired all of the outstanding shares of BAF. The acquisition
was made to assist the Company with its plans to expand operations in the United Kingdom.
The total purchase price was $2,349,000 and included $1,034,000 of cash paid, $1,148,000
of assumed liabilities and $167,000 of transaction fees and expenses. The purchase price
was funded with the proceeds of an advance on the Companys revolving line of credit.
The acquisition was accounted for under the purchase method of accounting and accordingly,
the purchase price was allocated based on the fair value of the assets acquired and
liabilities assumed.

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The
purchase price was allocated as follows:

|                                                                                                    | 
|--------------------------------------------------------------------------------------------------- | 
|Current Assets                                                                                      | 
|Property and Equipment                                                                              | 
|Goodwill                                                                                            | 
|Other Intangible Assets (principally customer relationships
        and non-competition agreements) | 
|Other                                                                                               | 
|                                                                                                    | 
|                                                                                                    | 
|                                                                                                    | 

In
addition, the Company has placed $87,000 in escrow that will be paid to the sellers if
there are no claims against them related to any representations or warranties contained in
the purchase agreement. Also, if certain financial performance objectives are achieved in
the future, the sellers may be paid an additional $174,000 of contingent consideration.
The Company has recorded the escrow amount as a deposit and has not recorded the
contingent consideration because of the uncertainty as to whether the amount will
ultimately be paid. If either of the above payments are made to the sellers in the future,
the amounts will be recorded as goodwill.

The
amount of the purchase price that was allocated to other intangible assets will be
amortized over a period of seven (7) years for the non-compete agreements and fifteen (15)
years for the customer relationship intangible. The amount of amortization expense that is
expected to be recorded in each of the next five (5) years is approximately $35,000.

The
results of operations for BAF during the period February 22, 2006 to March 31, 2006 have
been included in the Companys consolidated statement of operations.

# NOTE 12  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, 2006, 2005 and 2004, the
Company made matching contributions of approximately $54,000, $42,000 and $38,000,
respectively, to the plan.

# NOTE 13  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, 2006, the Company was reinsured for claims that
exceed $50,000 per participant and an annual maximum aggregate limit of approximately
$783,000. Reinsurance limits for the fiscal year ending March 31, 2007 were raised to
$100,000 per participant and $898,000 in the aggregate. Future claims experience may
affect the reinsurance limits that may be available to the Company in subsequent fiscal
years. The Company has established a reserve of approximately $90,000 and $49,000 at March
31, 2006 and 2005, respectively, for all unpaid claims incurred and reported during fiscal
year 2006 and an estimate of claims incurred during fiscal year 2006 that have not been
reported as of March 31, 2006. Self insured medical claims costs incurred during the
periods ended March 31, 2006, 2005 and 2004 totaled approximately $469,000, $591,000 and
$480,000, respectively.

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# NOTE 14  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%.
Interest expense incurred on the related party note payable was $56,228, $73,705 and
$52,699, respectively, for the fiscal years ending March 31, 2006, 2005 and 2004. 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 15  TAXES

The
components of income tax expense is as follows:

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

Total
income tax expense for 2006, 2005 and 2004 resulted in effective tax rates of 42.0%, 42.7%
and 37.5%, respectively. The reasons for the differences between these effective tax rates
and the United States statutory rate of 34.0% are as follows:

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

Although
the Company has operations in a foreign country, to date, there has been no material
taxable income attributable to those operations in the foreign country.

