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

FORM 10-K

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

For fiscal year ended MARCH 31, 2009

OR

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

For transition period from _____________ to _____________

Commission File Number:    001-31578

MTS MEDICATION TECHNOLOGIES, INC.

(Exact Name of Registrant as Specified in Its Charter)

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

2003 Gandy Boulevard North, St. Petersburg, Florida	33702
(Address of Principal Executive Offices)	(Zip Code)

727-576-6311

(Registrant's Telephone Number, Including Area Code)

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

Title of Each Class	Name of Each Exchange on Which Registered
COMMON STOCK, $0.01 PAR VALUE	The NASDAQ Stock Market LLC

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

NONE

(Title of Class)

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

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

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

Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§229.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit and post such files).          Yes         No    

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

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check One):

Large accelerated filer                Accelerated filer                Non-accelerated filer                 Smaller Reporting Company

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

Aggregate market value of voting common stock held by non-affiliates of the registrant as September 30, 2008.     $32,500,000

Number of shares of common stock outstanding as of June 19, 2009 was 6,473,065.

Documents Incorporated by Reference

The information required by Part III of this Annual Report on Form 10-K, to the extent not set forth herein, is incorporated herein by reference from the Registrant’s definitive proxy statement relating to the Annual Meeting of Shareholders to be held in 2009.

MTS MEDICATION TECHNOLOGIES, INC.

INDEX

		Page
PART I
Item 1.	Business	1
Item 1A.	Risk Factors	4
Item 1B.	Unresolved Staff Comments	12
Item 2.	Properties	12
Item 3.	Legal Proceedings	13
Item 4.	Submission of Matters to a Vote of Security Holders	13
PART II
Item 5	Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	14
Item 6.	Selected Financial Data	15
Item 7.	Management's Discussion and Analysis of Financial Condition and Results of Operations	15
Item 7A.	Quantitative and Qualitative Disclosure About Market Risk	22
Item 8.	Financial Statements and Supplementary Data	22
Item 9.	Changes in and Disagreements With Accountants on Accounting and Financial Disclosure	23
Item 9A.	Controls and Procedures	23
Item 9B.	Other Information	24
PART III
Item 10.	Directors, Executive Officers and Corporate Governance	26
Item 11.	Executive Compensation	25
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	25
Item 13.	Certain Relationships and Related Transactions and Director Independence	25
Item 14.	Principal Accounting Fees and Services	25
PART IV
Item 15.	Exhibits, Financial Statement Schedules	26
Index to Financial Statements		27
Signatures		55
Exhibit Index		56 - 57
Certifications		60 - 63

i.

PART I

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

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

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

        In this 10-K, unless otherwise indicated, the terms “we”, “us”, “our”, “registrant” and “MTS” refer to MTS Medication Technologies™, Inc. (“MTS”) and its subsidiaries.

ITEM 1.    BUSINESS

Introduction

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

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

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Products

        MTS manufactures proprietary medication dispensing systems and related products for use by medication prescription providers; primarily institutional pharmacies servicing long-term care and correctional facilities. These systems utilize consumable medication punch cards and specialized machines that allow the pharmacies to automatically or semi-automatically assemble, fill and seal drugs into medication punch cards representing a weekly or monthly supply of a patient’s medication. The use of these cards and machines provides a cost effective customized package at competitive prices. The punch card medication dispensing system can provide tamper evident packaging for products dispensed in the package, and promotes medication compliance.

        We offer our customers a wide variety of equipment that includes machines that are used for manual or semi-automated filling of punch cards, generally referred to as pre-pack machines, and sophisticated automated machines (including software), such as our OnDemand® system, which can be interfaced with the pharmacy’s inventory control and filling systems.

        The retail price of MTS’s pre-pack machines ranges from $1,100 to $150,000 depending upon the degree of automation and options requested by a customer. We offer several types of OnDemand machines ranging in price from $200,000 to $850,000. The punch cards typically retail from approximately $155 to $300 per 1,000 cards and blisters, depending upon the size, design and volume of cards ordered by a customer. MTS also sells prescription labels and ancillary supplies designed to complement sales of consumable medication punch cards.

        In addition to the consumable products and packaging equipment, we also have developed two products that allow for the storage of medication and assist in the administration of medication in an institutional pharmacy or skilled nursing facility.

Research and Development

        We dedicate a certain amount of our resources to develop new products to provide innovative ways for our customers to automate their pharmacy activities and assist them in becoming more cost efficient. We expended approximately $792,000 and $331,000 on research and development activities for each of the fiscal years ended March 31, 2009 and 2008, respectively. In addition, we have developed new consumable products and automation that we believe will introduce punch card products into markets that we currently do not service including retail pharmacies and nutraceutical distribution. Several of the packaging automation and medication administration products we have developed and currently sell have a significant software component. When we sell this type of equipment, we enter into a software license agreement with our customer.

Manufacturing Processes

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

        MTS uses automated fabrication equipment to produce its medication packaging equipment. We design all essential components of the machines, and we utilize outsourced manufacturers to supplement our manufacturing capacity.

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

Markets and Customers

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

        MTS’s products are sold throughout the United States primarily through its sales organization and some independent sales representatives. In addition, MTS Limited distributes products in the United Kingdom and MTS GmbH distributes products in Germany. Sales to countries outside the United States represented approximately 12.7% of our total revenue in fiscal 2009. Our largest customer in Europe is Lloyds Pharmacy, Ltd., which represents approximately 5.5% of our European sales and approximately 1.2% of our overall sales. In the fiscal year ended March 31, 2009, sales to our two largest institutional pharmacy customers in the United States, Omnicare, Inc.® and PharMerica, Inc., represented approximately 34.1% and 9.8%, respectively of our total net sales. In addition, we sell our consumable products to drug wholesalers who in turn resell the products to pharmacies. Sales to three major wholesalers, McKesson, Cardinal Health and Amerisource Bergen®, represented approximately 10.5% of our net sales in the fiscal year ended March 31, 2009. Some of the sales to the wholesalers are for the indirect benefit of Omnicare and PharMerica.

