Table of Contents

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

# FORM 10-Q

(Mark One)

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

For the quarterly period ended
June 30, 2007

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

| | For 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,
        Suite 800, 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    
     No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer,
or a non-accelerated filer. See definition of accelerated filer and large accelerated filer in Rule 12-2 of
the Exchange Act.  (Check one):

Large accelerated filer     
          Accelerated filer        
       Non-accelerated filer

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

As of August 13, 2007, the registrant had 6,274,965 shares of common stock, $.01 par
        value per share outstanding.

---

# MTS MEDICATION
TECHNOLOGIES, INC. AND SUBSIDIARIES

# Index

| |                   | Page                                                                                                                                            | 
| | ----------------- | ----------------------------------------------------------------------------------------------------------------------------------------------- | 
|
|
|
| | Item 1.           | Financial Statements                                                                                                                            | 
| |                   |                                                                                                                                                 | 
| |                   | Condensed Consolidated
        Balance Sheets  June 30, 2007 and March 31, 2007                                                                | 
|
| |                   | Condensed Consolidated
        Statements of Operations  Three Months Ended June 30, 2007 and 2006                                             | 
|
| |                   | Condensed Consolidated
        Statement of Changes in Stockholders Equity and Comprehensive Income  Three Months
        Ended June 30, 2007 | 
|
| |                   | Condensed Consolidated
        Statements of Cash Flows  Three Months Ended June 30, 2007 and 2006                                             | 
| |                   |                                                                                                                                                 | 
| |                   | Notes
        to Consolidated Financial Statements                                                                                              | 
|
| | Item 2.           | Management's Discussion and
        Analysis of Financial Condition and Results of Operations                                                   | 
| |                   |                                                                                                                                                 | 
| | Item 3.           | Quantitative and
        Qualitative Disclosures About Market Risk                                                                              | 
| |                   |                                                                                                                                                 | 
| | Item 4.           | Controls and Procedures                                                                                                                         | 
| |                   |                                                                                                                                                 | 
|
| |                   |                                                                                                                                                 | 
| | Item 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

# PART 1 - FINANCIAL
INFORMATION

Item 1. Financial
Statements

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

# ASSETS

|                        | June 30, 2007 |  | March 31, 2007
|----------------------- | ------------- |  | --------------
|
|
|Current Assets:         |               |  |               
|Cash                    |               |  | $             
|Restricted Cash         |               |  |               
|Accounts Receivable     |               |  |               
|Inventories             |               |  |               
|Prepaids and Other      |               |  |               
|Deferred Tax Asset      |               |  |               
|
|Total Current Assets    |               |  |               
|
|Property and Equipment  |               |  |               
|Goodwill                |               |  |               
|Other Intangible Assets |               |  |               
|Other Assets            |               |  |               
|
|Total Assets            |               |  | $             
|

# LIABILITIES AND
STOCKHOLDERS' EQUITY

|Current Liabilities:                                |  |  |   |        |   |  |   |        |  
|--------------------------------------------------- |  |  | - | ------ | - |  | - | ------ | -
|Accounts
        Payable and Accrued Liabilities    |  |  | $ | 7,890  |   |  | $ | 7,024  |  
|Current Maturities of Long-Term Debt                |  |  |   | 2,288  |   |  |   | 2,447  |  
|Current Maturities of Related Party Note Payable    |  |  |   | 333    |   |  |   | 328    |  
|
|Total Current Liabilities                           |  |  |   | 10,511 |   |  |   | 9,799  |  
|
|Long-Term Debt, Less Current Maturities             |  |  |   | 5,273  |   |  |   | 5,395  |  
|Related Party Note Payable, Less Current Maturities |  |  |   | 21     |   |  |   | 106    |  
|Other Liabilities                                   |  |  |   | 990    |   |  |   | 283    |  
|Deferred Tax Liability                              |  |  |   | 559    |   |  |   | 553    |  
|
|Total Liabilities                                   |  |  |   | 17,354 |   |  |   | 16,136 |  
|
|Stockholders' Equity:                               |  | 
|Common Stock                                        |  |  |   | 63     |   |  |   | 62     |  
|Capital In Excess of Par Value                      |  |  |   | 8,957  |   |  |   | 8,736  |  
|Accumulated Other Comprehensive Income              |  |  |   | 297    |   |  |   | 254    |  
|Retained Earnings                                   |  |  |   | 822    |   |  |   | 989    |  
|Treasury Stock                                      |  |  |   | (328   | ) |  |   | (328   | )
|
|Total Stockholders' Equity                          |  |  |   | 9,811  |   |  |   | 9,713  |  
|
|Total Liabilities and Stockholders' Equity          |  |  | $ | 27,165 |   |  | $ | 25,849 |  
|

