Table of Contents

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

# FORM 10-Q

(Mark One)

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

For the quarterly period ended September 30, 2005

|[  ] | 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.   |X|   Yes
             [  ]    No

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

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

As of November 14, 2005, the registrant had 6,008,805 shares of common stock, $.01 par
        value per share, issued and outstanding.

---

# MTS MEDICATION
TECHNOLOGIES, INC. AND SUBSIDIARIES

# Index

| |                | Page                                                                                                                  | 
| | -------------- | --------------------------------------------------------------------------------------------------------------------- | 
|
|
|
| | Item 1.        | Financial Statements                                                                                                  | 
| |                |                                                                                                                       | 
| |                | Condensed
        Consolidated Balance Sheets - September 30, 2005 and March 31, 2005                                 | 
|
| |                | Condensed
        Consolidated Statements of Earnings - Three Months and Six Months Ended September 30, 2005 and 2004 | 
|
| |                | Condensed
        Consolidated Statements of Changes in Stockholders' Equity - Six Months Ended September 30, 2005    | 
|
| |                | Condensed
        Consolidated Statements of Cash Flows - Six Months Ended September 30, 2005 and 2004                | 
| |                |                                                                                                                       | 
| |                | Notes
        to Condensed Consolidated Financial Statements                                                          | 
|
| | Item 2.        | Management's Discussion and
        Analysis of Financial Condition and Results of Operations                         | 
| |                |                                                                                                                       | 
| | Item 3.        | Quantitative and
        Qualitative Disclosures About Market Risk                                                    | 
| |                |                                                                                                                       | 
| | Item 4.        | Controls and Procedures                                                                                               | 
|
| |                |                                                                                                                       | 
|
| |                |                                                                                                                       | 
| | Item 1.        | Legal Proceedings                                                                                                     | 
|
| | Item 2.        | Unregistered Sales of Equity Securities and Use of Proceeds                                                           | 
|
| | Item 3.        | Defaults Upon Senior Securities                                                                                       | 
|
| | Item 4.        | Submission of Matters to a Vote of Securities                                                                         | 
|
| | Item 5.        | Other Information                                                                                                     | 
|
| | Item 6.        | Exhibits                                                                                                              | 
|
| | Signatures     |                                                                                                                       | 
|
| | Certifications |                                                                                                                       | 

i.

---

Table of Contents

# ITEM 1.  FINANCIAL STATEMENTS

# PART 1 - FINANCIAL
INFORMATION  MTS MEDICATION TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS(In Thousands)

# ASSETS

|                            | September 30, 2005 |  | March 31, 2005
|--------------------------- | ------------------ |  | --------------
|
|                            | (Unaudited)        |  |               
|Current Assets:             |                    |  |               
|Cash                        |                    |  | $             
|Accounts Receivable, Net    |                    |  |               
|Inventories, Net            |                    |  |               
|Prepaids and Other          |                    |  |               
|Deferred Tax Benefits       |                    |  |               
|
|Total Current Assets        |                    |  |               
|
|Property and Equipment, Net |                    |  |               
|Other Assets, Net           |                    |  |               
|
|Total Assets                |                    |  | $             
|

# LIABILITIES AND
STOCKHOLDERS' EQUITY

|Current Liabilities:                                     |  |  |   |        |   |  |   |        |  
|-------------------------------------------------------- |  |  | - | ------ | - |  | - | ------ | -
|Accounts Payable and
        Accrued Liabilities         |  |  | $ | 4,004  |   |  | $ | 4,021  |  
|Current Maturities of Long-Term
        Debt             |  |  |   | 513    |   |  |   | 431    |  
|Current Maturities of Related
        Party Note Payable |  |  |   | 298    |   |  |   | 290    |  
|
|Total Current Liabilities                                |  |  |   | 4,815  |   |  |   | 4,742  |  
|
|Long-Term Debt, Less Current Maturities                  |  |  |   | 3,733  |   |  |   | 5,492  |  
|Related Party Note Payable, Less Current Maturities      |  |  |   | 590    |   |  |   | 742    |  
|Lease Incentive                                          |  |  |   | 333    |   |  |   | 350    |  
|
|Total Liabilities                                        |  |  |   | 9,471  |   |  |   | 11,326 |  
|
|Stockholders' Equity:                                    |  | 
|Preferred Stock                                          |  |  |   | 2      |   |  |   | 2      |  
|Common Stock                                             |  |  |   | 60     |   |  |   | 59     |  
|Capital In Excess of Par Value                           |  |  |   | 13,898 |   |  |   | 13,786 |  
|Accumulated Deficit                                      |  |  |   | (2,097 | ) |  |   | (2,931 | )
|Treasury Stock                                           |  |  |   | (328   | ) |  |   | (328   | )
|
|Total Stockholders' Equity                               |  |  |   | 11,535 |   |  |   | 10,588 |  
|
|Total Liabilities and Stockholders' Equity               |  |  | $ | 21,006 |   |  | $ | 21,914 |  
|

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

1

---

Table of Contents

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

|                                                   | Three Months Ended September 30, |  | Six Months Ended September 30,
|-------------------------------------------------- | -------------------------------- |  | ------------------------------
|
|
|
|
|Revenue:                                           |                                  |  |                               
|Net Sales                                          |                                  |  | $                             
|
|Costs and Expenses:                                |                                  | 
|Cost of Sales                                      |                                  |  |                               
|Selling, General and Administrative                |                                  |  |                               
|Depreciation and Amortization                      |                                  |  |                               
|
|Total Costs and Expenses                           |                                  |  |                               
|
|Operating Profit                                   |                                  |  |                               
|
|Other Expenses                                     |                                  | 
|Interest Expense                                   |                                  |  |                               
|Amortization of:                                   |                                  | 
|Financing Costs                                    |                                  |  |                               
|Original Issue Discount                            |                                  |  |                               
|
|Total Other Expenses                               |                                  |  |                               
|
|Income Before Income Taxes                         |                                  |  |                               
|
|Income Tax Expense                                 |                                  |  |                               
|
|Net Income (Loss)                                  |                                  |  |                               
|
|Convertible Preferred Stock Dividends              |                                  |  |                               
|
|Net Income (Loss) Available to Common Stockholders |                                  |  | $                             
|
|Net Income (Loss) Per Basic Common Share           |                                  |  | $                             
|
|Net Income (Loss) Per Diluted Common Share         |                                  |  | $                             
|
|Weighted Average Shares Outstanding  Basic        |                                  |  |                               
|
|Weighted Average Shares Outstanding  Diluted      |                                  |  |                               
|