Segments

        Our operations are conducted in three separate business segments. Our Consumables segment represents the manufacturing and sale of all non-durable products such as, punch cards, prescription bags and labels. Our Packaging Automation segment represents the manufacture and sale of machines that our customers use to package medication into our punch cards. Our Medication Administration Systems segment represents the manufacture and sale of equipment that is used to store and assist in the administration of medication. We report our results of operation on a consolidated basis, as well as by operating segment in our Consolidated Financial Statements included in this report.

Competition

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

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        Our primary competitors in the United States are Drug Package, Inc., AutoMed® Technologies and RX Systems, Inc. We believe that our automated proprietary packaging equipment distinguishes MTS from its competitors’ less automated systems. Our automated packaging machine with the highest throughput can fill and seal up to 600 consumable medication cards per hour. We believe that our production rates for the prepackaging of prescriptions and our “just-in-time” OnDemand system will meet the needs of our customers who are consolidating and require higher productivity to meet their growing market share. Our primary competitors in Europe are Surgichem, Ltd. and Jones Packaging, Ltd.

Proprietary Technology

        There are numerous patent applications and patent license agreements for products that we sell and that we have developed. Our business, however, is not materially dependent upon our owning, or obtaining, any single patent from the United States Patent and Trademark Office.

        We can provide no assurance that we will obtain any additional patents with respect to our medication dispensing or information systems and products or that any patent obtained, now or in the future, will provide meaningful protection from competition.

Government Regulations

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

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

Geographic Information

        The individual subsidiaries comprising the Company operate predominantly in a single industry as manufacturers of consumable medication punch cards, packaging equipment and ancillary products. The Company has operations in the United States and subsidiaries in the United Kingdom and Germany. In computing operating profit for foreign subsidiaries, allocations of general corporate expenses have been made. In addition to our evaluation of our three segments, management evaluates the Company’s business performance on a geographic basis based upon the country in which the sales originate.

Employees

        None of our employees is covered by a collective bargaining agreement. We consider our relationship with our employees to be good. We employ 238 persons in the United States and 33 persons in Europe.

ITEM 1A.   RISK FACTORS

        You should carefully consider the following risks and all of the other information set forth in this prospectus before deciding to invest in shares of our common stock. The following risks comprise all the material risks of which we are aware; however, these risks and uncertainties may not be the only ones we face. Additional risks and uncertainties not presently known to us or that we currently deem immaterial may also adversely affect our business or financial performance. If any of the events or developments described below actually occurred, our business, financial condition or results of operation would likely suffer. In that case, the trading price of our common stock would likely decline, and you would lose all or part of your investment in our common stock.

4

Risks Related to Our Business

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

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

•     develop and expand their product and service offerings more quickly;
•     adapt to new or emerging technologies and changing customer needs more quickly;
•     negotiate more favorable purchase agreements with suppliers;
•     devote greater resources to the marketing and sale of their products; and
•     address customers' service-related issues more effectively.

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

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

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

•     the level and timing of customer orders and related customer acceptances, especially relating to our OnDemand systems;
•     the composition of the costs of revenue between materials, labor and manufacturing overhead;
•     our level of experience in manufacturing a particular product;
•     fluctuations in materials costs and availability of materials;
•     the timing of expenditures in anticipation of increased sales and customer product delivery requirements; and
•     adverse changes in general economic conditions.

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

We need to improve our disclosure controls and procedures and internal control over financial reporting to comply with SEC reporting requirements

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

        As of March 31, 2009, we reported a control deficiency that constituted a material weakness in internal control over preparation, review and presentation and disclosure of our consolidated financial statements. Specifically, our control deficiencies included a lack of effective controls over recording inventory transactions. This control deficiency, in the aggregate, could result in a misstatement to accounts and disclosures that is material to the annual or interim financial statements that would not be prevented or detected.

5

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

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

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

        For the fiscal year ended March 31, 2009, our 10 largest customers accounted for approximately 62% of our net sales, and our two largest customers accounted for approximately 44% of our net sales. We are dependent upon the continued growth, viability and financial stability of our customers whose industries have experienced consolidation and pricing and regulatory pressures. We expect to continue to depend upon a relatively small number of customers for a significant percentage of our net sales. Consolidation among our customers may further reduce the number of customers that generate a significant percentage of our net sales and expose us to increased risks relating to dependence on a small number of customers. A significant reduction in sales to any of our customers or a customer exerting significant pricing and margin pressures on us, could have a material adverse effect on our results of operations.

A substantial portion of our revenue is from the sales of products and provision of services to customers outside of the United States. Thus, we may be subject to certain risks related to international sales and operations.

        Sales of products and the provision of services to customers outside the United States accounted for approximately 13% of our consolidated revenue for the fiscal year ended March 31, 2009. We anticipate that international sales and services will continue to account for a significant portion of our revenue in the foreseeable future. As a result, we may be subject to certain risks, including risks associated with the application and imposition of protective legislation and regulations relating to import or export or otherwise resulting from trade or foreign policy and risks associated with exchange rate fluctuations. Additional risks include potentially adverse tax consequences, tariffs, quotas and other barriers, potential difficulties involving our strategic alliances and managing foreign sales agents or representatives and potential difficulties in accounts receivable collection.

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

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

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

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

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

6

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

We manufacture a majority of our products from a single facility, while also utilizing third parties to manufacture some products.

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

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

        Long-term contracts are usually not a significant part of our business. We make significant decisions, including production schedules, materials procurement, personnel needs and other resource requirements, based on our estimate of customer requirements. The short-term nature of our customers’ commitments, their uncertainty about future economic conditions, and the possibility of rapid changes in demand for their products reduce our ability to accurately estimate the future requirements of those customers. In addition, uncertainty about future economic conditions makes it difficult to forecast operating results and make production planning decisions about future periods.

        Customers have previously cancelled their orders, changed production quantities, delayed production and changed their sourcing strategy for a number of reasons, and may do one or more of these in the future. Such changes, delays and cancellations may lead to a decline in our production and our possession of excess inventory which we may not be able to sell to the customer or a third party.