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

1

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

|                                              | Three Months Ended June 30,
|--------------------------------------------- | ---------------------------
|
|
|
|
|Net Sales                                     |                            
|
|Costs and Expenses:                           |                            
|Cost of Sales                                 |                            
|Selling, General and Administrative           |                            
|Depreciation and Amortization                 |                            
|
|Total Costs and Expenses                      |                            
|
|Operating Income                              |                            
|
|Interest Expense                              |                            
|
|Income Before Taxes                           |                            
|
|Income Tax Expense                            |                            
|
|Net Income                                    |                            
|
|Convertible Preferred Stock Dividends         |                            
|
|Net Income Available to Common Stockholders   |                            
|
|Net Income Per Common Share - Basic           |                            
|
|Net Income Per Common Share - Diluted         |                            
|
|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 SUBSIDIARIESCONDENSED CONSOLIDATED STATEMENT OF
CHANGES IN STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME 
THREE MONTHS ENDED JUNE 30, 2007(In Thousands; Except Shares)
                            (Unaudited)

|                                                   |  | Common Stock |  |   |    | Accumulated |   |       |  |   |     |  |   |     
|-------------------------------------------------- |  | ------------ |  | - | -- | ----------- | - | ----- |  | - | --- |  | - | ----
|
|
|
|
|
|Balance March 31, 2007                             |  | 6,243,665    |  | $ | 62 |             | $ | 8,736 |  | $ | 254 |  | $ | 989 
|Cumulative Effect of Initial Application of FIN 48 |  |              |  |   |    |             |   |       |  |   |     |  |   | (700
|Tax Benefit of Stock Option Exercises              |  |              |  |   |    |             |   | 69    |  |   |     |  |   |     
|Exercise of Stock Options                          |  | 26,300       |  |   | 1  |             |   | 96    |  |   |     |  |   |     
|Stock Grants Issued                                |  | 5,000        |  |   |    |             |   | 56    |  |   |     |  |   |     
|Comprehensive Income:                              |  |             
|Net Income                                         |  |              |  |   |    |             |   |       |  |   |     |  |   | 533 
|Foreign Currency
        Translation Adjustment    |  |              |  |   |    |             |   |       |  |   | 43  |  |   |     
|
|Total Comprehensive Income                         |  |              |  |   |    |             |   |       |  |   |     |  |   |     
|
|Balance June 30, 2007                              |  | 6,274,965    |  | $ | 63 |             | $ | 8,957 |  | $ | 297 |  | $ | 822 
|

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

3

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

|                                                                                  | Three Months Ended June 30,
|--------------------------------------------------------------------------------- | ---------------------------
|
|
|
|Operating Activities                                                              |                            
|Net Income Before Preferred Stock Dividends                                       |                            
|Adjustments to Reconcile Net Income to Net Cash Provided By Operating Activities: |                            
|Depreciation and Amortization                                                     |                            
|Tax Benefit of Options Exercised                                                  |                            
|Deferred Income Taxes                                                             |                            
|Share-Based Compensation                                                          |                            
|Changes In Operating Assets and Liabilities:                                      |                            
|Restricted Cash                                                                   |                            
|Accounts Receivable                                                               |                            
|Inventories                                                                       |                            
|Prepaids and Other                                                                |                            
|Accounts Payable and Other Accrued Liabilities                                    |                            
|
|Total Adjustments                                                                 |                            
|
|Net Cash Provided By Operating Activities                                         |                            
|
|Investing Activities                                                              |                            
|Expended For Property and Equipment                                               |                            
|Expended For Product Development                                                  |                            
|
|Net Cash Used By Investing Activities                                             |                            
|
|Financing Activities                                                              |                            
|Payments On Notes Payable and Term Loans                                          |                            
|Payments On Related Party Note Payable                                            |                            
|Paydowns on Revolving Line of Credit                                              |                            
|Advances on Revolving Line of Credit                                              |                            
|Dividends On Convertible Preferred Stock                                          |                            
|Tax Benefit of Options Exercised                                                  |                            
|Proceeds from Exercise of Stock Options                                           |                            
|
|Net Cash Used By Financing Activities                                             |                            
|
|Effect of Exchange Rate Changes On Cash                                           |                            
|Net 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:                                                              |                            
|Provision for Uncertain Tax Positions                                             |                            

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

4

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# MTS MEDICATION
TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 FOR THE THREE MONTHS ENDED JUNE 30, 2007

# NOTE A  BASIS OF
PRESENTATION

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

MTSP
primarily manufactures and sells consumable medication punch cards, packaging equipment
and ancillary products throughout the United States. Its customers are predominantly
pharmacies that supply nursing homes, assisted living and correctional facilities with
prescription medications for their patients. MTSP manufactures its proprietary consumable
punch cards and packaging equipment in its own facilities and also uses third parties to
manufacture packaging equipment. This manufacturing process uses integrated equipment for
manufacturing the consumable medication punch cards. The consumable medication punch cards
and packaging equipment are designed to provide a cost effective method for pharmacies to
dispense medications. The Companys medication dispensing systems and products
provide innovative methods for dispensing medications in consumable packages. MTS Limited
distributes products for MTSP in the United Kingdom. In February 2006, the Company
acquired BAF, a United Kingdom based manufacturer of bags and labels for pharmacies. In
February 2007, the Company acquired Consilio, a distributor of consumable packages in
Germany.

The
accompanying unaudited condensed consolidated financial statements have been prepared in
accordance with accounting principles generally accepted in the United States of America
(US GAAP) for interim financial information and with the instructions to Form
10-Q and 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-month period ended June 30, 2007 are not necessarily indicative of the results that
may be expected for future quarters in the year ended March 31, 2008. The unaudited
condensed consolidated financial statements should be read in conjunction with the
consolidated financial statements and notes thereto included in the Companys annual
report on Form 10-K for the year ended March 31, 2007.

# NOTE B  RESTRICTED
CASH

In
May 2007, the Company entered into an agreement with its largest customer to sell On
Demand machines. The machines are anticipated to be delivered to the customer
over an eighteen month period. The agreement provides that certain deposits will be
made by the customer 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. In June 2007 the customer provided the Company with a deposit of $1.4
million and the Company, in turn, provided a deposit of $1.2 million to its
outsourced manufacturer of the machines. The remaining cash is held in a
separate bank account to be used to fund future costs associated with the manufacture
of the machines and has been recorded as restricted cash.