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

2

---

Table of Contents

# MTS MEDICATION
TECHNOLOGIES, INC. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF CHANGES
IN STOCKHOLDERS' EQUITYSIX MONTHS ENDED SEPTEMBER 30, 2005(In
Thousands)(Unaudited)

|                                         | Preferred Stock |       | Common Stock |   |   |  |           |  |   |    | 
|---------------------------------------- | --------------- | ----- | ------------ | - | - |  | --------- |  | - | -- | 
|
|
|
|
|
|Balance March 31, 2005                   |                 | 2,000 |              | $ | 2 |  | 5,894,505 |  | $ | 59 | 
|
|Stock Options and Warrants Exercised     |                 |       |              |   |   |  | 107,600   |  |   | 1  | 
|
|Stock Grant Issued                       |                 |       |              |   |   |  | 5,000     |  |   |    | 
|
|Convertible Preferred Stock Dividend     |                 |       |              |   |   |  |           |  |   |    | 
|
|Tax Benefit from Stock Options Exercised |                 |       |              |   |   |  |           |  |   |    | 
|
|Foreign Currency Translation Adjustment  |                 |       |              |   |   |  |           |  |   |    | 
|
|Net Income                               |                 |       |              |   |   |  |           |  |   |    | 
|
|Balance September 30, 2005               |                 | 2,000 |              | $ | 2 |  | 6,007,105 |  | $ | 60 | 
|

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

3

---

Table of Contents

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

|                                                                        | Six Months Ended September 30,
|----------------------------------------------------------------------- | ------------------------------
|
|
|
|
|Operating Activities                                                    |                               
|Net Income (Loss)                                                       |                               
|
|Adjustments to Reconcile Net Income (Loss)
         to Net Cash         |                               
|Provided by Operating
        Activities:                               |                               
|Amortization of Deferred Financing Costs                                |                               
|Amortization of Original Issue Discount                                 |                               
|Depreciation and Amortization                                           |                               
|Income Tax Expense                                                      |                               
|Restricted Stock Grant Awarded                                          |                               
|Lease Incentive                                                         |                               
|Loss on Disposal of Equipment                                           |                               
|(Increase) Decrease in:                                                 |                               
|Accounts Receivable                                                     |                               
|Inventories                                                             |                               
|Prepaids and Other                                                      |                               
|Increase (Decrease) in:                                                 |                               
|Accounts Payable and Other Accrued Liabilities                          |                               
|
|Total Adjustments                                                       |                               
|
|Net Cash Provided by Operations                                         |                               
|
|Investing Activities                                                    |                               
|Expended for Property and Equipment                                     |                               
|Expended for Product Development                                        |                               
|Expended for Patents and Other Assets                                   |                               
|
|Net Cash Used by Investing Activities                                   |                               
|
|Financing Activities                                                    |                               
|Payments on Notes Payable and
        Long-Term Debt                    |                               
|Payments on Related Party Note Payable                                  |                               
|(Paydowns) Advances on
        Revolving Line of Credit                 |                               
|Payments on Subordinated Notes                                          |                               
|Borrowing on Term Loans and
        Subordinated Notes                  |                               
|Payments on Term Loans                                                  |                               
|Exercise of Stock Options                                               |                               
|Expended for Financing Costs                                            |                               
|Dividends on Convertible Preferred
        Stock                        |                               
|
|Net Cash Used by Financing Activities                                   |                               
|
|Effect of Exchange Rate Changes on Cash                                 |                               
|
|Net (Decrease) Increase in Cash                                         |                               
|Cash at Beginning of Period                                             |                               
|
|Cash at End of Period                                                   |                               
|
|
|Supplemental Information                                                |                               
|
|Cash paid for interest                                                  |                               
|
|Supplemental Disclosure of Non-Cash Activities                          |                               
|
|Reclassification of machine
        rentals from Inventory to Equipment |                               
|Reclassification of software from Other Assets to
        Equipment     |                               

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

4

---

Table of Contents

# MTS MEDICATION
TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS FOR THE SIX MONTHS ENDED SEPTEMBER 30, 2005

# NOTE A  BASIS OF PRESENTATION

The
accompanying unaudited condensed consolidated financial statements have been prepared in
accordance with accounting principles generally accepted in the United States of America
(US GAAP) for interim financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all of the information and
notes required by US GAAP for complete financial statements. In the opinion of management,
all adjustments (consisting of normal recurring accruals) considered necessary for a fair
presentation have been included. Operating results for the six-month period ended
September 30, 2005 are not necessarily indicative of the results that may be expected for
future quarters in the year ended March 31, 2006. 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, 2005.

The
unaudited condensed consolidated financial statements include the accounts of the Company
and its subsidiaries, MTS Packaging Systems, Inc. (MTSP) and MTS
Medication Technologies International, Ltd. (MTS Limited). All other
subsidiaries of the Company did not have operations during the six-month periods ended
September 30, 2005 and 2004.