Our operating results and/or financial condition may be adversely affected if we undertake acquisitions of businesses that do not perform as we expect or that are difficult for us to integrate.

        We expect to continue to implement our growth strategy, in part, by acquiring companies. At any particular time, we may be in various stages of assessment, discussion and negotiation with regard to one or more potential acquisitions, not all of which will be consummated. We make public disclosure of pending and completed acquisitions when appropriate and required by applicable securities laws and regulations.

        Acquisitions involve numerous risks and uncertainties. If we complete one or more acquisitions, our results of operations and financial condition may be adversely affected by a number of factors, including: the failure of the acquired businesses to achieve the results we have projected in either the near or long term; the assumption of unknown liabilities; the difficulties of imposing adequate financial and operating controls on the acquired companies and their management and the potential liabilities that might arise pending the imposition of adequate controls; the difficulties in the integration of the operations, technologies, services and products of the acquired companies; and the failure to achieve the strategic objectives of these acquisitions.

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Our operating results and/or financial condition may be adversely affected by foreign operations.

        We have acquired businesses in Europe in the past and expect to consider additional foreign acquisitions in the future. Our existing foreign operations and any operations we may acquire in the future carry risks in addition to the risks of acquisition, as described above. At any particular time, foreign operations may encounter risks and uncertainties regarding the governmental, political, economic, business and competitive environment within the countries in which those operations are based. Additionally, foreign operations expose us to foreign currency fluctuations that could impact our results of operations and financial condition based on the movements of the applicable foreign currency exchange rates in relation to the United States Dollar.

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

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

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

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

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

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

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

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

•     stop or delay selling, incorporating or using products that incorporate the challenged intellectual property;
•     pay damages;
•     enter into licensing or royalty agreements, which may be unavailable under acceptable terms; and
•     redesign products and services that incorporate infringing technology.

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

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

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

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

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

Our customers are subject to governmental regulations and procedures and other legal requirements. A significant change in, or noncompliance with, these regulations, procedures and requirements could have a material adverse effect on our profitability.

        The retail drug store and pharmacy benefit services businesses are subject to numerous federal, state and local regulations. Consequently, our customers are subject to the risk of changes in various federal, state and local laws, which include, but are not limited to:  federal, state and local registration and regulation of pharmacies; applicable Medicare and Medicaid regulations; the Health Insurance Portability and Accountability Act; regulations of the United States Food and Drug Administration, the United States Federal Trade Commission, the Drug Enforcement Administration, and the Consumer Product Safety Commission and state regulatory authorities, governing the sale, advertisement and promotion of products they sell; anti-kickback laws; and federal and state laws governing the practice of the profession of pharmacy. Changes in these regulations may require extensive system and operating changes that may be difficult for our customers to implement. Untimely compliance or noncompliance with applicable regulations by our customers could result in the imposition of civil and criminal penalties that could adversely affect the continued operation of their businesses and may substantially increase the costs and burden of pharmaceutical distribution, which could decrease the demand for our products and services.

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The changing United States healthcare environment may negatively impact our revenue and income.

        Our products and services are intended to function within the structure of the healthcare financing and reimbursement system currently existing in the United States. In recent years, the healthcare industry has undergone significant changes in an effort to reduce costs and government spending. These changes include an increased reliance on managed care; cuts in Medicare funding affecting our healthcare provider customer base; consolidation of competitors, suppliers and customers; and the development of large, sophisticated purchasing groups. We expect the healthcare industry to continue to change significantly in the future. Some of these potential changes, such as a reduction in governmental support of healthcare services or adverse changes in legislation or regulations governing prescription drug pricing, healthcare services or mandated benefits, may cause healthcare industry participants to reduce the amount of our products and services they purchase or the price they are willing to pay for our products and services. Changes in pharmaceutical manufacturers’ pricing or distribution policies could also significantly reduce our income.

Our credit facility has restrictive terms and our failure to comply with any of these terms could put us in default, which would have an adverse effect on our business and prospects.

        Our credit facility requires us to maintain specified financial ratios and comply with certain restrictive covenants. Our ability to meet these financial ratios and satisfy these restrictive covenants and tests may be affected by events beyond our control. A breach of any of the restrictive covenants or our inability to comply with the required financial ratios would result in a default under our credit facility or require us to dedicate a substantial portion of our cash flow from operations to payments on our indebtedness. Our credit facility is secured by all of our assets, and accordingly, in the event of default the lender has the right to take possession of any such assets.

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

        MTS is a holding company with no direct operations and we conduct all of our business through our subsidiaries. Our principal assets are the equity interests we hold in our operating subsidiaries. As a result, we are dependent on the cash flow of our subsidiaries and dividends and distributions from our subsidiaries to generate the funds necessary to meet our financial obligations, including the payment of any current and future indebtedness obligations we may have.

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

        We are subject to periodic federal, state, local and foreign income tax audits for various tax years. Although we attempt to comply with all taxing authority regulations, adverse findings or assessments made by the taxing authorities as the result of an audit could adversely affect us including, without limitation, an ongoing audit by the Internal Revenue Service of our federal income tax return for the fiscal year ended March 31, 2008.

Risks Related to Ownership of Our Common Stock

We do not intend to pay dividends on our common stock.

        We have not declared or paid any dividends on our common stock to date and we do not anticipate declaring or paying any dividends on our common stock in the foreseeable future. We intend to reinvest all future earnings in the growth of our business. Any future determination relating to our dividend policy will be at the discretion of our board of directors and will depend on our results of operations, financial condition, capital requirements, business opportunities, contractual restrictions and other factors deemed relevant. To the extent we do not pay dividends on our common stock, investors must look solely to stock appreciation for a return on their investment in our common stock.

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The price of our common stock price may be volatile.

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

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

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

Our directors, officers and their respective affiliates will continue to have substantial influence over our affairs, which could
limit your ability to influence key transactions, including a change in control.