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Deferred
taxes consist of the following:

|                                       | March 31, 2006 |  | March 31, 2005
|-------------------------------------- | -------------- |  | --------------
|
|                                       | (In Thousands)
|
|Current:                               |                |  |               
|Deferred Tax Assets:                   |                | 
|Tax Loss Carryforward                  |                |  | $             
|Reserves and Provisions                |                |  |               
|Inventory Valuation Allowance          |                |  |               
|Allowance for Doubtful Accounts        |                |  |               
|
|Current Deferred Tax Assets, Net       |                |  |               
|
|Noncurrent:                            |                | 
|Deferred Tax Assets:                   |                |  |               
|Reserves and Provisions                |                |  |               
|
|Noncurrent Deferred Tax Asset          |                |  |               
|
|Deferred Tax Liability:                |                | 
|Depreciation / Amortization            |                |  |               
|
|Noncurrent Deferred Tax Liability      |                |  |               
|
|Noncurrent Deferred Tax Liability, Net |                |  |               
|
|Net Deferred Tax Asset                 |                |  | $             
|

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
$2.2 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, in the fiscal year ending March 31, 2007
will fully utilize the remaining tax loss carryforward. Accordingly, the entire related
deferred tax asset has been classified as current.

# NOTE 16 
STOCKHOLDERS EQUITY

Stockholders
Equity consists of the following:

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

|                          | March 31, |            | March 31, |            | March 31,
|------------------------- | --------- | ---------- | --------- | ---------- | ---------
|
|
|
|Par Value $.01 Per Share: |           |            |           |            |          
|Authorized Shares         |           | 25,000,000 |           | 25,000,000 |          
|Outstanding Shares        |           | 6,017,005  |           | 5,836,160  |          
|Issued Shares             |           | 6,017,065  |           | 5,836,220  |          

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Series
A Convertible Participating Preferred Stock

In
June 2002, the Company issued 2,000 shares of convertible preferred stock at $1,000 per
share. The holders of the convertible preferred stock are entitled to receive quarterly
dividends at the rate of 11% per annum. The dividends are payable in cash or shares of
convertible preferred stock at the Companys option and are cumulative. Through the
period ended March 31, 2006, 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
holder of the shares of convertible preferred stock are entitled to vote with the holders
of the common stock based upon the number of common shares that would result from a
conversion of the preferred share into common shares. The terms of the preferred stock
contain a make-whole provision that obligates the Company to pay certain amounts to the
holders if they do not ultimately receive an amount equal to the price per share of the
common stock on the date they elect to convert the preferred stock into common stock. On
the date the convertible preferred stock was issued, the fair market value of the
Companys common stock was $2.77 per share based upon the closing bid on the Over The
Counter Bulletin Board (OTCBB). The difference between the fair market value
of the shares and the conversion price of the convertible preferred stock represented a
constructive dividend to the holders of the preferred stock in the amount of $347,000. In
addition, the terms of the convertible preferred stock agreement contains certain
antidilution provisions and also contains a make-whole provision that obligates the
Company to pay certain amounts to the holder of the preferred stock if they do not
ultimately receive an amount equal to the price per share of the common stock on the date
they exercise their right to convert the preferred stock into common stock. The Company
followed the accounting prescribed in EITF 98-5and EITF 00-27 for the
recording of the convertible preferred stock and the constructive dividend.

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

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

# Stock Options

MTS
Medication Technologies, Inc. Stock Incentive Plan (the Plan) provides for the
granting to employees of incentive stock options within the meaning of Section 422 of the
Internal Revenue Code. A total of 2,100,000 shares of common stock are reserved for
issuance under the Plan. As of March 31, 2006, options to purchase 1,048,600 shares were
outstanding and 183,600 options are available for issuance under the Plan.

Incentive
stock options historically contained terms that provide for vesting over a period of three
to five years and expire at the time the recipient ceases to be employed by the Company or
ten years, whichever occurs first, however, options granted in the fiscal year ended
March 31, 2006 vested on the grant date.

In
connection with the exercise of options under the Companys Stock Incentive Plan,
during the fiscal years ended March 31, 2006 and 2005, tax benefits to the Company of
$187,000 and $506,000, respectively, were recorded as additional paid in capital.