The
agreement further provides that in the event the Company does not deliver the machines or
the machines do not meet the acceptance criteria contained in the agreement, the customer
will be entitled to a full refund of the deposit. Although the Company currently
believes that the machines will ultimately be delivered and accepted by the customer and
the associated revenue will be recognized at that time, the deposit received from the
customer has been recorded as a customer deposit in accrued liabilities since it is fully
refundable if acceptance criteria are not met. The deposit that was provided to the
manufacturer of the machines will ultimately be applied towards the purchase of the
machines from the manufacturer and is only refundable to the extent that costs have not
been incurred to manufacture machines and has been recorded as a prepaid asset.

5

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Table of Contents

# NOTE C  INVENTORIES

The
components of inventory consists of the following:

|                                     | June 30, 2007  |   | March 31, 2007
|------------------------------------ | -------------- | - | --------------
|
|                                     | (In Thousands)
|
|Raw Materials                        |                | $ | 3,202         
|Finished Goods and Work in Progress  |                |   | 3,440         
|Less:  Inventory Valuation Allowance |                |   | (374          
|
|                                     |                | $ | 6,268         
|

# NOTE D  EARNINGS
PER SHARE

Basic
earnings per share is calculated by dividing net income available to common stockholders
by the weighted average number of shares of common stock outstanding for the period.
Diluted earnings per share is calculated by dividing net income before preferred stock
dividends by the basic weighted average number of shares of common stock outstanding for
the period, adjusted for the dilutive effect of common stock equivalents, using the
treasury stock method and the if converted method as it relates to
the convertible preferred stock outstanding.

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

|                                                                              | Three Months Ended June 30,             
|----------------------------------------------------------------------------- | ----------------------------------------
|
|
|
|                                                                              | (In Thousands; Except Per Share Amounts)
|Numerator:                                                                    |                                         
|
|Net Income Before Preferred
        Stock Dividends                           |                                         
|
|Convertible Preferred
        Stock Dividends                                 |                                         
|
|Net Income Available to Common
        Stockholders                           |                                         
|
|Denominator:                                                                  |                                         
|
|Weighted Average
        Shares Outstanding  Basic                           |                                         
|
|Add: Effect of Dilutive
        Warrants and Options                          |                                         
|
|Effect of Conversion of
        Convertible Preferred Stock into Common Stock |                                         
|
|Weighted Average Shares
        Outstanding  Diluted                         |                                         
|
|Net Income Per Common Share  Basic                                           |                                         
|
|Net Income Per Common Share  Diluted                                         |                                         
|

The
effect of 6,000 and 249,000 options were not included in the calculation of net income per
diluted common share for the three months ended June 30, 2007 and 2006, respectively, as
the effect would have been anti-dilutive.

6

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Table of Contents

# NOTE E 
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 Plan). As of June 30,
2007, options to purchase 724,950 shares were outstanding and there were no options
available for issuance under the Plan.

On
April 1, 2006, the Company adopted Statement of Financial Accounting Standards No. 123
(revised 2004) Share-Based Payment (FAS No. 123R). The following disclosures
provide information regarding the Companys share-based compensation awards, all of
which are classified as equity awards in accordance with FAS No. 123R:

| | 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 three months ended June 30,
2007 and 2006, 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 $56,000 ($34,000
net of tax) during the three months ended June 30, 2007 and approximately $31,000
($19,000 net of tax) during the three months ended June 30, 2006, 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 outside
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 immediately; however, the Company has historically granted options that
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.
No options were granted during the three months ended June 30, 2007 and 2006.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

The
Company has 5,900 warrants outstanding at an exercise price of $1.88 per share as of June
30, 2007, which expire in 2009. These warrants were issued in 1998 and no new warrants
have been issued since that time. There has been no activity relating to the warrants
during the three months ended June 30, 2007.

During
the three months ended June 30, 2007, the Company received approximately $97,000 in cash
from stock option exercises. A tax benefit of approximately $69,000 was recorded in the
statement of changes in stockholders equity. As of June 30, 2007, the Company has
unrecognized compensation cost of approximately $17,000 expected to be recognized over the
next three years for share-based awards.

A
summary of the changes in stock options outstanding during the three months ended June 30,
2007 is as follows:

|                              |  |         |   |  | Weighted Average
|----------------------------- |  | ------- | - |  | ----------------
|
|
|
|
|Outstanding at March 31, 2007 |  | 763,250 |   |  | $               
|Options Exercised             |  | (26,300 | ) |  | $               
|Options Expired               |  | (12,000 | ) |  |                 
|
|Outstanding at June 30, 2007  |  | 724,950 |   |  | $               
|

7

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Table of Contents

# Outstanding Options

|                |  |         |  | Weighted Average |  |      
|--------------- |  | ------- |  | ---------------- |  | -----
|
|
|
|$1.45 -   $2.30 |  | 237,000 |  | 3.7              |  | $1.55
|$2.50 -   $5.00 |  | 131,200 |  | 5.0              |  | $3.53
|$5.60 - $12.45  |  | 356,750 |  | 8.0              |  | $6.43

Exercisable Options

|                |  |         |  | Weighted Average |  |      
|--------------- |  | ------- |  | ---------------- |  | -----
|
|
|
|$1.45 -   $2.30 |  | 237,000 |  | 3.7              |  | $1.55
|$2.50 -   $5.00 |  | 91,200  |  | 4.4              |  | $3.11
|$5.60 - $12.45  |  | 351,750 |  | 8.0              |  | $6.41

The
options outstanding at June 30, 2007 expire on various dates through March 2014.