        Our directors, officers and their respective affiliates beneficially own in the aggregate approximately 34% of our outstanding common stock. Consequently, these stockholders have the ability to exert substantial influence over all matters requiring approval by our stockholders. These stockholders may be able to influence the election and removal of directors and any merger, consolidation or sale of all or substantially all of our assets, as well as other matters. This concentration of ownership could have the effect of delaying, deferring or preventing a change in control or impeding a merger, consolidation, takeover or other business combination.

Our management includes members of a single family.

        Michael P. Conroy serves as our Chief Financial Officer and his son, James M. Conroy, serves as our Controller. Because of the family relationship among these members of our management, certain employer/employee matters may not be conducted on a fully arms-length basis as would be the case if the family relationship did not exist. However, independent directors unrelated to the Conroy family comprise our Compensation Committee and Audit Committee and we expect that compensation and other significant employer/employee issues, including performance evaluations and compensation reviews, will be conducted on a fully arms-length basis as would be the case if the family relationship did not exist.

Any future issuance of our preferred stock could adversely affect holders of our common stock.

        Our board of directors has the authority to issue shares of preferred stock without any action on the part of our stockholders. In addition, our board also has the power, without stockholder approval, to set the terms of any such series of shares of preferred stock that may be issued, including voting rights, dividend rights and preferences upon liquidation or dissolution. If we issue preferred stock in the future that has preference over our common stock with respect to the payment of dividends or upon our liquidation, dissolution or winding up of our affairs, or if we issue preferred stock with voting rights that dilute the voting power of our common stock, the rights of holders of our common stock or the market price of our common stock could be adversely affected.

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

•     As of March 31, 2009, we had 6,454,005 shares of common stock outstanding. In addition, the following shares of our common stock are issuable upon exercise of currently outstanding securities.
  
•     835,496 shares of common stock are issuable upon exercise of currently outstanding common stock purchase options having exercise prices ranging from $1.45 to $13.70.

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

Our certificate of incorporation, amended and restated bylaws and Delaware law contain provisions that could discourage acquisition bids or merger proposals, which may adversely affect the market price of our common stock.

        Certain provisions of our certificate of incorporation, our amended and restated bylaws and applicable Delaware General Corporation Law could deter a change in our management or render more difficult an attempt to obtain control of our company, even if such a proposal is favored by a majority of our stockholders. These provisions could discourage potential takeover attempts and could adversely affect the market price of our common stock. For example, Delaware law prohibits us from engaging in a broad range of business combinations with any “interested stockholder,” meaning generally that a stockholder who beneficially owns more than 15% of our common stock cannot acquire us for a period of three years from the date this person became an interested stockholder, unless various conditions are met, such as approval of the transaction by our board of directors. Finally, our certificate of incorporation includes undesignated preferred stock, which may enable our board to discourage an attempt to obtain control of us by means of a tender offer, proxy contest, merger or otherwise.

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

        As a public company, we are subject to certain federal regulations and the rules and regulations of the SEC. The SEC has also adopted rules pertaining to, among other things, audit committee requirements and additional disclosure and reporting requirements. Our reputation and financial results could be materially harmed by any failure by us to comply with any current or future rules or regulations relating to federal corporate reform measures adopted by the SEC. In addition, we incur significant legal, accounting and other compliance costs.

If securities or industry analysts do not publish research or reports about us, our business or our market, or if they change their recommendations regarding our stock adversely, our stock price and trading volume could decline.

        The trading market for our common stock is influenced by the research and reports that industry or securities analysts publish about us, our business or our market. If one or more of the analysts who cover us change their recommendation regarding our stock adversely, our stock price would likely decline. If one or more of these analysts cease coverage of our company or fail to regularly publish reports on us, we could lose viability in the financial markets, which in turn could cause our stock price or trading volume to decline.

ITEM 1B.    UNRESOLVED STAFF COMMENTS

        None.

ITEM 2.   PROPERTIES

        We currently lease approximately 132,500 square feet consisting of office space and air-conditioned manufacturing and warehousing space at 2003 Gandy Boulevard North, St. Petersburg, Florida, 33702. The lease term expires on September 30, 2016. Our corporate administrative offices and the primary manufacturing facilities for MTS are at this location. The monthly lease payments are currently $65,271 plus tax, insurance, utilities and CAM and increase to $80,000 plus tax in the final year. In addition, we are obligated to pay annual operating expenses (i.e., insurance, property taxes and common area maintenance fees). The Company has applied the provisions of FASB Statement 13, “Accounting for Leases” to account for the lease payments. Accordingly, the total lease payments that will be made over the term of the lease are being recorded as an expense on a pro-rata basis, adjusted for the consumer price index, over the term of the lease as opposed to recording the amount of lease payments actually made. As a result, the difference between the actual lease payments made and the amount of expense recorded is carried as a liability on our balance sheet. The amount of this liability was $435,000 and $388,000 at March 31, 2009 and 2008, respectively.

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

        MTS also leases approximately 5,200 square feet at approximately $3,900 per month for office and warehouse space at 21530 Drake Road, Cleveland, Ohio. The lease is on a month-to-month basis.

        MTS Limited currently leases approximately 1,600 square feet of office and warehouse space at Unit 6A/6B Dalton Court, Blackburn Interchange, Lower Darwen, Blackburn, Lancashire, England. The lease is for a term of three years, and the monthly lease payments are approximately $3,200. The lease expires in May 2012 and is cancellable at any time with six months notice.

        We entered into a premises lease with the previous owners of BAF Printers, Limited (“BAF”), which was a company we acquired in 2006, for approximately 12,000 square feet of office and manufacturing space. The lease is on a month-to-month basis. Monthly lease payments are approximately $5,200, and we are also obligated to pay annual operating expenses (i.e., insurance, utilities and property taxes). The premises is in Leeds, England.

        MTS GmbH currently leases approximately 300 square feet of office space in Darmstadt, Germany. The lease is on a month-to-month basis and can be cancelled with a three-month notice. The monthly lease payments are approximately $1,000.