50

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Activity
related to options is as follows:

|                              |  |           |   |  | Weighted Average
|----------------------------- |  | --------- | - |  | ----------------
|
|
|
|
|Outstanding at March 31, 2003 |  | 1,521,806 |   |  | $               
|Granted in Fiscal 2004:       |  |          
|Officers and Directors        |  | 89,000    |   |  | $               
|Employees                     |  | 43,333    |   |  | $               
|Options Exercised             |  | (404,791  | ) |  | $               
|Options Expired               |  | (78,048   | ) |  | $               
|
|Outstanding at March 31, 2004 |  | 1,171,300 |   |  | $               
|Granted in Fiscal 2005:       |  |          
|Officers and Directors        |  | 275,000   |   |  | $               
|Employees                     |  | 160,000   |   |  | $               
|Options Exercised             |  | (356,583  | ) |  | $               
|Options Expired               |  | (156,917  | ) |  | $               
|
|Outstanding at March 31, 2005 |  | 1,092,800 |   |  | $               
|Granted in Fiscal 2006:       |  |          
|Officers and Directors        |  | 5,000     |   |  | $               
|Employees                     |  | 220,000   |   |  | $               
|Options Exercised             |  | (93,900   | ) |  | $               
|Options Expired               |  | (175,300  | ) |  | $               
|
|Outstanding at March 31, 2006 |  | 1,048,600 |   |  | $               
|

# Outstanding Shares

|                |  |         |  | Weighted Average |  |      
|--------------- |  | ------- |  | ---------------- |  | -----
|
|
|
|$1.45 -   $2.30 |  | 277,500 |  | 5.0              |  | $1.60
|$2.50 -   $5.00 |  | 274,100 |  | 4.4              |  | $3.08
|$5.60 - $12.45  |  | 497,000 |  | 9.3              |  | $6.34

# Exercisable Shares

|                |  |         |  | Weighted Average |  |      
|--------------- |  | ------- |  | ---------------- |  | -----
|
|
|
|$1.45 -   $2.30 |  | 277,500 |  | 5.0              |  | $1.60
|$2.50 -   $5.00 |  | 231,100 |  | 3.8              |  | $2.92
|$5.60 - $12.45  |  | 497,000 |  | 9.3              |  | $6.34

The
options outstanding at March 31, 2006 expire on various dates commencing in October 2005
and ending in March 2014.

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The
weighted  average grant date fair value of options  granted during fiscal years 2006,
 2005 and 2004 was $3.65,  $4.44 and $3.48, respectively.

Warrants

Activity
related to warrants is as follows:

|                                |  |          | Weighted Average
|------------------------------- |  | -------- | ----------------
|
|
|
|Outstanding at March 31, 2003   |  | 774,117  |                 
|Warrants Granted in Fiscal 2004 |  |         |                 
|Warrants Exercised              |  | (178,100 | )               
|Warrants Expired                |  |         |                 
|
|Outstanding at March 31, 2004   |  | 596,017  |                 
|Warrants Granted in Fiscal 2005 |  |         |                 
|Warrants Exercised              |  | (566,517 | )               
|Warrants Expired                |  |         |                 
|
|Outstanding at March 31, 2005   |  | 29,500   |                 
|Warrants Granted in Fiscal 2006 |  |         |                 
|Warrants Exercised              |  | (23,600  | )               
|Warrants Expired                |  |         |                 
|
|Outstanding at March 31, 2006   |  | 5,900    |                 
|

The
warrants expire on various dates commencing August 2008 and ending April 2009. All
warrants are 100% vested at March 31, 2006.

# NOTE 17  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 income per common share diluted calculation for the fiscal years ended March 31, 2006,
2005 and 2004 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 of common stock was assumed to be converted for each of the twelve months ended
March 31, 2006, 2005 and 2004 respectively. Additionally, dividends of $222,000, $220,000
and $220,000 for the twelve months ended March 31, 2006, 2005 and 2004, 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, 2004 was conformed to the calculation used for the
fiscal years ended March 31, 2006 and 2005.