# NOTE B  INVENTORIES

The components
of inventory consist of the following:

|                                     | September 30, 2005 |  | March 31, 2005
|------------------------------------ | ------------------ |  | --------------
|
|                                     | (In Thousands)    
|
|Raw Materials                        |                    |  | $             
|Finished Goods and Work in Progress  |                    |  |               
|Less:  Inventory Valuation Allowance |                    |  |               
|
|                                     |                    |  | $             
|

# NOTE C  EARNINGS
PER SHARE

Earnings
per share are computed using the basic and diluted calculations on the face of the
statement of operations. Basic earnings per share are calculated by dividing net income
available to common stockholders by the weighted average number of shares of common stock
outstanding for the period and any warrants outstanding that are exercisable at a de
minimus amount. Diluted earnings per share are calculated by dividing net income 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.

5

---

Table of Contents

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

|                                                                      | Three Months Ended                       |  | Six Months Ended
|--------------------------------------------------------------------- | ---------------------------------------- |  | ----------------
|
|
|
|
|                                                                      | (In Thousands; Except Per Share Amounts)
|Numerator:                                                            |                                          |  |                 
|
|Net Income (Loss)                                                     |                                          |  | $               
|
|Minus:                                                                |                                          | 
|
|Convertible Preferred Stock Dividend                                  |                                          |  |                 
|
|Net Income (Loss) 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                         |                                          |  |                 
|
|Income (Loss) Per Common Share  Basic                                |                                          |  | $               
|
|Income (Loss) Per Common Share  Diluted                              |                                          |  | $               
|

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

This
effect of outstanding options and warrants of approximately 717,000 shares and the effect
of approximately 847,000 shares of common stock that would be issued upon conversion of
the convertible preferred stock have not been included in the calculation of the loss per
common share for the six months ended September 30, 2004 because their effect would have
been anti-dilutive. For the three and six months ended September 30, 2005, the effect of
436,000 common stock options have not been included in the calculation of the loss per
common share because their effect would have been anti-dilutive.

# NOTE D  STOCK
BASED COMPENSATION

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

6

---

Table of Contents

|                                                                       | Three Months Ended                       |   | Six Months Ended
|---------------------------------------------------------------------- | ---------------------------------------- | - | ----------------
|
|
|
|
|                                                                       | (In Thousands; Except Per Share Amounts)
|
|Net Income (Loss) Available to
        Common Shareholders as Reported |                                          | $ | 450             
|
|Less:                                                                  |                                          |  
|Stock Based Employee
        Compensation Cost Under                   |                                          |   |                 
|the Fair Value Based Method, Net of Related Tax Effect                 |                                          |   | (90             
|
|Net Income (Loss) Pro Forma                                            |                                          | $ | 360             
|
|Net Income (Loss) Per Common Share, Basic as Reported                  |                                          | $ | 0.08            
|
|Net Income (Loss) Per Common Share,
        Basic Pro Forma            |                                          | $ | 0.06            
|
|Net Income (Loss) Per Share, Diluted as
        Reported               |                                          | $ | 0.07            
|
|Net Income (Loss) Per Share,
        Diluted Pro forma                 |                                          | $ | 0.06            
|
|For Basic Income Per Share  Weighted
        Average Shares           |                                          |   | 5,930           
|
|For Diluted Income Per Share  Weighted
        Average Shares         |                                          |   | 7,147           

On
August 5, 2005, in response to the recently published accounting standard, Statement of
Financial Accounting Standards No. 123 (revised 2004), Share-Based Payment(SFAS 123R), the Compensation Committee of the Companys Board of
Directors approved accelerating the vesting of options to acquire approximately 13,000
shares of the Companys stock, which accounted for all unvested outstanding options
with an exercise price of $5.65 per share or greater. All of these options are
out-of-the-money and all are held by two executive officers. An option was considered
out-of-the-money if the stated option exercise price was greater than $5.29, the closing
price of the Companys common stock on the day the Compensation Committee approved
the acceleration. The accelerated vesting was effective as of the close of business on
August 5, 2005.

The
decision to accelerate vesting of these options was made primarily to avoid recognizing
compensation cost in the statement of earnings in future financial statements upon the
effectiveness of SFAS 123R. It is estimated that the maximum future compensation expense
that will be avoided, based on the Companys implementation date for FAS 123R of
April 1, 2007, is approximately $35,000, all of which is related to options held by two
executive officers of the Company.

7

---

Table of Contents

# NOTE E  REVENUE
RECOGNITION

The
Company recognizes revenue on the sale of machines, other than OnDemand systems, and all
consumables when products are shipped and title transfers. The Company recognizes revenue
related to the sale of its OnDemand systems as prescribed in SOP 97-2 Software
Revenue Recognition because the software component of the OnDemand system is
significant and not incidental to the value and functionality of the machine. In addition,
the sale of an OnDemand system 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 system installed at the customers
location (b) the user training (c) certain component parts that are sold separately,
principally cassettes that hold medications. The vendor specific fair value of the
deliverables outlined in (b-c) has been determined based upon the value of these
deliverables if they were sold separately. The fair value of the deliverable outlined in
(a) has been determined using the residual method which equals the total selling price of
the OnDemand system, including installation, training and cassettes, less the aggregate
fair value of (b-c). The terms of the sale arrangement for an OnDemand system 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 system is installed, the revenue associated with those cassettes is
recognized upon their delivery. When the training is performed, the Company recognizes the
revenue associated with the training. During the prior year the Company modified its sales
arrangements for the sale of OnDemand systems to remove any acceptance criteria that was
previously contained in the sales contract. Prior to the removal of the acceptance
criteria the Company did not recognize any revenue on the sale of an OnDemand system until
the customer acknowledged that the machine had met the acceptance criteria contained in
the contract.

