Table of Contents

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

# FORM 10-Q

(Mark One)

|x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended December 31, 2008
|- | ----------------------------------------------------------------------------------------------------------------------------------------

| ̈ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934For the transition period
        from _______________ to _______________
|- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------

Commission File Number:   001-31578

| |                                                        | 
| | ------------------------------------------------------ | 
| | 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,
       St. Petersburg, Florida  33702 | 
| | ----------------------------------------------------------------- | 
| |                                                                   | 
| | (Address of Principal Executive Offices)                          | 

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

| |                                                                                            | 
| | ------------------------------------------------------------------------------------------ | 
| | N/A                                                                                        | 
| |                                                                                            | 
| | (Former Name, Former Address and Former Fiscal Year,
        if changed since last report) | 

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, a non-accelerated filer, or a smaller reporting company. See the definitions of large
accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange
Act.

| | Large accelerated filer |  ̈                                                 | Accelerated filer         |  ̈
| | ----------------------- | ------------------------------------------------- | ------------------------- | -
| | Non-accelerated filer   |  ̈    (Do not check if smaller reporting company.) | Smaller reporting company | x

Indicate by check mark whether the registrant is a shell company (as defined in rule 12b-2 of the Exchange Act).
            Yes     ̈
             No    x

Indicate the number of shares outstanding of each of the issuers classes of common stock, as of
the latest practicable date.

| | Class                                  |  | Outstanding at February 16, 2009 | 
| | -------------------------------------- |  | -------------------------------- | 
| |                                        |  |                                  | 
| | Common Stock, $.01 par value per share |  | 6,454,005                        | 

---

# MTS MEDICATION TECHNOLOGIES,
INC. AND SUBSIDIARIES

# Index

| |                   | Page                                                                                                                                         | 
| | ----------------- | -------------------------------------------------------------------------------------------------------------------------------------------- | 
|
|
|
| | Item 1.           | Financial Statements                                                                                                                         | 
| |                   |                                                                                                                                              | 
| |                   | Consolidated
        Balance Sheets  December 31, 2008 (Unaudited) and March 31, 2008                                                       | 
|
| |                   | Consolidated
        Statements of Income  Three and Nine Months Ended December 31, 2008 and 2007 (Unaudited)                               | 
|
| |                   | Consolidated
        Statement of Changes in Stockholders Equity and Comprehensive Income  Nine Months Ended December 31, 2008 (Unaudited) | 
|
| |                   | Consolidated
        Statements of Cash Flows  Nine Months Ended December 31, 2008 and 2007 (Unaudited)                                     | 
| |                   |                                                                                                                                              | 
| |                   | Notes to Consolidated Financial Statements (Unaudited)                                                                                       | 
|
| | Item 2.           | Management's Discussion and
        Analysis of Financial Condition and Results of Operations                                                | 
| |                   |                                                                                                                                              | 
| | Item 3.           | Quantitative and
        Qualitative Disclosures About Market Risk                                                                           | 
| |                   |                                                                                                                                              | 
| | Item 4.           | Controls and Procedures                                                                                                                      | 
| |                   |                                                                                                                                              | 
|
| |                   |                                                                                                                                              | 
| | Item 1.           | Legal Proceedings                                                                                                                            | 
| |                   |                                                                                                                                              | 
| | Item 1A.          | Risk Factors                                                                                                                                 | 
| |                   |                                                                                                                                              | 
| | Item 2.           | Unregistered Sales of Equity
        Securities and Use of Proceeds                                                                          | 
| |                   |                                                                                                                                              | 
| | Item 3.           | Default Upon Senior Securities                                                                                                               | 
| |                   |                                                                                                                                              | 
| | Item 4.           | Submission of Matters to a Vote of Security Holders                                                                                          | 
| |                   |                                                                                                                                              | 
| | Item 5.           | Other Information                                                                                                                            | 
| |                   |                                                                                                                                              | 
| | Item 6.           | Exhibits                                                                                                                                     | 
|
| | Signatures        |                                                                                                                                              | 
|
| | Index to Exhibits |                                                                                                                                              | 
|
| | Certifications    |                                                                                                                                              | 

i.

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Table of Contents

# Forward Looking
Statement

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

Forward-looking
statements are inherently subject to risks and uncertainties, some of which
cannot be predicted or quantified based on current expectations. Consequently,
future events and actual results could differ materially from those set forth in,
contemplated by, or underlying the forward-looking statements contained herein. The
following important factors, among others, could affect future results and events,
causing those results and events to differ materially from those expressed or implied in
our forward-looking statements:

- fluctuations in foreign currency;
- our ability to compete in a very competitive market;
- the limited number of customers that we depend on for our net sales;
- the additional risks inherent in our international operations;
- the small number of suppliers that we depend on for raw materials;
- our reliance on a single facility in which we manufacture a majority of our products;
- our reliance on short-term contracts with most of our clients;
- intellectual property rights and litigation;
- risks in product and technology development;
- the potential adverse effect of governmental regulation on our business, as well as our customers' businesses;
- the changing U.S. healthcare environment; and
- other factors that we may not have currently identified or quantified.

For
a further list and description of various risks, relevant factors and uncertainties that
could cause future results or events to differ materially from those expressed or implied
in our forward-looking statements, see Part I, Item 2. Managements Discussion
and Analysis of Financial Condition and Results of Operations, Part II, Item
1A. Risk Factors and Notes to Condensed Consolidated Financial Statements. Readers
are cautioned not to place undue reliance on any forward-looking statements contained
herein, which speak only as of the date hereof. We undertake no obligation to publicly
release the result of any revisions of these forward-looking statements that may be made
to reflect events or circumstances after the date hereof or to reflect the occurrence of
unexpected events.

---

Table of Contents

# PART 1 - FINANCIAL
INFORMATION

# Item 1.    Financial
Statements

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

ASSETS

|                             | December 31, 2008 |  | March 31, 2008
|---------------------------- | ----------------- |  | --------------
|
|                             | (Unaudited)       |  |               
|
|Current Assets:              |                   |  |               
|Cash                         |                   |  | $             
|Restricted Cash              |                   |  |               
|Accounts Receivable, Net     |                   |  |               
|Inventories, Net             |                   |  |               
|Prepaids and Other           |                   |  |               
|Deferred Tax Asset           |                   |  |               
|
|Total Current Assets         |                   |  |               
|
|Property and Equipment, Net  |                   |  |               
|Goodwill                     |                   |  |               
|Other Intangible Assets, Net |                   |  |               
|Other Assets, Net            |                   |  |               
|
|Total Assets                 |                   |  | $             
|

LIABILITIES AND
STOCKHOLDERS' EQUITY

|Current Liabilities:                             |  |  |   |        |   |  |   |        |  
|------------------------------------------------ |  |  | - | ------ | - |  | - | ------ | -
|Accounts Payable and Accrued Liabilities         |  |  | $ | 8,686  |   |  | $ | 8,653  |  
|Current Maturities of Long-Term Debt             |  |  |   | 31     |   |  |   | 74     |  
|Current Maturities of Related Party Note Payable |  |  |   |       |   |  |   | 106    |  
|Customer Deposits                                |  |  |   | 1,370  |   |  |   | 4,123  |  
|
|Total Current Liabilities                        |  |  |   | 10,087 |   |  |   | 12,956 |  
|
|Long-Term Debt, Less Current Maturities          |  |  |   | 9,509  |   |  |   | 11,691 |  
|Other Liabilities                                |  |  |   | 815    |   |  |   | 834    |  
|Deferred Tax Liability                           |  |  |   | 283    |   |  |   | 376    |  
|
|Total Liabilities                                |  |  |   | 20,694 |   |  |   | 25,857 |  
|
|Stockholders' Equity:                            |  | 
|Common Stock                                     |  |  |   | 64     |   |  |   | 64     |  
|Capital In Excess of Par Value                   |  |  |   | 10,422 |   |  |   | 10,137 |  
|Accumulated Other Comprehensive (Loss) Income    |  |  |   | (599   | ) |  |   | 374    |  
|Retained Earnings                                |  |  |   | 3,960  |   |  |   | 2,344  |  
|Treasury Stock                                   |  |  |   | (328   | ) |  |   | (328   | )
|
|Total Stockholders' Equity                       |  |  |   | 13,519 |   |  |   | 12,591 |  
|
|Total Liabilities and Stockholders' Equity       |  |  | $ | 34,213 |   |  | $ | 38,448 |  
|

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

1

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Table of Contents

# MTS MEDICATION
TECHNOLOGIES, INC. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF INCOME
(In Thousands; Except Earnings Per Share Amounts)(Unaudited)

|                                              | Three Months Ended December 31, |  | Nine Months Ended December 31,
|--------------------------------------------- | ------------------------------- |  | ------------------------------
|
|
|
|
|Net Sales                                     |                                 |  | $                             
|
|Costs and Expenses:                           |                                 | 
|Cost of Sales                                 |                                 |  |                               
|Selling, General and Administrative           |                                 |  |                               
|Depreciation and Amortization                 |                                 |  |                               
|
|Total Costs and Expenses                      |                                 |  |                               
|
|
|Operating Profit                              |                                 |  |                               
|
|Interest Expense                              |                                 |  |                               
|
|Income Before Taxes                           |                                 |  |                               
|
|Income Tax Expense                            |                                 |  |                               
|
|Net Income                                    |                                 |  |                               
|
|Net Income Per Basic Common Share             |                                 |  | $                             
|
|Net Income Per Diluted Common Share           |                                 |  | $                             
|
|Weighted Average Shares Outstanding - Basic   |                                 |  |                               
|
|Weighted Average Shares Outstanding - Diluted |                                 |  |                               
|