ITEM 3.   LEGAL PROCEEDINGS

        We are involved in certain claims and legal actions arising in the ordinary course of business. There can be no assurance that these matters will be resolved on terms acceptable to us. We believe the ultimate disposition of these matters will not have a material adverse effect on our financial position, results of operations or liquidity.

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

        None.

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PART II

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

Price Range of Our Securities

        Since July 15, 2008, our common stock has been trading on NASDAQ under the symbol “MTSI.” Prior to July 15, 2008, our common stock traded on AMEX under the symbol “MPP.” The table below sets forth the range of high and low sales prices for our common stock for the periods indicated, as reported by NASDAQ and AMEX, as applicable.

2009 Fiscal Year	High		Low
First Quarter	$	12.27	$	7.31
Second Quarter	$	5.98	$	4.51
Third Quarter	$	6.01	$	2.16
Fourth Quarter	$	4.59	$	2.45
2008 Fiscal Year	High		Low
First Quarter	$	13.44	$	10.60
Second Quarter	$	12.88	$	10.50
Third Quarter	$	14.25	$	11.64
Fourth Quarter	$	13.50	$	10.67

        As of June 15, 2009, there were approximately 1,900 holders of record of our common stock and the closing price of our common stock reported on NASDAQ was $4.99.

        We have not declared a dividend on our common stock and do not currently intend to declare a dividend. We intend to reinvest our future earnings, if any, into the operations of our business.

Equity Compensation Plan Information

        The following table sets forth certain information relating to our equity compensation plans as of March 31, 2009.

Equity Compensation Plan Information
				Number of Securities
	Number of Securities to	Weighted-Average		Remaining Available for
	Be Issued Upon Exercise	Exercise Price		Future Issuance Under
Plan Category	of Outstanding Options	of Outstanding Options		Equity Compensation Plans
Equity compensation plans approved by security holders	835,496	$	5.24	312,754
Stock Incentive Plan	–		–	–
Equity compensation plans not approved by security holders	–		–	–
Total	835,496	$	5.24	312,754

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ITEM 6.    SELECTED FINANCIAL DATA

        Not applicable.

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

OVERVIEW

        We believe our business continues to grow for several reasons. First, the aging global population results in more medication being prescribed and increases the number of people that reside in skilled nursing and assisted living facilities.  These increases cause revenue to increase for our pharmacy customers, which in turn leads to increased orders for our packaging supplies for medications and our fulfillment automation.  As our customers grow, we grow with them.  Second, we have made strategic acquisitions in Europe, which have added to the growth of our core products.  We believe Europe is a receptive market for our packaging and automation systems, and we expect the European market to continue to represent an expanding portion of our total consolidated revenue.  We continue to look for potential acquisitions in Europe to further expand in that market. Third, we have invested heavily in technology that has enhanced the automation we sell.  As a result, we have experienced growth in sales of both prepackaging equipment, as well as our highly advanced robotic OnDemand systems.

        Our operating margins have been impacted by our expansion into new markets and our introduction of new products which has led to us hiring additional personnel and investing in our infrastructure.  We believe that our increased investment in personnel and infrastructure has helped to, and will continue to help to, set the stage for future growth and take advantage of our opportunities.  We believe these investments will enhance our chance of success in markets such as retail pharmacy, nutraceutical and our traditional long term care market in the United States and Europe.  We believe that our successful launch of our products into the retail pharmacy market, our introduction of automation into the retail pharmacy medication delivery model and the continued acceptance of our OnDemand system automation by our long term care market customers in the United States and Europe will combine to significantly increase our revenue and, ultimately, improve our operating margins.

        We believe that our packaging automation products help us ensure that our customers will continue to purchase our consumable products, and therefore, provide us with a very reliable recurring stream of profitable revenue. We remain committed to leverage that consumable product revenue stream to achieve our long-term objectives of creating more value for our shareholders.

        The information set forth below represents selected quarterly results of operations for each of the quarters in fiscal years ended March 31, 2009 and 2008.

	Fiscal Year Ended March 31, 2009
	For The Three Months Ended
	June 30, 2008			September 30, 2008			December 31, 2008			March 31, 2009
	(In Thousands, Except Percentages and Per Share Amounts) (Unaudited)
Income Statement Data:
Net Sales	$	19,366		$	20,702		$	19,234		$	16,973
Gross Profit	$	6,033		$	6,661		$	6,192		$	6,423
Gross Profit Percentage		31.2	%		32.2	%		32.2	%		37.8	%
Net Income	$	374		$	555		$	687		$	865
Net Income Per Basic Common Share	$	0.06		$	0.09		$	0.11		$	0.13
Net Income Per Diluted Common Share	$	0.06		$	0.08		$	0.10		$	0.13

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	Fiscal Year Ended March 31, 2008
	For The Three Months Ended
	June 30, 2007			September 30, 2007			December 31, 2007			March 31, 2008
	(In Thousands, Except Percentages and Per Share Amounts) (Unaudited)
Income Statement Data:
Net Sales	$	14,820		$	14,118		$	14,720		$	14,151
Gross Profit	$	5,462		$	5,842		$	5,645		$	4,980
Gross Profit Percentage		36.9	%		41.4	%		38.3	%		35.2	%
Net Income	$	533		$	775		$	611		$	136
Net Income Per Basic Common Share	$	0.09		$	0.12		$	0.10		$	0.02
Net Income Per Diluted Common Share	$	0.08		$	0.12		$	0.09		$	0.02

FISCAL YEAR 2009 COMPARED TO FISCAL YEAR 2008

Segment Results of Operations

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

Segment Results of Operations

        Operating profit (loss), as presented below is net sales less cost of sales and other operating expenses that are directly identifiable to the respective segment or allocated on the basis of sales or manpower. Operating profit is reconciled to income before taxes in Note 19 to the Consolidated Financial Statements included in the report.