At
June 30, 2007, exercisable options had aggregate intrinsic values of approximately
$5,492,000. At June 30, 2007, exercisable warrants had aggregate intrinsic values of
approximately $62,000. Options exercised during the three months ended June 30, 2007, had
intrinsic values of approximately $209,000.

# NOTE F  LONG-TERM
DEBT

|                                                                                                                                                                                                                  | June 30,       |  | March 31,
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -------------- |  | ---------
|
|
|                                                                                                                                                                                                                  | (In Thousands)
|
|
|Term loan payable in monthly
        installments of $178,000 through June 2009 and one final installment of $1,067,000 in July 2009 plus
        interest at 0.75% above the prime rate (9.0% at June 30, 2007). |                |  | $        
|
|Revolving line of credit due July 2009 plus
        interest payable monthly at the prime rate (8.25% at June 30, 2007).                                                                                          |                |  |          
|
|Term loan payable in graduated monthly
        installments of $32,000 - $52,000 plus interest at 0.50% above the prime rate (8.75% at June 30, 2007)
        through July 2007.                                  |                |  |          
|
|Note payable to related party
        payable in monthly installments of $28,785 including interest at 6.25% through July 2008.                                                                                   |                |  |          
|
|Capital leases expiring at various times
        through fiscal year 2010 at interest rates ranging from 6.29% to 9.5%.                                                                                           |                |  |          
|
|Total Long-Term Debt                                                                                                                                                                                              |                |  |          
|
|Less Current Portion (including $333,000
        and $328,000, respectively due to a related party).                                                                                                              |                |  |          
|
|Long-Term Debt Due After One Year                                                                                                                                                                                 |                |  | $        
|

8

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The
revolving line of credit and bank term loans are collateralized by a first security
interest in all of the assets of the Company. There was approximately $2.0 million
borrowed and an additional $3.0 million available on the Companys revolving line of
credit at June 30, 2007, based upon eligible collateral.

The
revolving line of credit and bank term loans contain provisions that require the Company
to maintain certain financial covenants that, among other things, require the maintenance
of tangible net worth, debt service coverage ratios and total debt to EBITDA. In addition,
capital expenditures are limited to certain amounts. The Company was in compliance with
all provisions of the loan agreements as of June 30, 2007 and March 31, 2007.

At
June 30, 2007, the Company also had a $1.0 million line of credit available for purchases
of equipment. Advances on the line of credit are repayable over a three-year term. There
were no amounts outstanding on this line of credit at June 30, 2007 or March 31, 2007.

# NOTE G 
COMMITMENTS AND CONTINGENCIES

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

The
Company has entered into certain agreements, which require the Company to potentially make
certain payments to members of senior management in the event of a change in control of
the Company or upon termination of employment. Also, the Company has entered into
indemnification agreements with its directors and officers for certain events or
occurrences that effect the officer or director as a result of the officer or director
serving in that capacity. The maximum potential amount of future payments the Company
could be required to make under these indemnification agreements is unlimited; however,
the Company has a director and officer liability insurance policy that is considered
adequate to cover its exposure.

# NOTE H 
STOCKHOLDERS EQUITY

In
December 2006, the Company entered into an agreement with an investor to redeem 2,000
shares of its convertible preferred stock. The convertible preferred stock had been
outstanding since 2002, paid a dividend of 11 percent, or $220,000 annually, and was
convertible into 847,457 shares of common stock. The Company paid the investor
approximately $6.5 million, or $7.65 per common share equivalent, as well as a $20,000
transaction fee, to fully redeem all of the outstanding shares of convertible preferred
stock held by the investor and completely satisfy all of its obligations under the
convertible preferred stock agreement. The Company recorded a constructive dividend of
approximately $4.5 million, or $0.74 per diluted common share in December 2006, associated
with the redemption which represents the amount by which the payment to the investor
exceeded the carrying value of the convertible preferred stock on the date of redemption.
The payment was funded with the proceeds of a term loan provided by the Companys
secured lender.

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# NOTE I  OTHER
ASSETS

|                                           | Amortization Period |        | June 30, |   | March 31,
|------------------------------------------ | ------------------- | ------ | -------- | - | ---------
|
|
|                                           | (In Thousands)     
|
|Product Development                        |                     | 3  5  |          | $ | 3,958    
|Less:  Accumulated
         Amortization   |                     |        |          |   | (2,326   
|
|                                           |                     |        |          | $ | 1,632    
|
|
|Patents                                    |                     | 5  17 |          | $ | 2,639    
|Less:  
        Accumulated Amortization   |                     |        |          |   | (1,897   
|
|                                           |                     |        |          | $ | 742      
|
|
|Financing Costs                            |                     | 3  5  |          | $ | 162      
|Less:  
          Accumulated Amortization |                     |        |          |   | (134     
|
|                                           |                     |        |          | $ | 28       
|
|
|Other                                      |                     |        |          | $ | 115      
|
|Total Other Assets, Net                    |                     |        |          | $ | 2,517    
|

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

# NOTE J  RECENT
ACCOUNTING PRONOUNCEMENTS

In
July 2006, the FASB issued FASB Interpretation 48, Accounting for Uncertainty in Income
Taxes: an Interpretation of FAS No. 109 (FIN 48).FIN 48, which
clarifies FAS No. 109, Accounting for Income Taxes, establishes the criterion
that an individual tax position has to meet for some or all of the benefits of that
position to be recognized in the Companys financial statements.