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

2

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# MTS MEDICATION TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME NINE
MONTHS ENDED DECEMBER 31, 2008 (In Thousands; Except Shares)(Unaudited)

|                                                  |  | Common Stock |  |   |    | Accumulated |   |        |  |   |      |   |  |  
|------------------------------------------------- |  | ------------ |  | - | -- | ----------- | - | ------ |  | - | ---- | - |  | -
|
|
|
|
|
|Balance March 31, 2008                            |  | 6,444,065    |  | $ | 64 |             | $ | 10,137 |  | $ | 374  |   |  | $
|Stock Grants Issued                               |  | 5,000        |  |   |    |             |   | 57     |  |   |      |   |  |  
|Share-Based Compensation                          |  |              |  |   |    |             |   | 176    |  |   |      |   |  |  
|Exercise of Stock Options and Warrants            |  | 5,000        |  |   |    |             |   | 9      |  |   |      |   |  |  
|Tax Benefit of Stock Option Exercises             |  |              |  |   |    |             |   | 43     |  |   |      |   |  |  
|Comprehensive Income:                             |  |              |  |   |    |             |   |        |  |   |      |   |  |  
|Net Income                                        |  |              |  |   |    |             |   |        |  |   |      |   |  |  
|Mark to Market of Interest Rate Swaps, Net of Tax |  |              |  |   |    |             |   |        |  |   | (153 | ) |  |  
|Foreign Currency Translation Adjustment           |  |              |  |   |    |             |   |        |  |   | (820 | ) |  |  
|
|Total Comprehensive Income                        |  |              |  |   |    |             |   |        |  |   |      |   |  |  
|
|Balance December 31, 2008                         |  | 6,454,065    |  | $ | 64 |             | $ | 10,422 |  | $ | (599 | ) |  | $
|

The accompanying notes are an
integral part of this financial statement.

3

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Table of Contents

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

|                                                         | Nine Months Ended December 31,
|-------------------------------------------------------- | ------------------------------
|
|
|
|Operating Activities                                     |                               
|Net Income                                               |                               
|Adjustments to Reconcile Net Income to Net Cash          |                               
|Provided by Operating Activities:                        |                               
|Depreciation and Amortization                            |                               
|Write-off of Deferred Financing Costs                    |                               
|Tax Benefit of Options Exercised                         |                               
|Deferred Income Taxes                                    |                               
|Loss on Disposal of Patents and Equipment                |                               
|Share-Based Compensation                                 |                               
|(Increase) Decrease in:                                  |                               
|Restricted Cash                                          |                               
|Accounts Receivable                                      |                               
|Inventories                                              |                               
|Prepaids and Other                                       |                               
|Increase (Decrease) in:                                  |                               
|Accounts Payable and Accrued Liabilities                 |                               
|Customer Deposits                                        |                               
|
|Total Adjustments                                        |                               
|
|Net Cash Provided by Operating Activities                |                               
|
|Investing Activities                                     |                               
|Expended for Property and Equipment                      |                               
|Expended for Product Development                         |                               
|Expended for Patents and Other Assets                    |                               
|
|Net Cash Used by Investing Activities                    |                               
|
|Financing Activities                                     |                               
|Payments on Notes Payable and Long-Term Debt             |                               
|Payments on Related Party Note Payable                   |                               
|Paydowns on Revolving Line of Credit                     |                               
|Advances on Revolving Line of Credit                     |                               
|Repayment of Previous Credit Facility                    |                               
|Tax Benefit of Options Exercised                         |                               
|Proceeds from Exercise of Options and Warrants           |                               
|Expended on Financing Costs                              |                               
|
|Net Cash (Used) Provided by Financing Activities         |                               
|
|Effect of Exchange Rate Changes on Cash                  |                               
|
|Net (Decrease) Increase in Cash                          |                               
|Cash at Beginning of Period                              |                               
|
|Cash at End of Period                                    |                               
|
|Supplemental Disclosure of Cash Flow Information         |                               
|Cash Paid for Interest                                   |                               
|Cash Paid for Taxes                                      |                               
|Non-Cash Activities:                                     |                               
|Reclassified machine rentals from Inventory to Equipment |                               
|Provision for Uncertain Tax Positions                    |                               
|Reclassified costs from product development to inventory |                               

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

4

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Table of Contents

# MTS MEDICATION
TECHNOLOGIES, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED DECEMBER 31, 2008

# NOTE 1  BASIS OF
PRESENTATION

MTS
Medication Technologies®, Inc., a Delaware corporation (the Company or
MTS), was incorporated in March 1984. MTS is a holding company that operates
through direct and indirect subsidiaries, MTS Packaging Systems, Inc.
(MTSP), MTS Medication Technologies, Ltd. (MTS Limited) and MTS
Medication Technologies GmbH (MTS GmbH). MTS GmbH is a wholly-owned subsidiary
of MTS Limited.

In
April 2008,  BAF  Printers,  Ltd. was merged into MTS Limited  pursuant to a statutory
 merger.  Prior to this merger,  BAF Printers, Ltd. operated as a wholly owned subsidiary
of MTS Limited.  The merged companies now operate under the MTS Limited name.

MTSP
primarily manufactures and sells consumable medication punch cards, packaging equipment
and ancillary products throughout the United States (the U.S.), Canada and
Europe. Its customers are predominantly institutional pharmacies that supply nursing
homes, assisted living and correctional facilities with prescription medications for their
patients. MTSP manufactures its proprietary consumable punch cards and most of its
packaging equipment in its own facilities. This manufacturing process uses integrated
equipment for manufacturing the consumable medication punch cards. In addition, MTSP
utilizes the services of outside contract manufacturers for some of its packaging
equipment. The consumable medication punch cards and packaging equipment are designed to
provide a cost effective method for pharmacies to dispense medications. MTSPs
medication dispensing systems and products provide innovative methods for dispensing
medications in disposable packages. MTS Limited distributes products for MTSP primarily in
the United Kingdom (the UK) and manufactures and sells prescription bags and
labels in the UK. MTS GmbH distributes products for MTSP in Germany. The Company currently
serves more than 4,500 institutional pharmacies in the long-term care and correctional
markets, both domestically and internationally.

The
accompanying unaudited condensed consolidated financial statements have been prepared in
accordance with accounting principles generally accepted in the U.S. (US GAAP)
for interim financial information and with the instructions to Form 10-Q and Rule 10 of
Regulation S-X. Accordingly, they do not include all of the information and notes required
by US GAAP for complete financial statements. In the opinion of management, all
adjustments (consisting of normal recurring accruals) considered necessary for a fair
presentation have been included. Operating results for the three- and nine-month periods
ended December 31, 2008 are not necessarily indicative of the results that may be expected
for the fourth quarter in the year ending March 31, 2009. The unaudited consolidated
financial statements should be read in conjunction with the consolidated financial
statements and notes thereto included in the Companys annual report on Form 10-K for
the year ended March 31, 2008.

# NOTE 2  RESTRICTED
CASH

In
May 2007, the Company entered into an agreement to provide sixteen OnDemand® Express
II and eight AccuFlex® machines to its largest customer over an eighteen-month
period.  The agreement provides that the customer will make certain deposits that
will ultimately be applied towards the purchase price of the machines.  The agreement
further provides that the deposits will be held in a separate bank account and used
exclusively for costs associated with the manufacture of the machines.  As of
December 31, 2008, the Company has deposits of approximately $1.3 million towards machines
delivered, but not accepted. This represents a decrease of approximately $1.0 million from
the previous quarter, due to the acceptance of five OnDemand machines. The Company has
used these cash deposits to pay for deposits to an outsourced manufacturer, and to pay
costs and expenses related to the manufacture and installation of the machines.

The
deposits received from the customer have been recorded as customer deposits because they
are fully refundable if the acceptance criteria for the delivered machines are not
met.  The deposits the Company has provided to the outsourced manufacturer of the
machines will ultimately be applied towards the purchase of the machines from the
manufacturer and are only refundable to the extent that costs have not been incurred to
manufacture machines. These vendor deposits are recorded as Prepaids and Other.

5

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Table of Contents

The
agreement further provides that in the event the Company does not deliver the machines,
the customer will be entitled to a full refund of the deposit. In addition, the Company
may be responsible for financial penalties in the event the machines are not delivered
according to the delivery schedule contained in the agreement. As of December 31, 2008,
the Company delivered 23 machines to the customer pursuant to the agreement and incurred
approximately $56,000 in penalties because three of the twenty-three machines were not
delivered according to the delivery schedule.