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

# NOTE F  RESEARCH
AND DEVELOPMENT AND PRODUCT DEVELOPMENT COSTS

The
Company expenses product research and development costs as incurred. The Company incurred
approximately $152,000 and $104,000 during the six months ended September 30, 2005 and
2004, respectively, for research and development costs.

All
costs incurred subsequent to the completion of research and development activities
associated with the products hardware components and the software components
achievement of technological feasibility are capitalized until the product is available
for general release to customers. The Company initially classifies the construction costs
of the first units produced for commercial use as product development costs prior to
transferring these costs to inventory. The Company capitalized approximately $439,000 and
$147,000 of product development costs during the six months ended September 30, 2005 and
2004, respectively.

Product
development costs are generally amortized on a straight-line basis over a five (5) year
period. Amortization expense related to product development costs was approximately
$190,000 and $163,000 for the six months ended September 30, 2005 and 2004, respectively.

At
September 30, 2005 and March 31, 2005, the Companys capitalized product development
costs included its OnDemand product and versions thereof, which represented approximately
$2,050,000 (excluding accumulated amortization) and $1,843,000, respectively, of the total
capitalized product development costs (see Note K).

8

---

Table of Contents

# NOTE G  LONG-TERM
DEBT

|                                                                                                                                            | September 30,  |  | March 31,
|------------------------------------------------------------------------------------------------------------------------------------------- | -------------- |  | ---------
|
|
|                                                                                                                                            | (In Thousands)
|
|Revolving line of credit due
        June 2007 plus interest payable monthly at the prime rate (6.75% at September 30, 2005)                |                |  | $        
|
|Bank term loan payable in graduated monthly
        installments of $16,000 -$52,000 plus interest                                          |                |  |          
|at 0.50% above the prime rate at September 30, 2005 through June 2007                                                                       |                |  |          
|
|Note payable to related party (see Note L)
        payable in monthly installments of $28,785 including interest at 6.25% through July 2008 |                |  |          
|
|Other Notes and Agreements                                                                                                                  |                |  |          
|
|Total Long-Term Debt                                                                                                                        |                |  |          
|
|Less Current Portion
        (including approximately $298,000 and $290,000, respectively, due to a related party)                          |                |  |          
|
|Long-Term Debt Due After One Year                                                                                                           |                |  | $        
|

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 $3.1 million borrowed and an additional $3.1 million available on the
Companys revolving line of credit at September 30, 2005 based upon eligible
collateral and overadvance capabilities provided for in the credit facility.

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 and debt service coverage ratios, limit the amount of capital
expenditures and require lender approval for certain matters. The Company was in
compliance with all provisions of the loan agreements as of September 30, 2005.

At
September 30, 2005, the Company also had a $300,000 line of credit available for purchases
of equipment at an interest rate of prime plus 0.75%. Advances on the line of credit are
repayable over a three-year term. There were no amounts outstanding on this line of credit
at September 30, 2005.

# NOTE H 
CONTINGENCIES

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

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

9

---

Table of Contents

# NOTE I 
STOCKHOLDERS EQUITY

In
June 2002, the Company issued 2,000 shares of convertible preferred stock at $1,000 per
share. The holders of the convertible preferred stock are entitled to receive quarterly
dividends at the rate of 11% per annum. The dividends are payable in cash or shares of
convertible preferred stock at the Companys option and are cumulative. Through the
period ended September 30, 2005, all dividends were paid in cash. Based on a conversion
price of $2.36 per share, the preferred stock is convertible into 847,457 shares of the
Companys common stock. On the date the convertible preferred stock was issued, the
fair market value of the Companys common stock was $2.77 per share based upon the
closing bid on the OTC Bulletin Board. The difference between the fair market value of the
shares and the conversion price of the convertible preferred stock represented a
constructive dividend to the holders of the preferred stock in the amount of $347,000. The
terms of the convertible preferred stock agreement contains certain anti-dilution
provisions and also contains a make-whole provision that obligates the Company to pay
certain amounts to the holder of the convertible preferred stock if they do not ultimately
receive an amount equal to the price per share of the common stock on the date they
exercise their right to convert the convertible preferred stock into common stock. The
Company followed the accounting prescribed in EITF 98-5 and EITF 00-27 for
the recording of the convertible preferred stock and the constructive dividend in fiscal
year 2003.

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

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

During
June 2005, the Company issued 5,000 common shares to its Chief Operating Officer as
compensation under his employment agreement.  The Company recorded compensation
expense in the amount of $29,250 during the six months ended September 30, 2005 based on
the fair value of the shares at the grant date.

# NOTE J  FINANCING
COSTS

The
Company incurred approximately $1,478,000 of financing costs during the fiscal year ended
March 31, 2003, including the value of the warrants issued to the Companys financial
advisors related to obtaining certain financing in June 2002. The financing costs were
allocated between the components of the financing that represented debt and equity. The
financing costs that were allocated to the debt proceeds, $1,110,000, have been recorded
as other assets and will be amortized over the repayment term of the various loans and
notes. The financing costs that were allocated to the equity proceeds, $368,000, have been
recorded as a reduction of the equity proceeds. These financing costs were written off as
part of the June 2004 debt refinancing. We incurred $106,000 in new financing costs in
June 2004. Amortization expense related to the financing costs was $18,000 and $484,000
for the six months ended September 30, 2005 and 2004, respectively.