Consumables

	Years Ended March 31,
	2009			2008
	(In Thousands, Except Percentages)
Net Sales	$	53,948		$	50,415
Gross Profit		22,015			21,296
Gross Profit %		40.8	%		42.2	%
Operating Profit	$	7,259		$	7,438
Operating Profit %		13.5	%		14.8	%

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        Net sales as of March 31, 2009 increased approximately $3.5 million, or 7.0%, primarily due to growth in sales to the United States long-term care market of approximately 8.7%. The growth in the United States is primarily attributable to the increase in medications dispensed in long-term care facilities that our customers service. Although net sales in Europe increased by 18.8%, when expressed in the functional currency of the country in which the sales are made, net sales increased 3.7% in terms of United States Dollars as a result of exchange rate fluctuations between the United States Dollar and the British Pound and the Euro.

        Gross profit percentage decreased in fiscal year 2009 primarily due to higher overhead costs allocated to this segment, as well as lower gross profit associated with European operations that resulted from the strengthening of the United States Dollar compared to the British Pound and the Euro.

        Operating margins declined in fiscal year 2009 primarily due to (a) lower gross profit percentage; (b) higher depreciation expense associated with assets related to this segment; (c) and foreign currency fluctuations.

Packaging Automation

	Years Ended March 31,
	2009			2008
	(In Thousands, Except Percentages)
Net Sales	$	21,710		$	7,161
Gross Profit		3,163			623
Gross Profit %		14.6	%		8.7	%
Operating Loss	$	(1,093	)	$	(2,849	)
Operating Loss %		(5.0	%)		(39.8	%)

        Net sales as of March 31, 2009 increased $14.5 million, or 203%, primarily because of the sale of OnDemand machines under an agreement with our largest customer. We recorded $14.6 million in revenue associated with 23 machines that were installed and accepted by the customer.

        Our operating loss during the year ended March 31, 2009 was lower than the prior fiscal year and our gross profit percentage increased because we realized additional gross profit dollars on the increased net sales, which offset a portion of the indirect costs associated with this segment.

Medication Administration Systems

	Years Ended March 31,
	2009			2008
	(In Thousands, Except Percentages)
Net Sales	$	617		$	233
Gross Profit		131			10
Gross Profit %		21.2	%		4.3	%
Operating Loss	$	(1,351	)	$	(594	)
Operating Loss %		(219.0	%)		(254.9	%)

        Net sales as of March 31, 2009 increased due to increased sales of our MedLocker systems.

        Our operating loss for the year ended March 31, 2009 was higher than the prior fiscal year because we have added personnel to develop the MedTimes product, and we have increased research and development expenditures for this product.

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        Consolidated operating income (loss) represents operating income (loss) for the Consumables, Packaging Automation and Medication Administration Systems segments less share-based compensation expense and corporate asset depreciation expense.

Consolidated Results of Operations

Net Sales

        Our consolidated net sales increased 31.9% for the fiscal year ended on March 31, 2009 compared with the prior year. The increase was primarily due to the installation of OnDemand machines that we sold to our largest customer pursuant to a contract that we entered into with them in May 2007. There were sixteen OnDemand Express II machines and eight OnDemand AccuFlex® machines sold as part of that contract. During fiscal year 2009, we recorded approximately $14.6 million in revenue that was associated with fifteen OnDemand Express II machines and 8 OnDemand AccuFlex machines. In addition, our consolidated net sales increased due to an approximately 7.0% increase in the sale of our consumable products, primarily punch cards and blisters. This increase resulted from sales to existing institutional pharmacy customers who continue to grow as a result of a general increase in the amount of medication dispensed to an increasing population of skilled nursing home and assisted living facility residents, as well as sales to new customers that we have gained by way of increased market penetration at the expense of our competition.

        We also experienced a growth in sales for our Medication Administration Systems segment as a result of success we have had with our MedLocker product.

        Our net sales in Europe increased 18.8% in fiscal 2009 compared to the prior year when these sales are expressed in the functional currencies of the country in which the product was sold. However, because the United States Dollar strengthened during fiscal year 2009 in relationship to the British Pound and the Euro, our net sales in Europe increased 3.7% when expressed in United States Dollars.

Cost of Goods Sold/Gross Profit

        Our consolidated gross profit decreased to 33.2% in fiscal year 2009 from 37.9% in the prior year primarily because of the proportion of sales that were derived from OnDemand machines in fiscal year 2009 compared to the prior year. The gross profit margin that we realize on the sale of OnDemand machines is significantly lower than the gross profit margin on consumable products. In addition, the gross profit margin that we realized in fiscal 2009 from the sale of consumable products in Europe was lower compared to the prior year because of the change in the relative value between the United States Dollar, the British Pound and the Euro. The majority of the consumable products that we sell in Europe is manufactured in the United States and sold in the functional currency of the countries we sell our products in. Also, although our consolidated gross profit dollars increased in fiscal 2009 compared with the prior year, it did not increase in proportion to our net sales due, in part, to an increase of approximately 16.8% in our manufacturing overhead. The increase in manufacturing overhead resulted primarily from increased costs associated with our Packaging Automation systems segment that related to additional personnel and other resources required to install and service the OnDemand machines we sold in fiscal year 2009.

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

        Our consolidated SG&A expenses increased 16.2% to $18.3 million in fiscal year 2009 from $15.7 million in the prior year. The increase was primarily due to:

(a)     additional technical and software support personnel added to manage the installed base of OnDemand machines;

(b)   higher research and development expenditures;

(c)   increased franchise and other state and local taxes resulting from an increase in the number of states in which we file tax returns; and

(d)   foreign currency transaction losses related to sales of products between United States and foreign subsidiaries.

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Depreciation and Amortization

        Our depreciation and amortization expense increased 5.8% to $2.9 million in fiscal year 2009 from $2.8 million in the prior year. The increase resulted primarily from increased depreciation associated with capital expenditures made during the previous fiscal year.

Interest Expense

        Interest expense decreased 24.8% to $479,000 in fiscal year 2009 from $637,000 in the prior year due to lower outstanding debt, as well as lower interest rates.