During
the three and nine months ended December 31, 2008, the customer accepted five machines and
twenty-one machines, respectively. As a result, the Company recorded $3.6 million and
$12.8 million, respectively, in revenue associated with the acceptance of these machines.

# NOTE 3  INVENTORIES

The
components of inventory consist of the following:

|                                     | December 31, 2008 |  | March 31, 2008
|------------------------------------ | ----------------- |  | --------------
|
|                                     | (In Thousands)   
|Raw Material                         |                   |  | $             
|Work in Process                      |                   |  |               
|Finished Goods                       |                   |  |               
|Less:  Inventory Valuation Allowance |                   |  |               
|
|                                     |                   |  | $             
|

# NOTE 4  EARNINGS
PER SHARE

Basic
earnings per share is calculated by dividing net income by the weighted average number of
shares of common stock outstanding for the period. Diluted earnings per share is
calculated by dividing net income by the weighted average number of shares of common stock
outstanding for the period, adjusted for the dilutive effect of common stock equivalents,
using the treasury stock method.

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

|                                              | Three Months Ended                       |  | Nine Months Ended
|--------------------------------------------- | ---------------------------------------- |  | -----------------
|
|
|
|                                              | (In Thousands; Except Per Share Amounts)
|Numerator:                                    |                                          |  |                  
|Net Income                                    |                                          |  | $                
|Denominator:                                  |                                          | 
|Weighted Average Shares Outstanding - Basic   |                                          |  |                  
|
|Weighted Average Shares Outstanding - Diluted |                                          |  |                  
|
|New Income Per Common Share  Basic           |                                          |  | $                
|
|Net Income Per Common Share  Diluted         |                                          |  | $                
|

6

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Table of Contents

The
effect of 585,496 and 188,250 and 60,000 and 66,000 options were not included in the
calculation of net income per diluted common share for the three and nine months ended
December 31, 2008 and 2007, respectively, as the effect would have been anti-dilutive.

# NOTE 5 
SHARE-BASED COMPENSATION

The
Company awards share-based compensation as an incentive for employees to contribute to the
Companys long-term success. Historically, the Company has issued options and
restricted stock under its Stock Incentive Plan (the Stock Plan). Share-based
compensation is recognized based on the fair value of the awards in accordance with SFAS
No. 123R (revised 2004) Share-Based Payment(SFAS No. 123R).
Compensation expense is recognized over the requisite service period on a straight-line
basis. As of December 31, 2008, options to purchase 843,496 shares were outstanding in the
aggregate under the Stock Plan and the Companys previous stock incentive plan, and
there were 307,754 options available for issuance under the Stock Plan.

| | Restricted
Stock Awards The Company grants restricted stock to certain executive employees
in exchange for services performed, which is based on the terms of their respective
employment agreements. The restricted shares issued are valued based on the value of the
Companys common stock on the date of grant. During the nine months ended December
31, 2008 and 2007, the Company issued 5,000 shares of restricted common stock to its Chief
Operating Officer as additional compensation under his employment agreement. The Company
recorded share-based compensation expense in the amount of approximately $0 and $57,000
($35,000 net of tax) during the three and nine months ended December 31, 2008 and $0 and
$56,000 ($34,000 net of tax) during the three and nine months ended December 31, 2007,
based on the fair value of the shares at the date of grant.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Stock
Options and Warrants  The Company grants stock options to employees that allow
them to purchase shares of the Companys common stock. Options are also granted to
members of the Board of Directors of the Company. The Company determines the fair value of
stock options at the date of grant using the Black-Scholes valuation model. Options
generally vest over three- to five-year periods. Awards generally expire ten years after
the date of grant. The Company issues new shares upon the exercise of stock options and
warrants. The Company issued 10,000 and 221,246 options to employees and members of the
Board of Directors during the three and nine months ended December 31, 2008. The options
had a fair value of approximately $13,000 and $458,000, respectively.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

The
Company has 900 warrants outstanding at an exercise price of $1.88 per share as of
December 31, 2008, which expire in August 2009. These warrants were issued in 1998 and no
new warrants have been issued since that time.

During
the three and nine months ended December 31, 2008, the Company received approximately $0
and $9,000 in cash from the exercise of 5,000 warrants.

As
of December 31, 2008, the Company has unrecognized compensation cost of approximately
$523,000 expected to be recognized over the next three years for share-based awards.

A
summary of the changes in stock options outstanding during the nine months ended December
31, 2008 is as follows:

|                                 |  |         |   |  | Weighted Average
|-------------------------------- |  | ------- | - |  | ----------------
|
|
|
|
|Outstanding at March 31, 2008    |  | 625,250 |   |  | $               
|Options Granted                  |  | 221,246 |   |  | $               
|Options Expired/Forfeited        |  | (3,000  | ) |  |                 
|
|Outstanding at December 31, 2008 |  | 843,496 |   |  | $               
|

7

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Table of Contents

# Outstanding Options

|                |  |         |  | Weighted Average |  |      
|--------------- |  | ------- |  | ---------------- |  | -----
|
|
|
|$1.45 -   $2.30 |  | 233,500 |  | 2.2              |  | $1.55
|$2.50 -   $4.47 |  | 79,500  |  | 4.9              |  | $3.82
|$5.24 - $13.70  |  | 530,496 |  | 8.0              |  | $7.08
|                |  |         |  |                  |  |      
|                |  | 843,496 |  |                  |  |      
|                |  |         |  |                  |  |      

# Exercisable Options

|                |  |         |  | Weighted Average |  |      
|--------------- |  | ------- |  | ---------------- |  | -----
|
|
|
|$1.45 -   $2.30 |  | 233,500 |  | 2.2              |  | $1.55
|$2.50 -   $4.47 |  | 69,500  |  | 4.2              |  | $3.79
|$5.60 - $13.70  |  | 271,591 |  | 6.8              |  | $6.96
|                |  |         |  |                  |  |      
|                |  | 574,591 |  |                  |  |      
|                |  |         |  |                  |  |      

The
options outstanding at December 31, 2008 expire on various dates through November 2018.

At
December 31, 2008, exercisable options had no aggregate intrinsic value. At December 31,
2008, exercisable warrants had aggregate intrinsic values of approximately $3,300.

# NOTE 6  LONG-TERM
DEBT

|                                                                                                                                                                | December 31, 2008 |  | March 31, 2008
|--------------------------------------------------------------------------------------------------------------------------------------------------------------- | ----------------- |  | --------------
|
|                                                                                                                                                                | (In Thousands)   
|
|Reducing revolving line of credit due in November 2010 with interest payable
        monthly at LIBOR plus 1.75% (2.19% at December 31, 2008).    (See Note 7.) |                   |  | $             
|
|Note payable to related party with interest at 6.25% repaid in July 2008.                                                                                       |                   |  |               
|
|Capital leases expiring at various times through fiscal year 2010 at interest rates ranging from 6.29% to 9.5%.                                                 |                   |  |               
|
|Total Long-Term Debt                                                                                                                                            |                   |  |               
|
|Less Current Portion (including $0 and $106,000, respectively, due to a related party).                                                                         |                   |  |               
|
|Long-Term Debt Due After One Year                                                                                                                               |                   |  | $             
|

8

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Table of Contents

The Company
has a reducing revolving credit facility (the Credit Facility) with a maximum
borrowing limit of up to $12.7 million at December 31, 2008. Availability under the Credit
Facility is permanently reduced by $335,000 each January 31, April 30, July 31 and October
31 through maturity in 2010.

The
Credit Facility contains provisions that require the Company to maintain certain financial
ratios such as, Debt Service Coverage, Funded Debt to EBITDA and
Total Liabilities to Tangible Net Worth. The Company was in compliance with
all covenants as of December 31, 2008.

The
Credit Facility is collateralized by a first security interest in all of the assets of the
Company and a pledge of 100% of the shares of its domestic wholly-owned subsidiaries, and
65% of its foreign wholly-owned subsidiaries. There was approximately $9.5 million
borrowed and an additional $3.2 million available under the Credit Facility at December
31, 2008.

# NOTE 7  FINANCIAL
DERIVATIVES

In
April 2008, the Company entered into three interest rate swap agreements for notional
amounts of $1 million, $2 million and $5 million, respectively. These swap agreements were
entered into in order to fix variable interest rates on the revolving long-term debt at an
average rate of 4.6%. The swaps mature in March 2009, March 2010 and March 2011,
respectively. The swap agreements were designated as cash flow hedges upon meeting the
criteria for effectiveness and are recorded at fair value in the consolidated balance
sheets. The Company calculates the effectiveness of the hedge on a quarterly basis. There
was no ineffectiveness during the three or nine months ending December 31, 2008. The
related gains or losses are recorded in stockholders equity as a component of other
comprehensive (loss) income.