10

---

Table of Contents

# NOTE K  OTHER
ASSETS

Other assets
consist of the following:

|                                           | Amortization Period |        | September 30, |   | March 31,
|------------------------------------------ | ------------------- | ------ | ------------- | - | ---------
|
|
|                                           | (In Thousands)     
|
|Product Development (see Note F)           |                     | 5      |               | $ | 3,349    
|Less:  Accumulated
         Amortization   |                     |        |               |   | (1,425   
|
|                                           |                     |        |               | $ | 1,924    
|
|
|Patents (see Note L)                       |                     | 5  17 |               | $ | 2,423    
|Less:  
        Accumulated Amortization   |                     |        |               |   | (1,443   
|
|                                           |                     |        |               | $ | 980      
|
|
|Financing Costs (see Note J)               |                     | 3      |               | $ | 106      
|Less:  
          Accumulated Amortization |                     |        |               |   | (44      
|
|                                           |                     |        |               | $ | 62       
|
|
|Other                                      |                     | 5      |               | $ |         
|Less:  
          Accumulated Amortization |                     |        |               |   |         
|
|                                           |                     |        |               | $ |         
|
|Total Other Assets, Net                    |                     |        |               | $ | 2,966    
|

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

# NOTE L  RELATED
PARTY TRANSACTIONS

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

11

---

Table of Contents

# NOTE M  LEASE
COMMITMENTS

The
Company currently leases 115,000 square feet consisting of office space and
air-conditioned manufacturing and warehousing space at 2003 Gandy Boulevard North, Suite
800, St. Petersburg, Florida. The lease automatically expands to 132,500 square feet on
October 1, 2006. The lease term is for 12 years ending September 30, 2016. Our corporate
administrative offices and the primary manufacturing facilities for MTS are at this
location. The monthly lease payments are approximately $50,000 plus tax in the first six
months and increase to approximately $52,000 plus tax in the last six months of fiscal
2006. In addition, we are obligated to pay annual operating expenses (i.e., insurance,
property taxes and common area maintenance fees). Due to the fact that the lease contains
scheduled rent increases, the Company has applied the provisions of FASB Statement 13,
Accounting for Leases. As a result, from October 1, 2004 through
September 30, 2005, the Company has recorded lease expense of approximately $195,000 in
excess of cash paid under this lease.

Pursuant
to the terms of the lease, the Company was paid a lease incentive of $400,000, which will
be amortized to rental expense over the term of the lease. As of September 30, 2005, the
lease incentive has been recorded in the accompanying condensed consolidated balance sheet
under the caption lease incentive in the amount of approximately $333,000 and
the current portion of approximately $33,000 being included in the accounts payable and
accrued liabilities.

The
Company also leases approximately 5,200 square feet at approximately $3,200 per month for
office and warehouse space at 21530 Drake Road, Cleveland, Ohio. The lease expires on
March 31, 2006.

MTS
Medication Technologies International, Ltd. currently leases approximately 1,600 square
feet of office and warehouse space at Unit 6A/6B Dalton Court, Blackburn Interchange,
Lower Darwen, Blackburn, Lancashire, England. The lease is for a term of one year, and the
monthly lease payments are approximately $3,400. The lease expires on May 20, 2006.

# NOTE N  PROPERTY
AND EQUIPMENT RECONCILIATION

As a
result of our move to our new facility in the latter part of fiscal 2005, we performed a
physical inventory of our property and equipment assets and instituted a tagging and
tracking system. This initiative was completed in the quarter ended September 30, 2005 and
resulted in a $399,000 charge, which has been included in depreciation and amortization
expense. We have determined that no individual prior period was materially misstated, and
therefore, restatement of prior periods is not necessary. The resulting charge is non-cash
and has no material impact on our cash flows, cash position or compliance with covenants
under our senior credit facility.

# NOTE O  RECENT
ACCOUNTING PRONOUNCEMENTS

In
December 2004, the Financial Accounting Standards Board (the FASB) issued
Statement on Financial Accounting Standard (SFAS) No. 123 (Revised 2004)
Share-Based Payment (No. 123R). SFAS No. 123R addresses all forms
of share-based payment (SBP) awards, including shares issued under employee
stock purchase plans, stock options, restricted stock and stock appreciation rights. SFAS
No. 123R will require the Company to expense SBP awards with compensation cost for SBP
transactions measured at fair value. The FASB originally stated a preference for a lattice
model because it believed that a lattice model more fully captures the unique
characteristics of employee stock options in the estimate of fair value, as compared to
the Black-Scholes model which the Company currently uses for its footnote disclosure. The
FASB decided to remove its explicit preference for a lattice model and not require a
single valuation methodology. SFAS No. 123R requires the Company to adopt the new
accounting provisions either prospectively or retrospectively beginning in the first
quarter of fiscal 2007. The Company has not yet determined either the method or the impact
of applying the various provisions of SFAS No. 123R.

12

---

Table of Contents

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

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

13

---

Table of Contents

# MTS MEDICATION
TECHNOLOGIES, INC. AND SUBSIDIARIES MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS FOR THE THREE AND SIX MONTHS ENDED SEPTEMBER 30, 2005

# 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

Revenue
increased 11% to $11.3 million in the second quarter ended September 30, 2005 compared
with $10.2 million in the same period of the prior year. Revenue from sales of our
consumable products to existing and new customers increased 12% overall. We believe the
revenue increase in our consumable products is the result of: (1) increased penetration of
independent pharmacies; (2) growth in market demands due to the aging demographics of the
U.S. population; (3) a continued shift toward punch-card use; and (4) growth in
international markets. We recorded one OnDemand system sale the second quarter ended
September 30, 2005 compared with two systems in the same period of the prior year.