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

|                                                                      | Year Ended                                        |  | Year Ended |       | Year Ended
|--------------------------------------------------------------------- | ------------------------------------------------- |  | ---------- | ----- | ----------
|
|
|                                                                      | (In Thousands, Except Earnings Per Share Amounts)
|Numerator:                                                            |                                                   |  |            |       |           
|
|Net Income Available to Common Stockholders                           |                                                   |  | $          | 1,430 |           
|                                                                      |                                                   |  |            |       |           
|Denominator:                                                          |                                                   | 
|
|Weighted Average Shares Outstanding  Basic                           |                                                   |  |            | 5,962 |           
|
|Add:  Effect of Dilutive Options and Warrants                         |                                                   |  |            | 381   |           
|
|Effect of Conversion of Convertible Preferred Stock into Common Stock |                                                   |  |            | 847   |           
|                                                                      |                                                   |  |            |       |           
|Weighted Average Shares Outstanding  Diluted                         |                                                   |  |            | 7,190 |           
|                                                                      |                                                   |  |            |       |           
|Net Income Per Common Share  Basic                                   |                                                   |  | $          | 0.24  |           
|                                                                      |                                                   |  |            |       |           
|Net Income Per Common Share  Diluted                                 |                                                   |  | $          | 0.23  |           
|                                                                      |                                                   |  |            |       |           

The
effect of 254,500, 9,800 and 114,000 options were not included in the calculation of net
income per diluted common share for fiscal years 2006, 2005 and 2004, respectively, as the
effect would have been anti-dilutive.

Certain
provisions of the convertible preferred stock issued in June 2002 may result in the
issuance of additional shares at some future date if certain events occur. Since these
events have not yet occurred, and therefore the number of additional shares is not known,
no additional shares have been included in the earnings per share calculation (see Note
16).

# NOTE 18  FINANCING
COSTS

The
Company incurred approximately $1,478,000 of financing costs during the fiscal year ended
March 31, 2003, including the value of the warrants issued to the Companys financial
advisors related to obtaining certain financing in June 2002. The financing costs were
allocated between the components of the financing that represented debt and equity. The
financing costs that were allocated to the debt proceeds, $1,110,000, have been recorded
as another asset and will be amortized over the repayment term of the various loans and
notes. The financing costs that were allocated to the equity proceeds, $368,000, have been
recorded as a reduction of the equity proceeds. These financing costs were written off as
part of the June 2004 debt refinancing. The Company incurred $105,000 in new financing costs in
June 2004. Amortization expense related to the financing costs was $36,000 and $500,000
for the fiscal years ended March 31, 2006 and 2005, respectively.

# NOTE 19 
CONTINGENCIES

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

53

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

# NOTE 20  SEGMENT
INFORMATION

The
individual subsidiaries comprising the Company operate predominantly in a single industry
as manufacturers of consumable medication punch cards, packaging equipment and ancillary
products. The Company has operations in the United States and subsidiaries in the United
Kingdom. In computing operating profit for foreign subsidiaries, allocations of general
corporate expenses have been made and intercompany sales were recorded at values that
approximate fair value exchanges between unrelated parties. Management evaluates the
Companys business performance on a geographic basis.

Identifiable
assets of the foreign subsidiaries are those assets related to the operations of those
companies. United States assets consists of all other operating assets of the Company.
Segment information is as follows:

|                                | United         |  | United |        |  |   |      
|------------------------------- | -------------- |  | ------ | ------ |  | - | -----
|
|
|                                | (In Thousands)
|
|2006                            |                |  |        |        |  |   |      
|Sales to Unaffiliated Customers |                |  | $      | 38,886 |  | $ | 3,636
|Intercompany Sales              |                |  | $      | 1,595  |  | $ |     
|Operating Income                |                |  | $      | 3,125  |  | $ | 58   
|Identifiable Assets             |                |  | $      | 18,895 |  | $ | 4,039
|Depreciation and Amortization   |                |  | $      | 2,247  |  | $ | 49   
|Capital Expenditures            |                |  | $      | 1,047  |  | $ | 7    
|
|2005                            |                |  |        |        | 
|Sales to Unaffiliated Customers |                |  | $      | 37,743 |  | $ | 2,481
|Intercompany Sales              |                |  | $      | 1,367  |  | $ |     
|Operating Income                |                |  | $      | 3,732  |  | $ | (87  
|Identifiable Assets             |                |  | $      | 21,076 |  | $ | 1,598
|Depreciation and Amortization   |                |  | $      | 1,864  |  | $ | 48   
|Capital Expenditures            |                |  | $      | 1,932  |  | $ | 20   
|
|2004                            |                |  |        |        | 
|Sales to Unaffiliated Customers |                |  | $      | 33,494 |  | $ | 1,340
|Intercompany Sales              |                |  | $      | 558    |  | $ |     
|Operating Income                |                |  | $      | 5,084  |  | $ | (451 
|Identifiable Assets             |                |  | $      | 19,831 |  | $ | 1,011
|Depreciation and Amortization   |                |  | $      | 1,342  |  | $ |     
|Capital Expenditures            |                |  | $      | 1,466  |  | $ | 3    

Sales
to Canada have been included in the United States because they are not material.

Net
foreign currency gains reflected in results of operations were immaterial for 2006, 2005
and 2004, respectively. Operating income is total sales and other operating income less
operating expenses. Segment operating income does not include interest expense and net
miscellaneous income/expense.

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# NOTE 21 
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION

|                                                  | 2006 |   | 2005 |  | 2004
|------------------------------------------------- | ---- | - | ---- |  | ----
|
|Supplemental Disclosure of Cash Flow Information:
|                                                 
|Cash Paid for Interest                            |      | $ | 327  |  | $   
|
|Cash Paid for Taxes                               |      | $ | 40   |  | $   
|

Non-Cash Activities

During
the fiscal year ended March 31, 2006 and 2005, the Company reclassified the following:

|   |                | 2006 |                                                         | 2005
|-- | -------------- | ---- | ------------------------------------------------------- | ----
|
|   | (In Thousands)
|
|1. |                |      | Machine rentals from inventory to equipment             |     
|2. |                |      | Tax overpayments from deferred tax asset to receivables |     
|3. |                |      | Product development costs to inventory                  |     
|4. |                |      | Product development costs to equipment                  |     

55

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# SIGNATURES

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

|Dated:  July 6, 2006 |  |  | Medical Technology Systems, Inc. | 
|-------------------- |  |  | -------------------------------- | 
|
|                     |  |  |                                  | 
|                     |  |  |                                  | 

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

|Signature                |  | Title                                                                             |  | Date         | 
|------------------------ |  | --------------------------------------------------------------------------------- |  | ------------ | 
|
|
|/s/ Todd E. Siegel       |  | Chairman of
        the Board of Directors, President and Chief Executive Officer |  | July 6, 2006 | 
|Todd E. Siegel           |  | (principal executive officer)                                                     |  |              | 
|
|/s/ Michael P. Conroy    |  | Chief Financial
        Officer and Vice President                                |  | July 6, 2006 | 
|Michael P. Conroy        |  | (principal financial officer)                                                     |  |              | 
|
|/s/ Michael D. Stevenson |  | Chief Operating
        Officer                                                   |  | July 6, 2006 | 
|Michael D. Stevenson     |  |                                                                                   |  |              | 
|
|/s/ Teresa Dunbar        |  | Principal Accounting
         Officer and Controller                              |  | July 6, 2006 | 
|Teresa Dunbar            |  |                                                                                   |  |              | 
|
|/s/ John Stanton         |  | Director and Vice
        Chairman of the Board of Directors                      |  | July 6, 2006 | 
|John Stanton             |  |                                                                                   |  |              | 
|
|/s/ Allen Braswell       |  | Director                                                                          |  | July 6, 2006 | 
|Allen Braswell           |  |                                                                                   |  |              | 
|
|/s/ Irv I. Cohen         |  | Director                                                                          |  | July 6, 2006 | 
|Irv I. Cohen             |  |                                                                                   |  |              | 
|
|/s/ David W. Kazarian    |  | Director                                                                          |  | July 6, 2006 | 
|David W. Kazarian        |  |                                                                                   |  |              | 
|
|/s/ Frank A. Newman      |  | Director                                                                          |  | July 6, 2006 | 
|Frank A. Newman          |  |                                                                                   |  |              | 
|