# NOTE 8  OTHER
ASSETS

Other
assets consist of the following:

|                                                          | Amortization Period |        | December 31, |   | March 31,
|--------------------------------------------------------- | ------------------- | ------ | ------------ | - | ---------
|
|
|                                                          | (In Thousands)     
|
|Product Development                                       |                     | 3  5  |              | $ | 4,406    
|Less:  Accumulated
         Amortization                  |                     |        |              |   | (3,059   
|
|                                                          |                     |        |              | $ | 1,347    
|
|
|Patents                                                   |                     | 5  17 |              | $ | 1,770    
|Less:  
        Accumulated Amortization                  |                     |        |              |   | (1,257   
|
|                                                          |                     |        |              | $ | 513      
|
|
|Financing Costs                                           |                     | 3  5  |              | $ | 102      
|Less:  
          Accumulated Amortization and Write Offs |                     |        |              |   | (66      
|
|                                                          |                     |        |              | $ | 36       
|
|
|Other                                                     |                     |        |              | $ | 47       
|
|Total Other Assets, Net                                   |                     |        |              | $ | 1,943    
|

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

9

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Table of Contents

# NOTE 9  RECENT
ACCOUNTING PRONOUNCEMENTS

In
March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative
Instruments and Hedging Activities, an amendment of SFAS No. 133 (SFAS No.
161). SFAS No. 161 is intended to improve financial standards for derivative instruments
and hedging activities by requiring enhanced disclosures to enable investors to better
understand the effect these instruments and activities have on an entitys financial
position, financial performance and cash flows. Entities are required to provide enhanced
disclosures about: how and why an entity uses derivative instruments; how derivative
instruments and related hedged items are accounted for under SFAS No. 133 and its
related interpretations; and how derivative instruments and related hedged items affect an
entitys financial position, financial performance and cash flows. SFAS No. 161
is effective for financial statements issued for fiscal years and interim periods
beginning after November 15, 2008. The Company will adopt SFAS No. 161 beginning
in the fourth quarter of fiscal year 2009. The Company is evaluating the impact that the
adoption of SFAS No. 161 will have on its consolidated financial statements.

In
December 2007, the FASB issued SFAS No. 141(revised 2007), Business
Combinations (SFAS No. 141R). SFAS No. 141R significantly changes the
accounting for business combinations in a number of areas including the treatment of
contingent consideration, preacquisition contingencies, transaction costs, in-process
research and development and restructuring costs. In addition, under SFAS No. 141R,
changes in an acquired entitys deferred tax assets and uncertain tax positions after
the measurement period will impact income tax expense. SFAS No. 141R is effective for
fiscal years beginning after December 15, 2008. The Company will adopt SFAS
No. 141R beginning in the first quarter of fiscal year 2010, which will change the
accounting treatment for business combinations on a prospective basis.

In
September 2006, the FASB issued SFAS No. 157, Fair Value Measurements(SFAS No, 157). SFAS No. 157 establishes a single definition of fair
value and a framework for measuring fair value, sets out a fair value hierarchy to be used
to classify the source of information used in fair value measurements, and requires new
disclosures of assets and liabilities measured at fair value based on their level in the
hierarchy. This statement applies under other accounting pronouncements that require or
permit fair value measurements. In February 2008, the FASB issued FSAB Staff Position
No. 157-1 (FSP 157-1) and FASB Staff Position No. 157-2 (FSP
157-2), which, respectively, removed leasing transactions from the scope of SFAS
No. 157 and deferred for one year the effective date for SFAS No. 157 as it
applies to certain nonfinancial assets and liabilities. On April 1, 2008, the Company
adopted, on a prospective basis, the SFAS No. 157 definition of fair value and became
subject to the new disclosure requirements (excluding FSP 157-2) with respect to fair
value measurements of (a) nonfinancial assets and liabilities that are recognized or
disclosed at fair value in its financial statements on a recurring basis (at least
annually) and (b) all financial assets and liabilities.  The adoption did not
impact the consolidated financial position or results of operations.  The additional
disclosures required by SFAS No. 157 are included in Note 11, Fair Value of Financial
Instruments.

The
deferral provided by FSP 157-2 applies to such items as nonfinancial assets and
liabilities initially measured at fair value in a business combination (but not measured
at fair value in subsequent periods) and nonfinancial long-lived asset groups measured at
fair value for an impairment assessment.  The Company is evaluating the impact FSP
157-2 will have on its nonfinancial assets and liabilities.

In
February 2007, the FASB issued SFAS No. 159, The Fair Value Option for
Financial Assets and Financial Liabilities(SFAS No. 159). SFAS
No. 159 permits companies to choose to measure many financial instruments and certain
other items at fair value. The objective is to improve financial reporting by providing
companies with the opportunity to mitigate volatility in reported earnings caused by
measuring related assets and liabilities differently without having to apply complex hedge
accounting provisions. SFAS No. 159 is effective for fiscal years beginning after
November 15, 2007. Companies are not allowed to adopt SFAS No. 159 on a
retrospective basis unless they choose early adoption. The Company adopted SFAS
No. 159 on April 1, 2008, and did not elect the fair value option for eligible
items that existed at the date of adoption.

10

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Table of Contents

# NOTE 10  SEGMENT
INFORMATION

During the
first quarter of fiscal year 2009, the Company began to evaluate its business under three
segments: (a) Consumables; (b) Packaging Automation; and (c) Medication Administration
Systems. The Consumables segment primarily consists of the manufacturing of punch cards
and blisters and other consumable medication packaging. The Packaging Automation segment
consists of products that provide customers with the ability to package medication into
the Companys consumable products in an efficient manner. This type of automation
allows the packaging of medication in either a pre-pack or an on-demand manner. The
Medication Administration Systems segment consists of automation products designed to
provide customers with a system to administer medication to residents at long-term care
facilities. These segments represent the manner in which the Companys operations are
managed. Prior to this change, the Company managed its business as one segment.

Below
are sales and operating income (loss) by segment for the three and nine months ended
December 31, 2008 and 2007 and a reconciliation of segment operating income to earnings
before income taxes. Operating income is net sales less cost of sales and other operating
expenses. Cost of sales and other operating expenses are directly identifiable to the
respective segment or allocated on the basis of sales or manpower.

|                                                   | Three Months Ended December 31, |  | Nine Months Ended December 31,
|-------------------------------------------------- | ------------------------------- |  | ------------------------------
|
|
|
|                                                   | (In Thousands)                 
|Net Sales                                          |                                 |  |                               
|Consumables                                        |                                 |  | $                             
|Packaging Automation                               |                                 |  |                               
|Medication Administration Systems                  |                                 |  |                               
|
|Net Sales                                          |                                 |  | $                             
|                                                   |                                
|Operating Profit (Loss) and Operating Margins      |                                 |  |                               
|Consumables                                        |                                 |  | $                             
|                                                   |                                 |  |                               
|                                                   |                                
|Packaging Automation                               |                                 |  |                               
|                                                   |                                 |  |                               
|                                                   |                                
|Medication Administration Systems                  |                                 |  |                               
|                                                   |                                 |  |                               
|                                                   |                                
|Corporate Expenses Not Allocated to Other Segments |                                 |  |                               
|
|Operating Profit                                   |                                 |  | $                             
|                                                   |                                
|Operating Margin                                   |                                 |  |                               
|                                                   |                                
|Deductions from Operating Income                   |                                 |  |                               
|Interest Expense                                   |                                 |  |                               
|
|Income Before Taxes                                |                                 |  | $                             
|

11

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Table of Contents

Geographic Information

Net
sales and operating profit and margins are classified by the major geographic areas in
which the Company operates was as follows:

|                                              | Three Months Ended December 31, |  | Nine Months Ended December 31,
|--------------------------------------------- | ------------------------------- |  | ------------------------------
|
|
|
|                                              | (In Thousands)                 
|Net Sales                                     |                                 |  |                               
|U.S.                                          |                                 |  | $                             
|Non-U.S.                                      |                                 |  |                               
|
|Total Net Sales                               |                                 |  | $                             
|
|Operating Profit (Loss) and Operating Margins |                                 | 
|U.S.                                          |                                 |  | $                             
|Non-U.S.                                      |                                 |  |                               
|
|Total Operating Profit                        |                                 |  | $                             
|
|Total Operating Margin                        |                                 |  |                               
|

Total
assets classified by major geographic areas in which the Company operates was as follows:

|         | December 31, 2008 |  | March 31, 2008
|-------- | ----------------- |  | --------------
|
|         | (In Thousands)   
|U.S.     |                   |  | $             
|Non-U.S. |                   |  |               
|
|         |                   |  | $             
|

# NOTE 11  FAIR
VALUE OF FINANCIAL INSTRUMENTS

The
Company adopted SFAS No. 157, effective April 1, 2008 for financial assets and
liabilities measured on a recurring basis. SFAS No. 157 applies to all financial
assets and financial liabilities that are being measured and reported on a fair value
basis. There was no impact for the adoption of SFAS No. 157 to the consolidated
financial statements. SFAS No. 157 establishes a framework for measuring fair value
and expands disclosure about fair value measurements. The statement requires fair value
measurements to be classified and disclosed in one of the following three categories:

| | Level 1: | Unadjusted quoted prices in active markets that are accessible at the measurement date
for identical, unrestricted assets or liabilities;
| | -------- | -----------------------------------------------------------------------------------------------------------------------------------------

| | Level 2: | Quoted prices in markets that are not active, or inputs which are observable, either
directly or indirectly, for substantially the full term of the asset or liability; or
| | -------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Level 3: | Prices or valuation techniques that require inputs that are both significant to the fair
value measurement and unobservable (i.e., supported by little or no market activity).
| | -------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

12

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The
following table summarizes the valuation of the Companys financial instruments by
the above SFAS No. 157 categories as of December 31, 2008:

|                    |  | December 31, 2008
|------------------- |  | -----------------
|
|
|
|
|
|                    |  | (In Thousands)   
|
|Interest Rate Swaps |  | $   (246)        

Interest
rate swaps are included in other liabilities. The Company utilizes interest rate swaps to
hedge fluctuations in variable interest rates associated with its long-term debt. These
derivatives are not exchange-traded and are over-the-counter customized derivative
transactions with highly rated bank counterparties. The Company estimates the fair value
of its derivatives using quotes determined by the swap counterparties.