14

---

Table of Contents

The
following table sets forth, for the three and six-month periods indicated, certain key
operating results and other financial information (in thousands, except per share data).

|                                  | Three Month Ended                        |  | Six Months Ended
|--------------------------------- | ---------------------------------------- |  | ----------------
|
|
|
|
|                                  | (In Thousands; Except Per Share Amounts)
|
|Net Revenue                       |                                          |  | $               
|Gross Profit                      |                                          |  | $               
|Operating Income                  |                                          |  | $               
|Net Income (Loss)                 |                                          |  | $               
|Diluted Earnings (Loss) Per Share |                                          |  | $               

# ESTIMATES AND CRITICAL
ACCOUNTING POLICIES

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

Revenue Recognition

The
Company recognizes revenue on the sale of machines, other than OnDemand systems, and all
consumables when products are shipped and title transfers. The Company recognizes revenue
related to the sale of its OnDemand systems as prescribed in SOP 97-2 Software
Revenue Recognition because the software component of the OnDemand system is
significant and not incidental to the value and functionality of the machine. In addition,
the sale of an OnDemand system 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 system installed at the customers
location (b) the user training (c) certain component parts that are sold separately,
principally cassettes that hold medications. The vendor specific fair value of the
deliverables outlined in (b-c) has been determined based upon the value of these
deliverables if they were sold separately. The fair value of the deliverable outlined in
(a) has been determined using the residual method which equals the total selling price of
the OnDemand system, including installation, training and cassettes, less the aggregate
fair value of (b-c). The terms of the sale arrangement for an OnDemand system 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 system is installed, the revenue associated with those cassettes is
recognized upon their delivery. When the training is performed, the Company recognizes the
revenue associated with the training. During the prior year the Company modified its sales
arrangements for the sale of OnDemand systems to remove any acceptance criteria that was
previously contained in the sales contract. Prior to the removal of the acceptance
criteria the Company did not recognize any revenue on the sale of an OnDemand system until
the customer acknowledged that the machine had met the acceptance criteria contained in
the contract.

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

15

---

Table of Contents

Valuation of Accounts
Receivable

Our
allowance for doubtful accounts of approximately $227,000 at September 30, 2005 is based
on managements estimates of the credit-worthiness of our customers, current economic
conditions and historical information. In the opinion of management, our allowance for
doubtful accounts is believed to be an amount sufficient to respond to normal business
conditions. Historically, the levels of recorded bad debt expense and write-offs have not
been material to our financial statements. Should business conditions deteriorate or any
large customer default on its obligations to us, this allowance may need to be
significantly increased, which would have a negative impact upon our operations.

Inventory Obsolescence
Valuation Allowance

Our
allowance for inventory obsolescence and slow moving inventory is reviewed on a monthly
basis. We review various information related to the age and turnover of specific inventory
items to assist in our assessment. In the opinion of management, the valuation allowance
is believed to be sufficient to absorb the ultimate obsolescence of certain inventory as
they may occur. The inventory obsolescence valuation allowance was approximately $344,000
at September 30, 2005.

Self-Insurance Plan
Reserve

We
have established a reserve for unpaid medical claims of approximately $47,000 at September
30, 2005. Management reviews claims history information provided to it by the third-party
administrator of the self insured plan on a regular basis and believes that the reserve is
sufficient to respond to the claims that may be incurred by the participants in the plan.

Deferred Tax Asset
Valuation Allowance

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

Impairment Valuations

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

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

Product Development

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

16

---

Table of Contents

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
established a reserve for warranty costs that we may incur during the warranty period that
is provided for in the OnDemand system sales agreements with our customers. To date,
warranty costs have not been material.

# RESULTS OF OPERATIONS

Three Months Ended
September 30, 2005 and 2004

Net
sales for the three months ended September 30, 2005 was $11.3 million compared with $10.2
million during the same period of the prior year. Net sales increased for consumable punch
cards and machines sold to new and existing customers by 12% overall. In addition, revenue
associated with the sale of OnDemand systems was $0.8 million during the three months
ended September 30, 2005 compared with $0.8 million in the same period of the prior year.
Average selling prices for consumable products were slightly lower during the second
quarter of fiscal 2005 compared to the same period of the prior fiscal year.

Cost
of sales for the three months ended September 30, 2005 was $6.9 million compared with $6.3
million during the same period of the prior year. Cost of sales as a percentage of sales
slightly decreased to 61.1% from 61.3% during the same period of the prior fiscal year.
Cost of sales as a percentage of sales decreased slightly primarily as a result of
manufacturing efficiency at higher production levels for consumable products.

Selling,
general and administration expenses for the three months ended September 30, 2005 were
$2.6 million compared to $2.7 million in the prior year. SG&A expense remained
comparable primarily due to increased investment in growth initiatives and new product
development offset by the stock grant given to the Companys former CFO in the second
quarter of the prior year.

Depreciation
and amortization expenses for the three months ended September 30, 2005 increased 61% to
$847,000 from $527,000 during the same period of the prior fiscal year. As a result of our
move to our new facility in the latter part of fiscal 2005, we performed a physical
inventory of our property and equipment assets and instituted a tagging and tracking
system. This initiative was completed in the quarter ended September 30, 2005 and resulted
in a $399,000 charge, which has been included in depreciation and amortization expense.
The increase from the same period of the prior fiscal year was also partially attributable
to increased depreciation and amortization of capital expenditures made to the new
facility partially offset by additional expense in the prior fiscal period resulting from
the acceleration of the amortization of leasehold improvements made to our previous
facility as a result of terminating our lease in anticipation of relocating in October
2004.

Interest
expense for the three months ended September 30, 2005 decreased 13% to $90,000 from
$103,000 during the same period of the prior fiscal year. The decrease results primarily
from lower debt levels as compared with the same period of the prior year.

Amortization
of financing costs was $9,000 in the second quarter of this year compared with $9,000 in
the second quarter of the prior year.

17

---

Table of Contents

We
realized income tax expense of $334,000 during the three months ended September 30, 2005
compared with $240,000 during the same period of the prior fiscal year. This results from
incurring a higher net profit during the three-month period ended September 30, 2005
compared to the same period of the prior year. The effective tax rate for the three-month
period ended September 30, 2005 compared with the same period of the prior year is
similar.