Income Tax Expense

        Income tax expense increased to $1.1 million in fiscal year 2009 from $0.7 million in the prior year because of higher net income before tax.

        Our effective tax rate was 31.4% in fiscal year 2009 compared with 26.4% in the prior year. Our effective tax rate increased primarily due to the fact that we recorded the benefit of state tax net operating losses in the previous year and adjusted uncertain tax positions in the previous year.

LIQUIDITY AND CAPITAL RESOURCES

        During the fiscal year ended March 31, 2009, we had net income of approximately $2.5 million compared to $2.1 million in the prior year. Cash provided by operating activities was approximately $5.6 million during the fiscal year ended March 31, 2009 compared to approximately $859,000 for the prior fiscal year. The increase results primarily from the fact that we were successful in gaining the acceptance of the OnDemand machines we sold to our largest customer and installed in the prior fiscal year, and thereby, significantly reducing our inventory of these machines and deposits we had outstanding with our outsourced manufacturer of the machines.

        Investing activities used approximately $2.5 million during the fiscal year ended March 31, 2009 compared with $5.2 million during the prior fiscal year. The decrease results primarily from the fact that in the prior year we spent approximately $2.0 million for a new punch card press. The press increased our capacity to produce punch cards to meet our expected needs through fiscal year 2010, and therefore, a similar expenditure was not required in fiscal year 2009.

        Financing activities used approximately $3.6 million during the fiscal year ended March 31, 2009 compared with $4.7 million provided during the prior fiscal year. Our free cash flow increased in fiscal year 2009 compared to the prior fiscal year because our capital expenditures were less and our operating cash flow increased, and therefore, we used our free cash flow to reduce our debt.

        We had working capital of $12.7 million at March 31, 2009, compared to $13.6 million at March 31, 2008. The decrease in working capital resulted primarily from the reduction in inventory and deposits to outsourced manufacturers that we had funded primarily with our revolving line of credit.

        We do not maintain significant cash balances because available cash is used to pay down our revolving line of credit. Cash on hand of $493,000 and $662,000 at March 31, 2009 and 2008, respectively, is held in banks located in the United States, the United Kingdom and Germany. We view the excess availability on our line of credit as our cash reserve. At March 31, 2009, we had approximately $4.1 million available on our revolving line of credit.

        Our revolving line of credit is collateralized by a first security interest in all of our assets and contains provisions that require us to maintain certain financial covenants. We were in compliance with all provisions of the loan agreements as of March 31, 2009. Our credit facility was originated in November 2007 and expires in November 2010. Availability on the revolving line of credit reduces by $335,000 each quarter through August 2010.

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

OFF-BALANCE SHEET ARRANGEMENTS

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

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 effect on our operations cannot be determined with absolute certainty. Actual results typically differ from these estimates in some fashion, and at times, these variances may be material to our financial statements. Our management continually evaluates its estimates and assumptions, which are based on historical experience and other factors that are believed to be reasonable under the 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.

Revenue Recognition

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

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

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

20

Accounts Receivable

        Trade accounts receivable are recorded based upon the invoiced amount, are generally not interest bearing and are considered past due when full payment is not received by the specified credit terms. We do not typically require collateral when granting credit; however, customer credit worthiness is reviewed prior to granting credit. We normally estimate the uncollectibility of our accounts receivable. We consider many factors when making our estimates, including analyzing accounts receivable and historical bad debts, customer concentrations, customer credit worthiness, current economic trends and changes in our customer payment terms when evaluating the adequacy of the reserve for uncollectible accounts. We review the status of our accounts monthly, assessing the customer’s ability to pay. When a specific account is deemed uncollectible, the account is written off against the reserve for uncollectible accounts. An additional reserve of one percent of accounts receivable would require an increase in the allowance for doubtful accounts and would result in additional expense of approximately $86,000.

Inventories

        Inventories are stated at the lower of cost or market. Cost is determined by the first-in, first-out (“FIFO”) method. The elements of costs included in the valuation of inventory are the direct costs associated with materials purchased, direct labor expended to manufacture the inventory and an allocation of general overhead expenses incurred to operate the manufacturing facilities. The allowance for inventory obsolescence and slow moving inventory is reviewed on a regular basis. We review various information related to the age and turnover of specific inventory items to assist with this assessment. An additional reserve of one percent of inventory would require an increase in the inventory reserve accounts and would result in additional expense of approximately $100,000.

Self-Insurance Plan Reserve

        We have a medical health benefit self-insurance plan, which covers substantially all of our employees. During the fiscal year ended March 31, 2009, we were reinsured for claims that exceed $100,000 per participant and an annual maximum aggregate limit of approximately $1.3 million. Future claims may affect the reinsurance limits that may be available to us.

Income Taxes

        Income taxes are provided for under the liability method in accordance with SFAS No. 109, Accounting for Income Taxes, whereby deferred tax assets are recognized for deductible temporary differences and operating loss and tax credit carryforwards and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the reported amounts of assets and liabilities and their tax basis. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Management considers anticipated future taxable income, the reversal of taxable temporary differences, and tax planning strategies in making the determination. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment. We also report interest and penalties related to uncertain income tax positions as income taxes. (See Note 15.)

Goodwill and Other Intangible Assets

        We follow SFAS No. 142, Goodwill and Other Intangible Assets, and accordingly do not amortize goodwill, but will annually review it for impairment. We test goodwill for impairment at least annually and whenever events occur or circumstances change that indicate there may be impairment. These events or circumstances could include a significant adverse change in the business climate, poor indicators of operating performance or a sale or disposition of a significant portion of a reporting unit. Testing goodwill for impairment requires us to determine the amount of goodwill associated with reporting units, estimate fair values of those reporting units and determine their carrying values. These processes are subjective and require significant estimates. These estimates include judgments about future cash flows that are dependent on internal forecasts, long-term growth rates, allocations of commonly shared assets and estimates of the weighted-average cost of capital used to discount future cash flows. Changes in these estimates and assumptions could materially affect the results of our reviews for impairment of goodwill. Based on these tests, goodwill was not impaired in 2009 or 2008.