# NOTE 12  THIRD
QUARTER ADJUSTMENTS

Inventory Adjustment and Manufacturers Rebate

The
 Company  conducted  a physical  inventory  of certain  items  related to it's  Packaging
 Automation  Segment  and its  Medication Administration  Segment in  January/February
 of 2009 and determined that the quantities on hand according to its inventory records
did not agree with the quantities  counted.  The amount of the  adjustment,  which was recorded in the third quarter ended December 31,
2008 was approximately $260,000.

In
addition,  the Company  entered into an agreement with a third-party  manufacturer  in
May 2007 related to manufacturering of 16 OnDemand machines.  The contract  provided that in the event
the gross profit margin earned by the  manufacturer on this contract  exceeded 15%, the
 manufacturer  would provide the Company with a rebate of 50% of the amount of gross
profit that  exceeded  15%.  During the second quarter ended  September 30, 2008, the
 manufacturer  advised the Company that it believed a rebate had been earned and
estimated the amount of the rebate earned,  at that point, to be approximately  $100,000.
 In January 2009, the entire amount of the rebate earned by the Company  ultimately  was
 determined  to be $150,000,  and the Company  recorded  $120,000 of the rebate in the
third quarter ended December 31, 2008 as a reduction in cost of sales based upon the
number of machines  that had been  delivered  by the  manufacturer  at that point.  The
Company  believes that although the amount of the rebate earned at the end of the second
 quarter ended  September 30, 2008 could have been  determined  it failed to record the
rebate in that period,  and  therefore,  overstated  its cost of sales during that period.

The
Company  reviewed the  potential  affect of the above errors on prior periods and
 determined  that (a) the errors did not affect the results of operation  of the prior
 fiscal year ended March 31, 2008;  and (b) the errors did not have a material net effect
on the results of  operation of the first or second  quarter of the current  fiscal year.
 As a result,  the impact of the  adjustments from the first and second  quarters of the
current  fiscal year have been recorded in the third quarter of the current  fiscal year
and represent a reduction of income before taxes of approximately $70,000.

13

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# MTS MEDICATION
TECHNOLOGIES, INC. AND SUBSIDIARIES  MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONSFOR THE THREE AND NINE MONTHS ENDED DECEMBER 31, 2008

# Item 2.   Managements
Discussion and Analysis of Financial Condition and Results of Operations

# Overview

The
Company has experienced growth in net sales throughout this fiscal year. A significant
portion of that growth has resulted from the installation and acceptance of OnDemand
machines that were sold to our largest customer. Sales of OnDemand machines to other
customers has slowed recently. We have not determined convincingly whether this slowdown
in sales results from economic conditions or credit restraints placed on our customers by
financial institutions. We are carefully monitoring this area of our business in order to
react to a continued slowdown in the Packaging Automation segment, if one occurs.

Net
sales in our Consumables segment have grown approximately 7% in the U.S. long-term care
market this fiscal year. Net sales of consumables in Europe have grown approximately 22%
when measured in the functional currency of the country in which the sales are made.
However, as a result of the recent strengthening of the U.S. dollar, our revenue growth in
Europe is approximately 11% this year when the revenue is translated into U.S. dollars.

Revenue
in our Medication Administration segment is comprised solely of sales of MedLocker®
and service and support of existing MedLocker installations. We recently lowered the price
of our MedLocker, which has resulted in an increase in the number of MedLocker units sold.
The operations of this segment have resulted in an operating loss of approximately $1.2
million this fiscal year. We are optimistic that our MedTimes® product will be
released for sale shortly and begin to result in additional gross profit to reduce
operating losses for this segment in the future.

Our
consolidated gross profit margins, consolidated operating income and net income declined
this fiscal year compared to the prior fiscal year primarily due to several factors.

| | 1. | Sales
in Europe are made to customers in the functional currency of the country in
which the sale is made, but product that is sold in Europe is manufactured in
the U.S. and paid for in U.S. dollars. As the U.S. dollar has strengthened, our
gross profit margins have declined on these sales compared to the previous
year.
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 2. | The
gross profit that we realized on the sale of OnDemand machines to our largest
customer was significantly lower than the gross profit margin we generally
realize on other products we sell.
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 3. | Our
operating costs have risen over the prior year primarily due to costs
associated with the OnDemand system contract with our largest customer.
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------

| | 4. | Operating
costs we have incurred this year in our Medication Administration segment have
increased compared to the prior year as we attempt to bring the MedTimes
product to market.
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

We
use many metrics to evaluate and monitor our business, including the following:

| | 1. | Revenue
growth, gross profit margins, operating income and net income by segment and by
geographic area;
| | -- | --------------------------------------------------------------------------------------------------------

| | 2. | Inventory turnover;
| | -- | -------------------

| | 3. | Account receivable collection days;
| | -- | -----------------------------------

| | 4. | Consolidated net income and operating cash flow; and
| | -- | ----------------------------------------------------

| | 5. | Investing activities.
| | -- | ---------------------

Each
of these key metrics is more fully discussed in the Management Discussion and Analysis.

14

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Table of Contents

# RESULTS OF OPERATIONS

# Three Months Ended
December 31, 2008 and 2007

Net
sales for the three months ended December 31, 2008 increased 30.7% to $19.2 million
compared with $14.7 million during the same period of the prior fiscal year. Revenue
associated with the sale of OnDemand machines was $4.7 million during the three months
ended December 31, 2008 compared with $700,000 during the same period of the prior fiscal
year. This increase relates primarily to the acceptance of five OnDemand machines by our
largest customer during the three months ended December 31, 2008. In addition, this
increase is attributable to an increase in net sales for consumable punch cards and
prepack machines both to new and existing customers. In addition, Net sales in Europe
decreased 8.4% during the three months ended December 31, 2008. Although net sales in
Europe increased by 15.9%, when expressed in the functional currency of the country in
which the sales are made, net sales declined 8.4% in terms of U.S. dollars as a result of
exchange rate fluctuations between the U.S. dollar and the British Pound and Euro.

Cost
of sales for the three months ended December 31, 2008 was $13.0 million compared with $9.1
million during the same period of the prior fiscal year. Cost of sales as a percentage of
sales increased to 67.8% from 61.7% during the same period of the prior fiscal year. Cost
of sales as a percentage of sales increased primarily because of the proportion of revenue
associated with OnDemand machines, which have a higher cost of sales percentage than
consumables.

Selling,
general and administration expenses for the three months ended December 31, 2008 increased
21.6% to $4.5 million from $3.7 million of the prior fiscal year primarily due to travel
and personnel costs associated with support of our OnDemand machine installations, general
administrative costs in the U.S. and Europe, foreign currency exchange fluctuations due to
a stronger U.S. dollar and increased research and development expenses.

Depreciation
and amortization expense for the three months ended December 31, 2008 decreased 5.8% to
$677,000 from $719,000 during the same period of the prior fiscal year. The decrease
resulted primarily from decreased amortization associated with previously capitalized
product development costs, which became fully amortized during the three months ended
December 31, 2008.

Interest
expense for the three months ended December 31, 2008 decreased 39.1% to $112,000 from
$184,000 during the same period of the prior fiscal year. The decrease results primarily
from a decrease in interest rates as well as a decrease in long-term debt outstanding
resulting from increased operating cash flow.

Income
tax expense decreased 56.5% to $171,000 during the three months ended December 31, 2008
compared with $393,000 during the same period of the prior fiscal year. The decrease
results from lower net income before income tax and the fact that our effective tax rate
decreased to 19.9% from 39.1%. Our effective tax rate declined from the previous year
because we determined that uncertain tax positions that we had previously provided for
were no longer appropriate and therefore we reduced our liability for these items and
recorded the amounts as a reduction in our current income tax provision.  In
addition, we believe that we are eligible for certain US income tax credits available to
manufacturing companies. The reduction in uncertain tax positions caused our effective
income tax rate to decline by 18.0% in the third quarter and 8.0% in the nine month
period and the US income tax credit related to manufacturing expenditures caused our
effective income tax rate to decline by 2.0% in the third quarter and 1.6% in the nine
month period.