The
Company adopted the provisions of FIN 48 and FASB Staff Position No. FIN 48-1 on April 1,
2007. Only tax positions that met the more-likely-than-not recognition threshold at the
adoption date were recognized or continued to be recognized. As a result of the
implementation of FIN 48, an additional $700,000 liability for uncertain tax positions was
recorded as a decrease to the beginning balance of retained earnings. Included in the
balance at April 1, 2007, are $841,000 of unrecognized tax benefits that, if recognized,
would favorably affect the annual effective income tax rate. As of June 30, 2007, we have
$856,000 of unrecognized tax benefits that is recorded as a component of other
liabilities. Approximately $141,000 of the total liability has been recorded as a current
liability because the Company believes that this amount will be paid during the next
twelve months.

Interest
and penalties related to uncertain tax positions are recorded as income tax expense.
During the quarter ended June 30, 2007, approximately $15,000 of interest and penalties
associated with uncertain tax positions, was recorded, which are included in the $856,000.

In
the jurisdictions in which the Company has operations, tax returns for various years from
1996 through 2006 are subject to examination.

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In
June 2006, the Emerging Issues Task Force reached a consensus on Issue No. 06-3
(EITF 06-3), Disclosure Requirements for Taxes Assessed by a
Governmental Authority on Revenue-Producing Transactions. The consensus allows
companies to choose between two acceptable alternatives based on their accounting policies
for transactions in which the company collects taxes on behalf of a governmental
authority, such as sales taxes. The guidance should be applied to financial reports
through retrospective application for all periods presented, if amounts are significant,
for interim and annual reporting beginning after February 1, 2007 and was adopted by
the Company on April 1, 2007.

In
September 2006, the FASB issued FAS No. 157, Fair Value Measurements. FAS
No. 157 defines fair value, establishes a framework for measuring fair value and
enhances disclosures about fair value measurements required under other accounting
pronouncements, but does not change existing guidance as to whether or not an instrument
is carried at fair value. FAS No. 157 is effective for fiscal years beginning after
November 15, 2007, the year beginning April 1, 2008 for the Company. The Company
is currently reviewing the provisions of FAS No. 157 to determine the impact on its
consolidated financial statements.

In
February 2007, the FASB issued FAS No. 159, The Fair Value Option for Financial
Assets and Financial Liabilities which permits entities to choose to measure many
financial instruments and certain other items at fair value that are not currently
required to be measured at fair value. FAS No. 159 will be effective for the Company
on April 1, 2008. The Company is currently evaluating the impact of adopting FAS
No. 159 on its financial position, cash flows, and results of operations.

A
variety of proposed or otherwise potential accounting standards are currently under study
by standard-setting organizations and various regulatory agencies. Because of the
tentative and preliminary nature of these proposed standards, management has not
determined whether implementation of such proposed standards would be material to the
Companys consolidated financial statements.

# NOTE K  SEGMENT
INFORMATION

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

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

|                                  | United States  |  | United Kingdom |        | Germany |   | Elimination |   | Consolidated
|--------------------------------- | -------------- |  | -------------- | ------ | ------- | - | ----------- | - | ------------
|
|                                  | (In Thousands)
|Three Months Ended June 30, 2007  |                |  |                |        |         |   |             |   |             
|Sales to Unaffiliated Customers   |                |  | $              | 12,695 |         | $ | 1,860       |   |             
|Intercompany Sales                |                |  | $              | 484    |         | $ |            |   |             
|Operating Income                  |                |  | $              | 818    |         | $ | 158         |   |             
|Identifiable Assets               |                |  | $              | 21,556 |         | $ | 4,857       |   |             
|Depreciation and Amortization     |                |  | $              | 562    |         | $ | 32          |   |             
|Capital Expenditures              |                |  | $              | 373    |         | $ | 16          |   |             
|
|Three Months Ended June  30, 2006 |                | 
|Sales to Unaffiliated Customers   |                |  | $              | 10,013 |         | $ | 1,503       |   |             
|Intercompany Sales                |                |  | $              | 558    |         | $ |            |   |             
|Operating Income                  |                |  | $              | 939    |         | $ | (89         | ) |             
|Identifiable Assets               |                |  | $              | 18,349 |         | $ | 4,269       |   |             
|Depreciation and Amortization     |                |  | $              | 521    |         | $ | 45          |   |             
|Capital Expenditures              |                |  | $              | 287    |         | $ | 22          |   |             

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

Net
foreign currency gains reflected in results of operations were not material for the three
months ended June 30, 2007 and 2006. Operating income is total sales and other operating
income less operating expenses. Segment operating income does not include interest expense
and net miscellaneous income/expense.

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# MTS MEDICATION
TECHNOLOGIES, INC. AND SUBSIDIARIESMANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS  FOR THE THREE MONTHS ENDED JUNE 30, 2007

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

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

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

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

# Summary of Results

Our
net sales in the first quarter ended June 30, 2007 were $14.8 million compared with $11.5
million in the same period of the prior year. Net sales from sales of our products to
existing and new customers, primarily in the long-term market, increased approximately
15%. Sales of our OnDemand® machines increased approximately 200%. We believe the
increase in net sales of our products to the long-term care market is primarily the result
of: (1) increased penetration of independent pharmacies that service nursing homes; (2)
growth of customer demands due to the aging demographics of the U.S. population; (3) a
continued shift toward punch-card use; (4) growth in international markets; and (5)
continued success in selling OnDemand machines. Our net sales in Europe were up
approximately 41% this quarter compared to the quarter ended June 30, 2006.