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# 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 10.4-10.7; 10.10; 10.12-10.14;
        10.18; and 10.23 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        |  | Form of Director/Officer Indemnification
        Agreement (5)                                                                                                                                                                                                                                                                                                                                                                                                                      
|10.3        |  | Stock Option Plan dated March 4, 1997 (6)                                                                                                                                                                                                                                                                                                                                                                                                                                           
|10.4        |  | Form of Warrant dated August 7, 1998,
        between Sally Siegel and Medical Technology Systems, Inc. (7)                                                                                                                                                                                                                                                                                                                                                                         
|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 18, 1998,
        between Todd and Shelia 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        |  | Employment Agreement between
        Medical Technology Systems, Inc. and Todd E. Siegel dated July 1, 2003. (8)                                                                                                                                                                                                                                                                                                                                                                    
|10.9        |  | Subordination Agreement between
        Eureka I, L.P., LaSalle Business Credit, Inc., Medical Technology Systems, Inc., MTS Packaging
        Systems, Inc. dated June 26, 2002. (4)                                                                                                                                                                                                                                                                                               
|10.10       |  | Securities Purchase Agreement between
        Eureka I, L.P. and Medical Technology Systems, Inc. dated June 26, 2002. (4)                                                                                                                                                                                                                                                                                                                                                          
|10.11       |  | Senior Subordinated Note between
        Eureka I, L.P. and Medical Technology Systems, Inc. dated June 26, 2002. (4)                                                                                                                                                                                                                                                                                                                                                               
|10.12       |  | Registration Rights Agreement between
        Eureka I, L.P. and Medical Technology Systems, Inc. dated June 26, 2002. (4)                                                                                                                                                                                                                                                                                                                                                          
|10.13       |  | Tag-Along Agreement between Eureka I, L.P.,
        Medical Technology Systems, Inc. and JADE Partners dated June 26, 2002. (4)                                                                                                                                                                                                                                                                                                                                                     
|10.14       |  | Tag-Along Agreement between Eureka I, L.P.,
        Medical Technology Systems, Inc. and Todd E. Siegel dated June 26, 2002. (4)                                                                                                                                                                                                                                                                                                                                                    
|10.15       |  | 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 and Marketing dated June 26, 2002. (4)
|10.16       |  | Guaranty Agreement between Eureka I, L.P.
        Medical Technology Systems, Inc. dated June 26, 2002. (4)                                                                                                                                                                                                                                                                                                                                                                         
|10.17       |  | Securities Pledge Agreement between
        Eureka I, L.P., Medical Technology Systems, Inc. and LifeServ Technologies, Inc. dated June 26, 2002. (4)                                                                                                                                                                                                                                                                                                                               
|10.18       |  | Security Agreement between Eureka I, L.P.,
        Medical Technology Systems, Inc. date June 26, 2002. (4)                                                                                                                                                                                                                                                                                                                                                                         
|10.19       |  | Trademark Security Agreement between
        Eureka I, L.P. and Medical Technology Systems, Inc. dated June 26, 2002. (4)                                                                                                                                                                                                                                                                                                                                                           
|10.20       |  | Trademark Security Agreement between Eureka
        I, L.P. and MTS Packaging Systems, Inc. dated June 26, 2002. (4)                                                                                                                                                                                                                                                                                                                                                                
|10.21       |  | Patent Security Agreement between
        Eureka I, L.P. and MTS Packaging Systems, Inc. dated June 26, 2002. (4)                                                                                                                                                                                                                                                                                                                                                                   
|10.22       |  | Patent Security Agreement between
        Eureka I, L.P. and Medical Technology Systems, Inc. dated June 26, 2002. (4)                                                                                                                                                                                                                                                                                                                                                              