Segments

During
the first quarter of fiscal year 2009, we began to evaluate our business under three
segments: (a) Consumables; (b) Packaging Automation; and (c) Medication Administration
Systems. The Consumables segment primarily consists of the manufacturing of punch cards
and blisters and other consumable medication packaging. The Packaging Automation segment
consists of products that provide our customers with the ability to package medication
into our consumable products in an efficient manner. This type of automation allows the
packaging of medication in either a pre-pack or an on-demand manner, which means that our
pharmacy customers can elect to package medications for inventory awaiting an order from
their long-term care customers or wait until the long-term care customers require the
medication and package it at that time. The Medication Administration Systems segment
consists of automation products designed to provide our customers with a system to
administer medication to residents at long-term care facilities. We currently sell one
product, MedLocker, and have developed another product, MedTimes. These segments represent
the manner in which we now manage our operations. Prior to this change, we managed our
business as one segment.

15

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Table of Contents

Segment Results of
Operations

Operating
profit (loss), as presented below is net sales less cost of sales and other operating
expenses that are directly identifiable to the respective segment or allocated on the
basis of sales or manpower. Operating profit is reconciled to income before taxes in Note
10 to the Consolidated Financial Statements included in the report.

Consumables

|                 | Three Months Ended December 31,
|---------------- | -------------------------------
|
|
|
|                 | (In Thousands)                 
|                 |                                
|Net Sales        |                                
|Operating Profit |                                
|Operating Margin |                                

Net
sales in the third quarter increased approximately $473,000, or 3.6%, primarily due to
growth in sales to the U.S. long-term care market of approximately 6.8%. The growth in the
U.S. is primarily attributable to the increase in medications dispensed in long-term care
facilities. Although net sales in Europe increased by 15.9%, when expressed in the
functional currency of the country in which the sales are made, net sales declined 8.4% in
terms of U.S. dollars as a result of exchange rate fluctuations between the U.S. dollar
and the British Pound and Euro.

Operating
margins declined in the third quarter primarily due to (a) increases in raw material
costs; (b) additional personnel added and allocated to this segment based on revenue;
(c)higher depreciation expense associated with assets related to this segment; (d) and
foreign currency fluctuations.

Packaging Automation

|                 | Three Months Ended December 31,
|---------------- | -------------------------------
|
|
|
|                 | (In Thousands)                 
|                 |                                
|Net Sales        |                                
|Operating Loss   |                                
|Operating Margin |                                

Net
sales in the third quarter increased $3.9 million, or 237.8%, primarily because of the
sale of OnDemand machines under an agreement with our largest customer. During the third
quarter, we recorded $3.6 million in revenue associated with five machines that were
installed and accepted by the customer.

Our
operating loss during the third quarter was lower than the prior fiscal year because we
realized additional gross profit on the increased net sales, which offset a portion of the
indirect costs associated with this segment.

16

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Table of Contents

Medication Administration
Systems

|                 | Three Months Ended December 31,
|---------------- | -------------------------------
|
|
|
|                 | (In Thousands)                 
|                 |                                
|Net Sales        |                                
|Operating Loss   |                                
|Operating Margin |                                

Net
sales in the third quarter increased due to increased sales of our MedLocker systems.

Our operating
loss during the third quarter was higher than the prior fiscal year because we have added
personnel to develop the MedTimes product, and we have increased research and development
expenditures for this product.

Consolidated
operating income represents operating income (loss) for the consumables, packaging
automation and medication administration segments less share-based compensation expense
and corporate asset depreciation expense.

# Nine Months Ended
December 31, 2008 and 2007

Net
sales for the nine months ended December 31, 2008 increased 35.8% to $59.3 million
compared with $43.7 million during the same period of the prior fiscal year. Revenue
associated with the sale of OnDemand machines was $15.4 million during the nine months
ended December 31, 2008 compared with $3.1 million during the same period of the prior
fiscal year. In addition, this increase is primarily attributable to an increase in net
sales for consumable punch cards and pre-pack machines primarily because of additional
sales made to new and existing customers. This increase relates primarily to the
acceptance of twenty-one OnDemand machines by our largest customer during the nine months
ended December 31, 2008. Also, our net sales in Europe when expressed in U.S. dollars
increased 11.3% due to increased penetration of our products in that market.

Cost
of sales for the nine months ended December 31, 2008 was $40.4 million compared with $26.7
million during the same period of the prior fiscal year. Cost of sales as a percentage of
sales increased to 68.2% from 61.1% during the same period of the prior fiscal year. Cost
of sales as a percentage of sales increased primarily because the proportion of revenue
associated with OnDemand machines, which have a higher cost of sales percentage than
consumables.

Selling,
general and administration expenses for the nine months ended December 31, 2008 increased
22.6% to $13.9 million from $11.4 million of the prior fiscal year primarily due to travel
and personnel costs associated with support of our OnDemand machine installations, general
and administrative costs in the U.S. and Europe, foreign currency exchange, fluctuations,
increased research and development expenses, increased health plan benefit costs, legal,
auditing and consulting expenses.

Depreciation
and amortization expense for the nine months ended December 31, 2008 increased 18.0% to
$2.3 million from $1.9 million during the same period of the prior fiscal year. The
increase resulted primarily from increased depreciation associated with capital
expenditures made during the prior fiscal year.

Interest
expense for the nine months ended December 31, 2008 decreased 25.0% to $376,000 from
$501,000 during the same period of the prior fiscal year. The decrease results primarily
from a decrease in interest rates as well as a decrease in long-term debt outstanding
resulting from increased operating cash flow.

17

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Income
tax expense decreased 45.0% to $697,000 during the nine months ended December 31, 2008
compared with $1,267,000 during the same period of the prior fiscal year. The decrease
results from lower net income before income taxes and the fact that our effective tax rate
decreased to 30.1% from 39.8%. Our effective tax rate declined from the previous year
because we determined that uncertain tax positions that we had previously provided for
were no longer appropriate and therefore we reduced our liability for these items and
recorded the amounts as a reduction in our current income tax provision.  In
addition, we believe that we are eligible for certain US income tax credits available to
manufacturing companies. The reduction in uncertain tax positions caused our effective
income tax rate to decline by 18.0% in the third quarter and 8.0% in the nine month
period and the US income tax credit related to manufacturing expenditures caused our
effective income tax rate to decline by 2.0% in the third quarter and 1.6% in the nine
month period.

# Segment Results of
Operations

Operating
profit (loss), as presented below is net sales less cost of sales and other operating
expenses that are directly identifiable to the respective segment or allocated on the
basis of sales or manpower. Operating profit is reconciled to income before taxes in Note
10 to the Consolidated Financial Statements included in the report.

Consumables

|                 | Nine Months Ended December 31,
|---------------- | ------------------------------
|
|
|
|                 | (In Thousands)                
|                 |                               
|Net Sales        |                               
|Operating Profit |                               
|Operating Margin |                               

Net
sales during the nine months ended December 31, 2008 increased approximately $2.6 million,
or 7.0%, primarily due to growth in sales to the U.S. long-term care market of
approximately 6.4% and growth in the European domiciliary and retail markets of
approximately 11.3%. The growth in the U.S. is primarily attributable to the increase in
medications dispensed in long-term care facilities. The European growth is primarily the
result of increased penetration of our products into that market.

Operating
margins declined during the nine months ended December 31, 2008 primarily due to (a)
increases in raw material costs; (b) increased scrap rates; (c) additional personnel
allocated to this segment based on revenue; (d) increased research and development expenses; (e) higher depreciation expense
associated with assets related to this segment; (f) higher health plan benefit costs due
to increased medical claims under the Companys self-insured medical plan; and (g)
foreign currency fluctuations.

Packaging Automation

|                 | Nine Months Ended December 31,
|---------------- | ------------------------------
|
|
|
|                 | (In Thousands)                
|                 |                               
|Net Sales        |                               
|Operating Loss   |                               
|Operating Margin |                               

18

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Net
sales during the nine months ended December 31, 2008 increased $12.8 million, or 221.7%,
because of an agreement with our largest customer for the sale of twenty-four OnDemand
machines. During the nine months ended December 31, 2008, we recorded $12.8 million in
revenue associated with twenty-one machines that were installed and accepted by the
customer. In addition, we sold three OnDemand AccuFlex machines to other independent
pharmacies, which resulted in approximately $1.0 million in revenue.

Our
operating loss during the nine months ended December 31, 2008 was lower than the prior
year because we realized additional gross profit on the increased net sales, which offset
a portion of the indirect costs associated with this segment.

Medication Administration
Systems

|                 | Nine Months Ended December 31,
|---------------- | ------------------------------
|
|
|
|                 | (In Thousands)                
|                 |                               
|Net Sales        |                               
|Operating Loss   |                               
|Operating Margin |                               

Net
sales during the nine months ended December 31, 2008 increased due to increased sales of
our MedLocker systems.

Our
operating loss during the nine months ended December 31, 2008 was higher than the prior
year because we have added personnel to develop the MedTimes product and increased
research and development expenditures for this product.