Six Months Ended
September 30, 2005 and 2004

Net
sales for the six months ended September 30, 2005 was $20.8 million compared with $20.3
million during the same period of the prior year. Net sales increased for consumable punch
cards and machines sold to new and existing customers by 11% overall. In addition, revenue
associated with the sale of OnDemand systems was $1.0 million during the six months ended
September 30, 2005 compared with $2.4 million in the same period of the prior year.
Average selling prices for consumable products were slightly lower during the six months
ended September 30, 2005 compared to the same period of the prior fiscal year.

Cost
of sales for the six months ended September 30, 2005 was $12.7 million compared with $12.5
million during the same period of the prior year. Cost of sales as a percentage of sales
decreased to 61.2% from 61.7% during the same period of the prior fiscal year. Cost of
sales as a percentage of sales decreased primarily as a result of operating efficiencies
in the manufacturing process and a higher percentage of sales from consumable products.

Selling,
general and administration expenses for the six months ended September 30, 2005 increased
7% to $5.3 million from $4.9 million in the prior year primarily due to increased
staffing, personnel related costs and new product development initiatives. The Company has
been adding personnel to support its growth plans in new products and new markets.

Depreciation
and amortization expenses for the six months ended September 30, 2005 increased 25% to
$1.3 million from $1.0 million during the same period of the prior fiscal year. As a
result of our move to our new facility in the latter part of fiscal 2005, we performed a
physical inventory of our property and equipment assets and instituted a tagging and
tracking system. This initiative was completed in the quarter ended September 30, 2005 and
resulted in a $399,000 charge, which has been included in depreciation and amortization
expense. The increase from the same period of the prior fiscal year was also partially
attributable to increased depreciation and amortization of capital expenditures made to
the new facility partially offset by additional expense in the prior period resulting from
the acceleration of the amortization of leasehold improvements made to our previous
facility as a result of terminating our lease in anticipation of relocating in October
2004.

Interest
expense for the six months ended September 30, 2005 decreased 57% to $179,000 from
$416,000 during the same period of the prior fiscal year. The decrease results primarily
from a $120,000 prepayment penalty incurred when our $4,000,000 subordinated note was
repaid in June 2004. Further, lower debt levels and lower interest rates have lowered
interest expense as compared with the same period of the prior year.

Amortization
of original issue discount and financing costs was $0 and $18,000, respectively, in the
second quarter of this year compared with $803,000 and $484,000, respectively, in the
second quarter of the prior year. The decrease resulted from the repayment of our
$4,000,000 subordinated note in June 2004. At that time, the remaining original issue
discount and financing costs associated with that note was completely amortized.

We
realized income tax expense of $507,000 during the six months ended September 30, 2005
compared with a tax expense of $150,000 during the same period of the prior fiscal year.
The increase in the effective tax rate for the six months ended September 30, 2005
compared with the same period of the previous year resulted from the permanent difference
between the carrying value of the subordinate debt for book and tax purposes in the prior
year.

18

---

Table of Contents

# LIQUIDITY AND CAPITAL
RESOURCES

During
the six months ended September 30, 2005, we had a net income available to common
stockholders of $722,000 compared with a net loss of $161,000 during the same period of
the prior fiscal year. Cash provided by operations was $2,662,000 during the six months
ended September 30, 2005 compared with $2,931,000 provided during the same period of the
prior year. We generated cash from operations during the first six months of fiscal 2006
primarily from net income and the add-back of depreciation and amortization expense, as
well as income tax expense. We had working capital of $8.6 million at September 30, 2005.

Investing
activities used $1,114,000 during the six months ended September 30, 2005 compared with
$1,116,000 during the same period of the prior fiscal year. During the six months ended
September 30, 2005, we incurred $439,000 expenditure for new product development and
$675,000 from property and equipment.

Financing
activities used $1,686,000 during the six months ended September 30, 2005 compared with
$1,708,000 provided during the same period of the prior fiscal year. The change results
primarily from the pay-down of the revolving line of credit and term loans.

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

We
have new product development projects underway, principally new versions of our OnDemand
system and our recently announced MedLocker 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 $3.1 million borrowed and an additional $3.1 million available on our revolving line
of credit at September 30, 2005 based upon eligible collateral and overadvance
capabilities provided for in the credit facility. In addition, we had $300,000 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 September 30, 2005.

We
believe that the cash generated from operations during this fiscal year, and amounts
available on our revolving 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.

19

---

Table of Contents

# CONTRACTUAL OBLIGATIONS

|                                                                                           |                | Payment Due by Period
|------------------------------------------------------------------------------------------ | -------------- | ---------------------
|
|
|
|
|                                                                                           | (In Thousands)
|
|Long-Term Debt Obligations                                                                 |                | $                    
|Capital Lease Obligations                                                                  |                | $                    
|Operating Lease Obligations                                                                |                | $                    
|Purchase Obligations                                                                       |                | $                    
|Other Long-Term Liabilities Reflected on the
        Registrants Balance Sheet Under GAAP |                | $                    
|
|Total                                                                                      |                | $                    
|

# ITEM 3.  QUANTITATIVE AND
QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We
do not engage in trading market risk sensitive instruments or purchasing hedging
instruments or other than trading instruments that are likely to expose us to
significant market risk, whether interest rate, foreign currency exchange, commodity price
or equity price risk.

# ITEM 4.   CONTROLS AND
PROCEDURES

Evaluation of Disclosure
Controls and Procedures

We
carried out an evaluation required by Rules 13a-15 and 15d-15 under the Securities
Exchange Act of 1934 (the Evaluation), under the supervision and with the
participation of our management, including our Chief Executive Officer (CEO)
and Chief Financial Officer (CFO), of the effectiveness of our disclosure
controls and procedures as defined in Rules 13a-15 and 15d-15 promulgated under the
Securities Exchange Act of 1934 (Disclosure Controls). Although we believe
that our pre-existing Disclosure Controls were adequate to enable us to comply with our
disclosure obligations, as a result of such Evaluation, we implemented minor changes,
primarily to formalize, document and update the procedures already in place. Based on that
Evaluation discussed below, our CEO and CFO concluded that the design and operation of our
Disclosure Controls and procedures provide reasonable assurance that the Disclosure
Controls and procedures are effective in timely alerting them to material information
required to be in our periodic Securities and Exchange Commission reports.