57

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|Exhibit No. |  | Description                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|----------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
|10.23       |  | Warrant Agreement between Eureka I, L.P. and Medical Technology Systems, Inc. dated June 26, 2002. (4)                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|10.24       |  | 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)                                                                                                                                                                                                                                                                                                                    
|10.25       |  | 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)                                                                                                                                                                                                                                                                                                                    
|10.26       |  | Term Note B between LaSalle Business Credit, Inc. as Agent, Standard Federal Bank National Association Inc. as Lender and Medical Technology Systems, Inc. and MTS Packaging Systems, Inc. dated June 26, 2002. (4)                                                                                                                                                                                                                                                                                                                                    
|10.27       |  | 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)                                                                                                                                                                                                                                                                                                                           
|10.28       |  | 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)                                                                                                                                                                                                                                                                                                                                     
|10.29       |  | 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)                                                                                                                                                                                                                                                                                                              
|10.30       |  | 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)                                                                                                                                                                                                                                                                                                                    
|10.31       |  | 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)
|10.32       |  | 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)                                                                                                                                                                                                                                                                                                  
|10.33       |  | 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)                                                                                                                                                                                                                                                                                                  
|10.34       |  | 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)                                                                                                                                                                                                                                                                                                                                     
|10.35       |  | Industrial lease between Gateway Business Centre, Ltd. and Medical Technology Systems, Inc. dated April 13, 2004. (10)                                                                                                                                                                                                                                                                                                                                                                                                                                 
|10.36       |  | Co-Marketing Agreement between Cardinal Health and Medical Technology Systems, Inc. dated May 13, 2004. (10)                                                                                                                                                                                                                                                                                                                                                                                                                                           
|10.37       |  | 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)                                                                                                                                                                                                                                                                                               
|10.38       |  | 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)                                                                                                                                                                                                                                                                                                                                   
|10.39       |  | 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. (10)                                                                                                                                                                                                                                                                                                                         
|10.40       |  | Employment Agreement between MTS Medication Technologies, Inc. and Michael D. Stevenson dated April 1, 2004. (11)                                                                                                                                                                                                                                                                                                                                                                                                                                      