Consolidated
profit represents operating profit (loss) for the consumables, packaging automation and
medication administration segments less share-based compensation expense and corporate
asset depreciation expense.

# LIQUIDITY AND CAPITAL
RESOURCES

Our
operating cash flow has increased the first nine months of this fiscal year compared to
the same period of the prior fiscal year primarily due to a decrease in inventory that has
resulted from the successful installation and acceptance of the OnDemand machines that we
sold to our largest customer. In addition, although our total accounts receivable
outstanding has increased, the average number of days that our customers are taking to pay
us has decreased to 40 days, compared to 58 days at the end of the prior fiscal year. The
increase in total accounts receivable is therefore related to the increase in our net
sales.

Investing
activities have used $2.6 million in the first nine months of this fiscal year compared to
$4.4 million in the first nine months of the prior year. The decrease is primarily
attributable to the fact that during our third quarter last year, we purchased a $2.0
million punch card press. Also, as we examined our need for access to our Credit Facility
during the second and third quarters of this fiscal year, we began to carefully evaluate
all capital expenditures and delayed, when possible, those that we considered not to be
critical. We do not believe that any delays in making capital expenditures will have an
adverse affect on our operations.

We
used our operating cash flow to fund our investing activities and then utilized the
remaining free cash flow to reduce our borrowing on our Credit Facility and other
outstanding debt by $2.2 million.

We
are in compliance with the financial covenants that are contained in our Credit Facility,
and based upon our expectations regarding future profitability and investing activity
needs, we believe that the availability on our Credit Facility is sufficient to support
operations.

19

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Our
Credit Facility was originated in November 2007 with Wachovia Bank. Wachovia Bank was
recently acquired by Wells Fargo Bank, however, we have not become aware of any changes in
the relationship we have with our lender that would adversely affect our ability to use
our Credit Facility as it was intended to be used.

At
December 31, 2008, there was $9.5 million outstanding on our Credit Facility. The maximum
amounts that could be borrowed as of that date was $12.7 million, however, we were limited
to $11.6 million in borrowing due to financial covenants in the loan agreement that limit
borrowing to two times our trailing four quarters earnings before interest, income taxes
and depreciation expense.

We
expect that our operating cash flow for the next twelve months will be sufficient to fund
our investing activities that are currently planned during that period and anticipate that
any excess cash will be used to reduce our outstanding debt.

# ESTIMATES AND CRITICAL
ACCOUNTING POLICIES

The
preparation of our consolidated financial statements in conformity with generally accepted
accounting principles in the U.S. 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
effect 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 under Part II, Item 1A of the Form 10-Q for
the fiscal quarter ended December 31, 2008 and those listed under Item 1A. Risk Factors in
our Form 10-K for the fiscal year ended March 31, 2008. Nevertheless, our management
believes the following items involve a higher degree of complexity and, judgment and
therefore, has commented on these items below.

Consolidation

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

Revenue Recognition

We
recognize 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. We recognize revenue related to the sale of our 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 locations; (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 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, we recognize the revenue associated
with the training. Revenue associated with annual maintenance contracts is recognized in
equal amounts over a twelve-month period.

20

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

Revenue
is reported net of rebates and discounts provided to customers and sales taxes. Rebates
are generally determined based upon pricing agreements that offer certain customers
incentives to purchase products from us. Discounts are provided from time to time
primarily to compensate customers for inconveniences caused by late shipments, defective
product or pricing errors.

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. We do not typically require collateral when granting credit;
however, customer credit worthiness is reviewed prior to granting credit. We normally
estimate the uncollectibility of our accounts receivable. We consider many factors when
making our estimates, including analyzing accounts receivable and historical bad debts,
customer concentrations, customer credit worthiness, current economic trends and changes
in our 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.

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. We review various information related to
the age and turnover of specific inventory items to assist with this assessment.

We
have recently evaluated the methodology we use to determine the amount of our inventory
obsolescence reserve and now evaluate our inventory for risk of obsolescence and slow
moving items in more detail by segment. During this quarter, we increased our inventory
obsolescence reserve by approximately $9,000. We believe that we currently have an
adequate reserve for obsolescence based on expectations of realizing the carrying value of
the inventory within the next twelve months, however, as business conditions change, we
may need to adjust it accordingly.

Self-Insurance Plan
Reserve

We
have a medical health benefit self-insurance plan, which covers substantially all of our
employees. During the three months ended December 31, 2008, we were reinsured for claims
that exceed $100,000 per participant and an annual maximum aggregate limit of
approximately $1.3 million. Future claims may affect the reinsurance limits that may be
available to us. We had two participants in our plan reach the individual limit of
$100,000 this fiscal year.

Income Taxes

Income
taxes are provided for under the liability method in accordance with SFAS 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. Management considers anticipated future taxable income,
the reversal of taxable temporary differences, and tax planning strategies in making the
determination. Deferred tax assets and liabilities are adjusted for the effects of changes
in tax laws and rates on the date of enactment.

21

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Product Development

All
costs incurred subsequent to the completion of research and development activities
associated with 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 three-year period beginning on the date
the product is released for sale to customers. We review the viability and recoverability
of these costs on a regular basis.

We
have capitalized approximately $850,000 associated with software components related to our
MedTimes product. This product is about to be released to customers, and we anticipate
that the first release will be made prior to the end of our fiscal year, which ends on
March 31, 2009. The first release is expected to be a beta release, and we are optimistic
that upon the successful conclusion of the beta, we will be able to solicit other
customers for this product. We believe that the product will be successful and also
believe that the potential for positive cash flow from the sale of this product will
be sufficient to recover the amount which we have capitalized for the software components.

In
the event that the beta is not successful, we will evaluate the product to determine if we
remain confident that we will recover the capitalized costs. If our determination is that
the recovery is doubtful, we will adjust the carrying value of the capitalized costs
appropriately. An adjustment in the carrying value of this asset could have a material
effect on our results of operation and also on our compliance with financial covenants in
our loan agreement.

Warranty

We
establish a reserve for warranty costs we may incur during the warranty period that is
provided for in the machine sales agreements with our customers. These estimates are
established using historical information on the nature, frequency and average cost of
claims. Actual experience could differ from the amounts estimated.

Goodwill and Other
Intangible Assets

We
review the carrying value of our Goodwill and Other Intangible Assets that was recorded at
the time we made certain acquisitions.  These acquisitions were made in both the
United Kingdom and Germany.  Our review of these assets includes, among other things,
an analysis of the anticipated future results of operation of the entities acquired. 
At this time we believe that the carrying value of these assets is appropriately stated in
our financial statements. However, the recent strengthening of the US dollar compared to
the British Pound and the Euro has caused our operating margins in Europe to
decline.  The effect of these changes in currency rates could cause an adjustment in
the carrying value of the Goodwill and Other Intangible assets related to our
European operations in the future.

Off-Balance Sheet
Arrangements

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

Contractual Obligations

Not
Applicable.

# Item 3.   Quantitative and
Qualitative Disclosures About Market Risk

Not
Applicable.

22

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# Item 4.    Controls and
Procedures

# Evaluation of Disclosure
Controls and Procedures

We
maintain disclosure controls and procedures that are designed to ensure that information
required to be disclosed by us in the reports we file or submit 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 our management, including our Chief Executive Officer (principal executive officer) and
Chief Financial Officer (principal financial officer), to allow timely decisions regarding
required disclosure. We have established a Disclosure Committee, consisting of certain
members of management, to assist in this evaluation. The Disclosure Committee meets on a
regular quarterly basis, and as needed.

Our management, including our Chief Executive Officer and Chief Financial Officer,
evaluated the effectiveness of our disclosure controls and procedures (as defined in
Rules 13a-15(e) and 15d-15(e) promulgated under the Exchange Act), at
December 31, 2008. Based on that evaluation, our Chief Executive Officer and Chief
Financial Officer concluded that, at December 31, 2008, our disclosure controls and
procedures were not effective 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 weakness 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, we determined that because effective controls regarding recording
inventory transactions were not in place, the carrying value of our inventory could be
misstated, and the related cost of goods sold could also be misstated, and therefore,
a material weakness existed in our internal control over financial reporting
and have disclosed this to the audit committee and to the independent registered public
accountants.

# Plan for Remediation of
Material Weakness

The
Company has realigned the responsibilities for overseeing the personnel who record
inventory transactions. Effective immediately, these individuals will be supervised by
personnel in the accounting department. In addition, new policies and procedures will be
instituted and cycle counts of individual inventory items will be made on a regular basis.

# Changes in Internal
Control Over Financial Reporting

There
has not been any significant change in our internal control over financial reporting
during the quarter ended December 31, 2008, other than those described above, that has
materially affected or is reasonably likely to materially affect our internal control over
financial reporting.

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# PART II  OTHER
INFORMATION

# Item 1.   Legal Proceedings

None.

# Item 1A. Risk Factors

Set
forth below are the material changes and updates from, and should be read in conjunction
with, the risk factors previously disclosed in our Annual Report on Form 10-K for our year
ended March 31, 2008, which was filed with the SEC on June 30, 2008.