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The
following table sets forth, for the three-month periods indicated, certain key operating
results and other financial information.

|                                            | Three Months Ended June 30,             
|------------------------------------------- | ----------------------------------------
|
|
|
|                                            | (In Thousands; Except Per Share Amounts)
|
|Net Sales                                   |                                         
|Gross Profit                                |                                         
|Operating Income                            |                                         
|Net Income Available to Common Stockholders |                                         
|Net Income Per Common Share - Diluted       |                                         

# ESTIMATES AND CRITICAL
ACCOUNTING POLICIES

The
preparation of our consolidated financial statements in conformity with generally accepted
accounting principles in the United States requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities as of the date of
the financial statements and revenue and expenses for the respective period-ended for such
statements. The determination of estimates requires the use of judgment since future
events and their affect on our operations cannot be determined with absolute certainty.
Actual results typically differ from these estimates in some fashion, and at times, these
variances may be material to our financial statements. Our management continually
evaluates its estimates and assumptions, which are based on historical experience and
other factors that are believed to be reasonable under these circumstances. These
estimates and our actual results are subject to the risk factors listed under Item
1. Business in our Form 10-K for the fiscal year ended March 31, 2007. 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, BAF and Consilio. All significant inter-company accounts
and transactions have been eliminated in consolidation.

Revenue Recognition

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

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

Revenue
is reported net of rebates and discounts provided to customers. Rebates are generally
determined based upon pricing agreements that offer certain customers incentives to
purchase products from the Company. Discounts are provided from time to time primarily to
compensate customers for inconveniences caused by late shipments, defective product or
pricing errors. Rebates and discounts were $410,000 and $337,000 for the three months
ended June 30, 2007 and 2006, respectively. Rebates and discounts are recorded at the time
they are earned by the customer.

Accounts Receivable

Trade
accounts receivable are recorded based upon the invoiced amount, are generally not
interest bearing and are considered past due when full payment is not received by the
specified credit terms. The Company does not typically require collateral when granting
credit; however, customer credit worthiness is reviewed prior to granting credit. The
Company normally estimates the uncollectibility of its accounts receivable. The Company
considers many factors when making its estimates, including analyzing accounts receivable
and historical bad debts, customer concentrations, customer credit worthiness, current
economic trends and changes in its customer payment terms when evaluating the adequacy of
the reserve for uncollectible accounts. The Company reviews the status of its accounts
monthly, assessing the customers ability to pay. When a specific account is deemed
uncollectible, the account is written off against the reserve for uncollectible accounts.
As of June 30, 2007 and March 31, 2007, the Company has established an allowance for
doubtful accounts of approximately $150,000 and $149,000, respectively, to account for
estimated 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. The Company reviews various information
related to the age and turnover of specific inventory items to assist its assessment. As
of June 30, 2007 and March 31, 2007, the Company established an inventory valuation
allowance of approximately $374,000 and $340,000, respectively, to account for the
estimated loss in value of inventory due to obsolescence.

Self-Insurance Plan
Reserve

The
Company has a medical health benefit self-insurance plan, which covers substantially all
of its employees. During the quarter ended June 30, 2007, the Company was reinsured for
claims that exceed $100,000 per participant and an annual maximum aggregate limit of
approximately $1,038,000. Future claims experience may affect the reinsurance limits that
may be available to the Company. The Company has established a reserve of approximately
$118,000 and $95,000 at June 30, 2007 and March 31, 2007, respectively, for all unpaid
claims incurred and reported during the quarter ended June 30, 2007 and the fiscal year
March 31, 2007. Self-insured medical claims costs incurred during the periods ended June
30, 2007 and June 30, 2006 totaled approximately $127,000 and $160,000, respectively.

Income Taxes

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

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Goodwill and Other
Intangible Assets

The
Company follows SFAS No. 142, Goodwill and Other Intangible Assets, and
accordingly will not amortize goodwill, but will annually review it for impairment. Other
intangible assets acquired in the BAF and Consilio acquisition are amortized on a
straight-line basis over a period ranging from seven to fifteen years, the estimated
useful lives of the assets.

Valuation of Long-Lived
Assets and Certain Identifiable Intangibles

Long-lived
assets and certain identifiable intangibles that are held and used by the Company are
reviewed for impairment whenever events or changes in circumstance indicate that the
carrying amount of these assets may not be recoverable in accordance with Financial
Accounting Standards Board (FASB) Statement of Financial Accounting Standards (SFAS) No.
144, Accounting for the Impairment or Disposal of Long-Lived Assets. In
performing the review for recoverability, the Company estimates the future cash flows
expected to result from the use of the assets and their eventual disposition. If the sum
of the expected future cash flows is less than the carrying amount of the assets, an
impairment loss is recognized based on a discounted cash flow analysis. Management
believes no impairment loss existed for any of the periods presented.

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 five-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. The Company also capitalizes the hardware components
associated with the development of the product and transfers the ultimate carrying value
to inventory when it becomes saleable.