Changes in Internal
Controls

There
has not been any change in our internal control over financial reporting identified in
connection with the Evaluation that occurred during the quarter ended September 30, 2005
that has materially affected or is reasonably likely to materially affect, those controls.

20

---

Table of Contents

Limitations on the
Effectiveness of Controls

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

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.

21

---

Table of Contents

# PART II  OTHER
INFORMATION

# ITEM 1.   LEGAL PROCEEDINGS

NONE.

# ITEM 2.   UNREGISTERED
SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

NONE.

# ITEM 3.   DEFAULTS UPON
SENIOR SECURITIES

NONE.

# ITEM 4.   SUBMISSION OF
MATTERS TO A VOTE OF SECURITIES

The
Company held its Annual Meeting of Shareholders on September 16, 2005. The shareholders
(a) elected five directors, each of who will serve until the 2006 annual meeting of
stockholders; and (b) voted to ratify the appointment of Grant Thornton LLP as the
Companys independent certified public accountants for fiscal year 2006.

The
following table sets forth the votes cast with respect to each of these matters:

|Matter |  | For                                                                   |  | Against   |  | Withheld |  | Abstain
|------ |  | --------------------------------------------------------------------- |  | --------- |  | -------- |  | -------
|
|
|(a)    |  | Election of Five Directors                                            |  |           |  |          |  |        
|
|       |  | Allen S. Braswell                                                     |  | 6,328,721 |  |         |  | 38,732 
|       |  | David W. Kazarian                                                     |  | 6,328,721 |  |         |  | 38,732 
|       |  | Frank A. Newman                                                       |  | 5,807,506 |  |         |  | 559,947
|       |  | Todd E. Siegel                                                        |  | 6,310,621 |  |         |  | 56,832 
|       |  | John Stanton                                                          |  | 6,312,141 |  |         |  | 55,312 
|
|(b)    |  | Ratify the Appointment of Grant
        Thornton LLP as the Company's |  |           |  |          |  |        
|       |  | independent certified
        public accountants for fiscal year 2006 |  | 6,075,764 |  |         |  | 287,999

# ITEM 5.  OTHER INFORMATION

NONE.

22

---

Table of Contents

# ITEM 6.  EXHIBITS

| | 31.1 | Certification of the President and Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
| | ---- | ---------------------------------------------------------------------------------------------------------------------

| | 31.2 | Certification of the Vice President and Chief Financial  Officer pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
| | ---- | ---------------------------------------------------------------------------------------------------------------------------

| | 32.1 | Certification of the President and Chief Executive Officer pursuant to 18 U.S.C. §.1350.
| | ---- | ----------------------------------------------------------------------------------------

| | 32.2 | Certification the Vice President and Chief Financial Officer pursuant to 18 U.S.C. §.1350.
| | ---- | ------------------------------------------------------------------------------------------

23

---

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:   November 14, 2005 |                                  
|                          |                                  
|                          |                                  
|                          |                                  

24

---

Table of Contents

Exhibit 31.1

CERTIFICATION PURSUANT
TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

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

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

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

| | (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.
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

5.       
          The registrants other certifying officer(s) and I have disclosed, based on
          our most recent evaluation of internal control over financial reporting, to the
          registrants auditors and the audit committee of the registrants
          board of directors (or persons performing the equivalent 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:   November 14, 2005 |  | By: | /s/ Todd E. Siegel                    | 
|------------------------- |  | --- | ------------------------------------- | 
|                          |  |     |                                       | 
|                          |  |     | Todd E. Siegel                        | 
|                          |  |     | President and Chief Executive Officer | 

25

---

Table of Contents

Exhibit 31.2

CERTIFICATION PURSUANT
TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Michael Branca,
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(s) and I are responsible for
          establishing and maintaining disclosure controls and procedures (as defined in
          Exchange Act Rules 13a-15(e) and 15d-15(e) for the registrant and have:

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

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

| | (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.
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

5.       
          The registrants other certifying officer(s) and I have disclosed, based on
          our most recent evaluation of internal control over financial reporting, to the
          registrants auditors and the audit committee of the registrants
          board of directors (or persons performing the equivalent 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:   November 14, 2005 |  | By: | /s/ Michael Branca                         | 
|------------------------- |  | --- | ------------------------------------------ | 
|                          |  |     |                                            | 
|                          |  |     | Michael Branca                             | 
|                          |  |     | Vice President and Chief Financial Officer | 

26

---

Table of Contents

Exhibit 32.1

CERTIFICATION PURSUANT
TO  18 U.S.C. §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 quarterly period ended September 30, 2005, 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 Section 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:
          November 14, 2005    | 
|                                      | 
|/s/Todd E. Siegel                     | 
|Todd E. Siegel                        | 
|President and Chief Executive Officer | 
|                                      | 
|                                      | 

27

---

Table of Contents

Exhibit 32.2

CERTIFICATION PURSUANT
TO  18 U.S.C. §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 quarterly period ended September 30, 2005, as
filed with the Securities and Exchange Commission on the date hereof (the Form
10-Q), I, Michael Branca, Vice President and Chief Financial Officer of the Company,
certify, pursuant to 18 U.S.C. §1350, as adopted pursuant to Section 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:
          November 14, 2005         | 
|                                           | 
|/s/Michael Branca                          | 
|Michael Branca                             | 
|Vice President and Chief Financial Officer | 
|                                           | 
|                                           |