# The gross domestic
 product for the U.S. and Europe has declined,  indicating that many of these  countries'
 economies,  including the U.S. economy, are in a recession.

There
has been an erosion of global consumer confidence amid concerns over declining asset
values, potential inflation, volatility in energy costs, geopolitical issues, the
availability and cost of credit, rising unemployment, and the stability and solvency of
financial institutions, financial markets, businesses, and sovereign nations. These
concerns have slowed global economic growth and have resulted in recessions in many
countries, including in the U.S. and Europe. If these economic conditions continue or
worsen, a number of negative effects on our business could result, including customers or
potential customers reducing or delaying orders, the insolvency of key suppliers, which
could result in production delays, the inability of customers to obtain credit, and the
insolvency of one or more customers. Any of these effects could impact our ability to
effectively manage inventory levels and collect receivables, increase our need for cash,
and ultimately decrease our net revenue and profitability.

# We are exposed to
intangible asset risk; specifically, our goodwill may become impaired.

As
of December 31, 2008, we have $894,000 of goodwill recorded on our Condensed
Consolidated Balance Sheet. Future goodwill impairment charges may result from changes
in economic and operating conditions, including foreign currency fluctuations, a further
significant and sustained decline in our stock price and market capitalization, a
significant decline in our expected future cash flows, a significant adverse change in the
business climate or slower growth. If we were to conclude that a write down of our
goodwill is necessary, then we would record the appropriate charge, which could result in
material charges that are adverse to our operating results and financial position. See
Managements Discussion and Analysis of Financial Condition and Results of
Operations  Estimates and Critical Accounting Policies  Goodwill and Other
Intangible Assets.

# We face certain risks in
collecting our trade accounts receivable.

We
generate a significant amount of trade accounts receivable sales from our customers.
Delays or defaults in payments owed to us could have a significant adverse impact on our
financial condition and results of operations. Factors that could cause a delay or default
include but are not limited to, business failures, turmoil in the financial and credit
markets, sluggish or recessionary U.S. or European economic conditions and declines in the
credit worthiness of our customers.

# Inflation may adversely
affect our business operations in the future.

Given
the current macroeconomic environment, it is possible that the U.S. and certain European
governments may attempt in the near future to provide a monetary stimulus, a fiscal
stimulus, or both, to the economy. Such actions may lead to inflationary conditions in our
cost base, particularly resulting in an increase in our cost of sales and our SG&A
expenses. This may harm our margins and profitability if we are unable to increase prices
or cut costs enough to offset the effects of inflation in our cost base.

24

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The financial markets have
recently experienced significant turmoil which may negatively impact our liquidity and our
ability to obtain financing, and may also cause a decrease in demand for our services.

Our
liquidity and our ability to obtain financing may be negatively impacted if the lender
under our Credit Facility, or another financial institution, suffers liquidity issues. In
such an event, we may not be able to draw on all, or a substantial portion, of our Credit
Facility. Also, if we attempt to obtain future financing in addition to our Credit
Facility, the credit market turmoil could negatively impact our ability to obtain such
financing. In addition, the credit market turmoil has negatively impacted certain of our
customers which could lead to a decrease in demand for our services.

# Fluctuations in foreign
currency may negatively impact our profit margin.

Our
European sales are denominated in the British Pound and the Euro. Given the recent
strengthening of the U.S. dollar compared to the British Pound and the Euro, our profit
margins have declined on sales through our European subsidiaries. If the Pound and Euro
continue to decline in value, our profit margins will continue to decline. In addition, as
the U.S. dollar has continued to strengthen, we have experienced losses on the exchange of
foreign currency.

# Item 2.   Unregistered
Sales of Equity Securities and Use of Proceeds

None.

# Item 3.    Defaults Upon
Senior Securities

None.

# Item 4.   Submission of
Matters to a Vote of Security Holders

None.

# Item 5.   Other Information

None.

25

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# Item 6. Exhibits

|Exhibit Index |  | 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           |  | Amended and Restated Bylaws (4)                                                                                                                    
|31.1          |  | Certification of the President and Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. (*)                          
|31.2          |  | Certification of the Vice President and Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. (*)                     
|32.1          |  | Certification of the President and Chief Executive Officer pursuant to 18 U.S.C. §1350. (*)                                                        
|32.2          |  | Certification of the Vice President and Chief Financial Officer pursuant to 18 U.S.C. §1350. (*)                                                   
|
|(*)           |  | Filed herein.                                                                                                                                      
|(1)           |  | Incorporated herein by reference to same Exhibit(s), respectively, Registration Statement on Form S-1 (File No. 33-17852) filed October 9, 1987.   
|(2)           |  | Incorporated herein by reference to same Exhibit(s), respectively, Registration Statement on Form S-1 (File No. 33-40678) filed May 17, 1991.      
|(3)           |  | Incorporated herein by reference to same Exhibit(s), respectively, Registration Statement on Form S-3 (File No. 333-112212) filed January 26, 2004.
|(4)           |  | Incorporated herein by reference to Form 8-K filed June 15, 2007.                                                                                  

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# SIGNATURES

Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned thereunto duly authorized.

|                          | MTS MEDICATION TECHNOLOGIES, INC.
|------------------------- | ---------------------------------
|
|
|Date:   February 17, 2009 |                                  
|                          |                                  
|                          |                                  
|                          |                                  

|Date:   February 17, 2009 |  | By: | /s/ Michael P. Conroy                      | 
|------------------------- |  | --- | ------------------------------------------ | 
|                          |  |     |                                            | 
|                          |  |     | Michael P. Conroy                          | 
|                          |  |     | Vice President and Chief Financial Officer | 

26

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# Exhibit Index

|Exhibit Index |  | 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           |  | Amended and Restated Bylaws (4)                                                                                                                    
|31.1          |  | Certification of the President and Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. (*)                          
|31.2          |  | Certification of the Vice President and Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. (*)                     
|32.1          |  | Certification of the President and Chief Executive Officer pursuant to 18 U.S.C. §1350. (*)                                                        
|32.2          |  | Certification of the Vice President and Chief Financial Officer pursuant to 18 U.S.C. §1350. (*)                                                   
|
|(*)           |  | Filed herein.                                                                                                                                      
|(1)           |  | Incorporated herein by reference to same Exhibit(s), respectively, Registration Statement on Form S-1 (File No. 33-17852) filed October 9, 1987.   
|(2)           |  | Incorporated herein by reference to same Exhibit(s), respectively, Registration Statement on Form S-1 (File No. 33-40678) filed May 17, 1991.      
|(3)           |  | Incorporated herein by reference to same Exhibit(s), respectively, Registration Statement on Form S-3 (File No. 333-112212) filed January 26, 2004.
|(4)           |  | Incorporated herein by reference to Form 8-K filed June 15, 2007.                                                                                  

28

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# CERTIFICATIONS

EXHIBIT 31.1

I, Todd E. Siegel, certify that:

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

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

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

| | 4. | The
registrants other certifying officer 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)) and internal
control over financial reporting (as defined in Exchange Act Rules
13a-15(f) and 15d-15(f)) for the registrant and have:
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

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

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

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

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

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

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

|Date:   February 17, 2009 |  | By: | /s/ Todd E. Siegel                    | 
|------------------------- |  | --- | ------------------------------------- | 
|                          |  |     |                                       | 
|                          |  |     | Todd E. Siegel                        | 
|                          |  |     | President and Chief Executive Officer | 

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EXHIBIT 31.2

I, Michael P. Conroy, certify that:

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

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

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

| | 4. | The
registrants other certifying officer 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)) and internal
control over financial reporting (as defined in Exchange Act Rules
13a-15(f) and 15d-15(f)) for the registrant and have:
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

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

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

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

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

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

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

|Date:   February 17, 2009 |  | By: | /s/ Michael P. Conroy                      | 
|------------------------- |  | --- | ------------------------------------------ | 
|                          |  |     |                                            | 
|                          |  |     | Michael P. Conroy                          | 
|                          |  |     | Vice President and Chief Financial Officer | 

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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 quarterly report of MTS Medication Technologies, Inc. (the
Company) on Form 10-Q for the quarter ended December 31, 2008 as filed with
the Securities and Exchange Commission on the date hereof (the Form 10-Q), I,
Todd E. Siegel, President and Chief Executive Officer of the Company, certify, pursuant to
18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of
2002, that:

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

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

|                                      | 
|------------------------------------- | 
|Dated:
          February 17, 2009    | 
|                                      | 
|/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 quarterly report of MTS Medication Technologies, Inc. (the
Company) on Form 10-Q for the quarter ended December 31, 2008 as filed with
the Securities and Exchange Commission on the date hereof (the Form 10-Q), 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-Q fully complies with the requirements of Section 13(a) or 15(d) of the
Securities Exchange Act of 1934 (15 U.S.C. § 78m or § 78o(d)); and
| | --- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------

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

|                                           | 
|------------------------------------------ | 
|Dated:
          February 17, 2009         | 
|                                           | 
|/s/ Michael P. Conroy                      | 
|Michael P. Conroy                          | 
|Vice President and Chief Financial Officer | 
|                                           | 
|                                           | 

32

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