Estimated Liabilities

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

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

Warranty

We
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. Warranty and service
costs incurred during the periods ended June 30, 2007 and 2006 totaled approximately
$158,000 and $85,000, respectively.

Foreign Currency
Transactions and Translation

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

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# RESULTS OF OPERATIONS

Three Months Ended June
30, 2007 and 2006

Net
sales for the three months ended June 30, 2007 increased 28.7% to $14.8 million compared
with $11.5 million during the same period of the prior year. Net sales increased for
consumable punch cards and prepack machines primarily because of additional sales made to
new and existing customers. In addition, revenue associated with the sale of OnDemand
machines was $2.0 million during the three months ended June 30, 2007 compared with
$677,000 during the same period of the prior year because we installed six machines in the
first quarter this year compared to one machine in the prior year quarter. Also, our net
sales in Europe increased 41% due, in part, to net sales in Germany, which resulted from
the acquisition of Consilio in February 2007.

Cost
of sales for the three months ended June 30, 2007 was $9.4 million compared with $7.2
million during the same period of the prior year. Cost of sales as a percentage of sales
increased to 63.1% from 62.6% during the same period of the prior year. Cost of sales as a
percentage of sales increased primarily because of higher factory overhead costs. Also,
the proportion of revenue associated with OnDemand machines, which have a higher cost of
sales then consumables, was higher in the first quarter of this year compared to the prior
year quarter.

Selling,
general and administration expenses for the three months ended June 30, 2007 increased 29%
to $3.8 million from $3.0 million of the prior 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, higher selling costs associated with variable
compensation plans, such as commissions, and severance and recruiting expenses.

Depreciation
and amortization expense for the three months ended June 30, 2007 increased 5.3% to
$596,000 from $566,000 during the same period of the prior year. The increase resulted
primarily from increased depreciation and amortization associated with capital
expenditures and acquired intangible assets.

Interest
expense for the three months ended June 30, 2007 increased 140% to $151,000 from $63,000
during the same period of the prior fiscal year. The increase results from higher levels
of debt primarily related to term loans used to fund the redemption of convertible
preferred stock completed in December 2006.

Income
tax expense increased 30.9% to $360,000 during the three months ended June 30, 2007
compared with $275,000 during the same period of the prior fiscal year. The increase
results from the fact that our net income before tax increased and our effective tax rate
increased to 40.3% from 38.6%. Our effective tax rate increased as a result of increased
state and local taxes, as well as interest and penalties that relates to our uncertain tax
positions.

# LIQUIDITY AND CAPITAL
RESOURCES

During
the three months ended June 30, 2007, we had net income of $533,000 compared with $437,000
during the same period of the prior fiscal year. Cash provided by operations was
approximately $1,141,000 and $1,288,000 during the three months ended June 30, 2007 and
2006, respectively. Although our EBITDA increased in the first quarter of this fiscal year
compared to the first quarter of the prior year, we used more cash to support our working
capital needs related primarily to increases in inventory and deposits provided to our
outsourced manufacturer of OnDemand machines. We had working capital of $7.2 million at
June 30, 2007 compared to $6.7 million at March 31, 2007.

Investing
activities used $590,000 during the three months ended June 30, 2007 compared with
$439,000 during the same period of the prior fiscal year. The increase results primarily
from an increase in expenditures for manufacturing equipment and product development
projects.

Financing
activities used $198,000 during the three months ended June 30, 2007 compared with
$710,000 during the same period of the prior fiscal year. The decrease results primarily
from lower pay-downs on the revolving line of credit. We used our line of credit in the
first quarter of this year to support our working capital needs.

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

We
have new product development projects underway, principally new versions of our OnDemand
machine and our MedTimes system, that are expected to be funded by cash flow from
operations. These projects are monitored on a regular basis to attempt to ensure that the
anticipated costs associated with them do not exceed our ability to fund them from cash
flow from operations and other sources of capital.

There
was $2.0 million borrowed and an additional $3.0 million available on our revolving line
of credit at June 30, 2007 based upon eligible collateral and overadvance capabilities
provided for in the credit facility. In addition, we had $1.0 million available on our
capital equipment line of credit.

The
revolving line of credit and term loans contain financial covenants that, among other
things, require us to maintain certain financial ratios, tangible net worth and limits the
amount of capital expenditures we can make. We were in compliance with all provisions of
the loan agreements at June 30, 2007 and March 31, 2007.

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

# Off-Balance Sheet
Arrangements

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

# Contractual Obligations

Summarized
below are our obligations and commitments to make future payments under certain
contractual obligations as of June 30, 2007:

|                 |  |                |   | Less Than |  | 1 - 3 |       | 4 - 5 |   | More Than
|---------------- |  | -------------- | - | --------- |  | ----- | ----- | ----- | - | ---------
|
|
|                 |  | (In Thousands)
|
|Long-Term Debt   |  |                | $ | 7,736     |  | $     | 2,518 |       | $ | 5,218    
|Capital Leases   |  |                | $ | 179       |  | $     | 103   |       | $ | 76       
|Operating Leases |  |                | $ | 7,793     |  | $     | 1,033 |       | $ | 1,695    
|Interest         |  |                | $ | 858       |  | $     | 524   |       | $ | 334      

# Item 3.     Quantitative and
Qualitative Disclosures About Market Risk

The
Company is exposed to the impact of interest rate changes as borrowings under its Senior
Credit Agreement bear interest at variable interest rates. The Company does not currently
actively manage this interest rate risk exposure. A 1% change in interest rates up or down
would have affected the Companys statement of operations on an annual basis by
approximately $74,000, the variable-rate outstanding level of debt at June 30, 2007.