58

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|Exhibit No. |  | Description                                                                                                                                                                                                                                            
|----------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
|10.41       |  | Third Amendment to Loan and Security Agreement between LaSalle Business Credit, LLC, as Agent, LaSalle Bank Midwest National Associations, Lender, and MTS Medication Technologies, Inc. and MTS Packaging Systems, Inc. dated February 22, 2006. (12) 
|10.42       |  | Second Amendment to Securities Pledge Agreement between LaSalle Business Credit, LLC, as Agent, LaSalle Bank Midwest National Associations, Lender, and MTS Medication Technologies, Inc. and MTS Packaging Systems, Inc. dated February 22, 2006. (12)
|10.43       |  | Continued Unconditional Guarantee between LaSalle Business Credit, LLC, as Agent LaSalle Bank Midwest National Associations, Lender, and MTS Medication Technologies, Inc. and MTS Packaging Systems, Inc. dated February 22, 2006. (12)               
|10.44       |  | Share Purchase Agreement between BAF, Ltd. and MTS Medication Technologies, International, Ltd. dated February 22, 2006 (*)                                                                                                                            
|10.45       |  | Sub-Lease of the Property between BAF, Ltd. and MTS Medication Technologies, International, Ltd. dated February 22, 2006. (*)                                                                                                                          
|10.46       |  | Service Agreement between Angela Bond-Wallis and MTS Medication Technologies, International, Ltd. dated February 22, 2006. (*)                                                                                                                         
|10.47       |  | Service Agreement between David Woods and MTS Medication Technologies, International, Ltd. dated February 22, 2006.  (*)                                                                                                                               
|21.1        |  | List of Subsidiaries(*)                                                                                                                                                                                                                                
|23          |  | Consent of Grant Thornton LLP dated May 18, 2005. (*)                                                                                                                                                                                                  
|31.1        |  | Certification by the Chief Executive Officer of MTS Medication Technologies, Inc. pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. (*)                                                                                                       
|31.2        |  | Certification by the Chief Financial Officer of MTS Medication Technologies, Inc. pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. (*)                                                                                                       
|32.1        |  | Certification by the Chief Executive Officer of MTS Medication Technologies, Inc. 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 MTS Medication Technologies, Inc. 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 10-Q filed November 12, 1998 for quarter ending September 30, 1998.                                                                                                                                           
|(8)         |  | Incorporated herein by reference to Form 10-Q filed August 15, 2003 for quarter ending June 30, 2003.                                                                                                                                                  
|(9)         |  | Incorporated herein by reference to Form 10-Q filed November 13, 2003 for quarter ending September 30, 2003.                                                                                                                                           
|(10)        |  | Incorporated herein by reference to Form 10-K filed June 29, 2004 for year ending March 31, 2004.                                                                                                                                                      
|(11)        |  | Incorporated herein by reference to Form 8-K filed September 10, 2004.                                                                                                                                                                                 
|(12)        |  | Incorporated herein by reference to Form 8-K filed February 22, 2006.                                                                                                                                                                                  
|(*)         |  | Filed herein.                                                                                                                                                                                                                                          

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EXHIBIT 23

CONSENT OF INDEPENDENT
REGISTERED PUBLIC ACCOUNTANTS

We
have issued our report dated June 26, 2006, accompanying the consolidated financial
statements included in the Annual Report of MTS Medication Technologies, Inc. on Form 10-K
for the year ended March 31, 2006. We hereby consent to the incorporation by reference of
said report in the Registration Statements of MTS Medication Technologies, Inc. on Form
S-3 (File No. 333-112212, effective February 6, 2004) and on Form S-8 (File No. 333-56384,
effective March 1, 2001).

|                        |  | 
|----------------------- |  | 
|/s/ GRANT THRONTON, LLP |  | 
|Tampa, Florida          |  | 
|                        |  | 
|June 26, 2006           |  | 

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# CERTIFICATIONS

EXHIBIT 31.1

I, Todd E. Siegel, certify that:

|1. | I
have reviewed this annual report on Form 10-K of MTS Medication Technologies, 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:   July 6, 2006 |  |  |  | 
|                     |  |  |  | 
|                     |  |  |  | 

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EXHIBIT 31.2

I, Michael P. Conroy, certify that:

|1. | I
have reviewed this annual report on Form 10-K of MTS Medication Technologies,
               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:   July 6, 2006 |  |  |  | 
|                     |  |  |  | 
|                     |  |  |  | 

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EXHIBIT 32.1

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

In connection with the Annual Report
of MTS Medication Technologies, Inc. (the Company) on Form 10-K for the year
ended March 31, 2006 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:  July 6, 2006                  | 
|                                      | 
|/s/Todd E. Siegel                     | 
|Todd E. Siegel                        | 
|President and Chief Executive Officer | 
|                                      | 
|                                      | 

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EXHIBIT 32.2

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

In connection with the Annual Report
of MTS Medication Technologies, Inc. (the Company) on Form 10-K for the year
ended March 31, 2005 as filed with the Securities and Exchange Commission on the date
hereof (the Form 10-K), I, Michael 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:  
        July 6, 2006              | 
|                                           | 
|/s/Michael P. Conroy                       | 
|Michael P. Conroy                          | 
|Vice President and Chief Financial Officer | 
|                                           | 
|                                           | 

64