In
addition, the Company is exposed to foreign rate changes of the British Pound and Euro as
it impacts the net asset value of its subsidiaries located in the United Kingdom and
Germany. The Company does not currently actively manage this foreign currency exchange
rate risk exposure. The Company believes that the exposure to foreign currency translation
gains or losses is minimal.

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# Item 4.    Controls and
Procedures

Evaluation of Disclosure
Controls and Procedures

Our
chief executive officer and chief financial officer are responsible for establishing and
maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e)
and 15d-15(e)) for MTS. Accordingly, our chief executive officer and chief financial
officer designed such disclosure controls and procedures, or caused such disclosure
controls and procedures to be designed under their supervision, to ensure that material
information relating to MTS, including our consolidated subsidiaries, is made known to our
chief executive officer and chief financial officer by others within those entities. We
regularly evaluate the effectiveness of disclosure controls and procedures and report our
conclusions about the effectiveness of the disclosure controls quarterly on our Form 10-Q
and annually on our Form 10-K. Based upon the evaluation for the period ended June 30,
2007, our chief executive officer and chief financial officer concluded that our
disclosure controls and procedures were effective, as of the end of the period ended June
30, 2007 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. 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.

Changes in Internal
Controls

There
has not been any significant change in our internal control over financial reporting
identified in connection with the evaluation that occurred during the quarter ended June
30, 2007 that has materially affected, or is reasonably likely to materially affect, those
controls.

Limitations on the
Effectiveness of Controls

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

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

CEO and CFO
Certifications

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

19

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Table of Contents

# PART II  OTHER
INFORMATION

# Item 1.     Legal Proceedings

None.

# Item 1A.     Risk factors

None.

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

None.

# Item 3.     Default Upon Senior
Securities

None.

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

None.

# Item 5.     Other Information

None.

# Item 6.     Exhibits

| | Exhibit Index |  | Description                                                                                                                                                                                                                                                 
| | ------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
|
| | 10.1          |  | Sixth Amendment to Loan and Security Agreement,
        dated August 1, 2007, between LaSalle Business Credit, LLC as agent for LaSalle Bank Midwest
         National Association and MTS Medication Technologies, Inc. and MTS Packaging Systems, Inc. (*)
|
| | 10.2          |  | MTS OnDemand Sales and License Agreement,
        dated May 7, 2007, between MTS Medication Technologies, Inc. and Omnicare, Inc. (*) (**)                                                                                                                  
|
| | 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.                                                                                                                                                                                                                                               
|
| | (**)          |  | Portions of Exhibit 10.1 have been omitted pursuant
        to a request for confidential treatment and have been filed separately with the Securities and
        Exchange Commission.                                                                     

20

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Table of Contents

# 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:   August 14, 2007 |                                  
|                        |                                  
|                        |                                  
|                        |                                  

|                        | 
|----------------------- | 
|
|Date:   August 14, 2007 | 
|                        | 
|                        | 
|                        | 

21

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Table of Contents

# EXHIBIT INDEX

| | Exhibit Index |  | Description                                                                                                                                                                                                                                                 
| | ------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
|
| | 10.1          |  | Sixth Amendment to Loan and Security Agreement,
        dated August 1, 2007, between LaSalle Business Credit, LLC as agent for LaSalle Bank Midwest
         National Association and MTS Medication Technologies, Inc. and MTS Packaging Systems, Inc. (*)
|
| | 10.2          |  | MTS OnDemand Sales and License Agreement,
        dated May 7, 2007, between MTS Medication Technologies, Inc. and Omnicare, Inc. (*) (**)                                                                                                                  
|
| | 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.                                                                                                                                                                                                                                               
|
| | (**)          |  | Portions of Exhibit 10.1 have been omitted pursuant
        to a request for confidential treatment and have been filed separately with the Securities and
        Exchange Commission.                                                                     

22

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Table of Contents

# 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)) for the registrant
and have:
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

| | b) | Evaluated
the effectiveness of the registrants disclosure controls and
procedures 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
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

| | 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:   August 14, 2007 |  | By: | /s/ Todd E. Siegel                    | 
|----------------------- |  | --- | ------------------------------------- | 
|                        |  |     |                                       | 
|                        |  |     | Todd E. Siegel                        | 
|                        |  |     | President and Chief Executive Officer | 

23

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Table of Contents

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)) for the registrant
and have:
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

| | b) | Evaluated
the effectiveness of the registrants disclosure controls and
procedures 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
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

| | 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:   August 14, 2007 |  | By: | /s/ Michael P. Conroy                      | 
|----------------------- |  | --- | ------------------------------------------ | 
|                        |  |     |                                            | 
|                        |  |     | Michael P. Conroy                          | 
|                        |  |     | Vice President and Chief Financial Officer | 

24

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Table of Contents

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 June 30, 2007 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:
          August 14, 2007      | 
|                                      | 
|/s/ Todd E. Siegel                    | 
|Todd E. Siegel                        | 
|President and Chief Executive Officer | 
|                                      | 
|                                      | 

25

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Table of Contents

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 June 30, 2007 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:
          August 14, 2007           | 
|                                           | 
|/s/ Michael P. Conroy                      | 
|Michael P. Conroy                          | 
|Vice President and Chief Financial Officer | 
|                                           | 
|                                           | 

26

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