21

        Other intangible assets acquired in acquisitions are amortized on a straight-line basis over a period ranging from seven to fifteen years, the estimated useful lives of the assets. Other intangible assets are tested for potential impairment whenever events or changes in circumstances suggest that the carrying value of an asset may not be fully recoverable in accordance with SFAS No. 144.

Recent Accounting Pronouncements

        In May 2009, the FSAB issued SFAS No. 165, Subsequent Events (“SFAS No. 165”). SFAS No. 165 is intended to establish general standards of accounting for and disclosure of events that occur after the balance sheet date, but before financial statements are issued or are available to be issued. It requires the disclosure of the date through which an entity has evaluated subsequent events and the basis for that date–that is, whether that date represents the date the financial statements were issued or were available to be issued. This disclosure should alert all users of financial statements that an entity has not evaluated subsequent events after that date in the set of financial statements being presented. SFAS No. 165 is effective for financial statements issued for fiscal years and interim periods ending after June 15, 2009. The Company is evaluating the impact that the adoption of SFAS No. 165 will have on its consolidated financial statements.

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

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

        In February 2008, the FASB issued FASB Staff Position No. 157-1 (“FSP 157-1”) and FASB Staff Position No. 157-2 (“FSP 157-2”), which, respectively, removed leasing transactions from the scope of SFAS No. 157 and deferred for one year the effective date for SFAS No. 157 as it applies to certain nonfinancial assets and liabilities. The deferral provided by FSP 157-2 applies to such items as nonfinancial assets and liabilities initially measured at fair value in a business combination (but not measured at fair value in subsequent periods) and nonfinancial long-lived asset groups measured at fair value for an impairment assessment.  The Company is evaluating the impact FSP 157-2 will have on its nonfinancial assets and liabilities.

ITEM 7A.    QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

        Not applicable.

ITEM 8.    FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

        Our Consolidated Financial Statements, notes thereto and the report of Grant Thornton LLP, our independent registered public accounting firm, are set forth on the pages indicated at Item 15 and are incorporated into this item by reference.

22

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

        None

ITEM 9A.    CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

        Our Chief Executive Officer and Chief Financial Officer are responsible for establishing and maintaining disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e)) of the Securities Exchange Act of 1934 (“the Exchange Act”) for MTS. Accordingly, our Chief Executive Officer and Chief Financial Officer designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under their supervision, to ensure that material information relating to MTS, including our consolidated subsidiaries, is made known to our Chief Executive Officer and Chief Financial Officer by others within those entities. We regularly evaluate the effectiveness of disclosure controls and procedures and report our conclusions about the effectiveness of the disclosure controls quarterly on our Form 10-Q and annually on our Form 10-K.

        Our management, including the Chief Executive Officer and Chief Financial Officer, conducted an evaluation of the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act) as of the end of the period covered by this report. Based upon that evaluation and as described below under “Management’s Report on Internal Control Over Financial Reporting,” the Chief Executive Officer and the Chief Financial Officer have identified a weakness in our internal control over financial reporting. Solely as a result of this material weakness, the Chief Executive Officer and the Chief Financial Officer concluded that our disclosure controls and procedures were not effective as of the end of the period ended March 31, 2009, in ensuring that material information relating to the Company required to be disclosed by the Company in reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and that such information is accumulated and communicated to management, including the Chief Executive Officer and the Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. Notwithstanding the material weakness described below, our management has concluded that the Consolidated Financial Statements fairly state, in all material respects, our financial condition, results of operations and cash flows for the periods presented in conformity with generally accepted accounting principles.

Management’s Report on Internal Control Over Financial Reporting

        Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act). Under the supervision and with the participation of our management, including our Chief Executive Office and Chief Financial Officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on criteria for effective internal control over financial reporting described in Internal Control–Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.

        Our internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles and includes those policies and procedures that:

• pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets;

• provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and

• provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements.

23

        Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

        Based on the definition of “material weakness” in the Public Company Accounting Oversight Board’s Auditing Standard No. 5, we have concluded that we did not maintain effective controls over recording inventory transactions. We determined that because effective controls regarding recording inventory transactions were not in place, the carrying value of our inventory could be misstated. This conclusion was disclosed to the Audit Committee and to the independent registered public accountants at the time it was identified.

Plan for Remediation of Material Weakness

        We have realigned the responsibilities for overseeing the personnel who record inventory transactions. These individuals will now be supervised by personnel in the accounting department. In addition, new policies and procedures will be instituted and cycle counts of individual inventory items will be made on a weekly basis.

Changes in Internal Control Over Financial Reporting

        Other than expressly noted above in this Item 9A, there was no change in our internal control over financial reporting during the fiscal year ended March 31, 2009 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

        This annual report does not include an attestation report of our registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by our registered public accounting firm pursuant to temporary rules of the SEC that permit us to provide only management’s report in this annual report.

ITEM 9B.   OTHER INFORMATION

        None.

24

PART III

ITEM 10.    DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

        The information required by this item is incorporated herein by reference to the information included in our definitive proxy statement, which will be filed by us within 120 days after the end of our 2009 fiscal year.

ITEM 11.    EXECUTIVE COMPENSATION

        The information required by this item is incorporated herein by reference to the information included in our definitive proxy statement, which will be filed within 120 days after the end of our 2009 fiscal year.

ITEM 12.    SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

        The information required by this item is incorporated herein by reference to the information included in our definitive proxy statement, which will be filed within 120 days after the end of our 2009 fiscal year.

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

ITEM 13.   CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

        The information required by this item is incorporated herein by reference to the information included in our definitive proxy statement, which will be filed within 120 days after the end of our 2009 fiscal year.

ITEM 14.   PRINCIPAL ACCOUNTANT FEES AND SERVICES

        The information required by this item is incorporated herein by reference to the information included in our definitive proxy statement, which will be filed within 120 days after the end of our 2009 fiscal year.

25

PART IV

ITEM 15.    EXHIBITS, FINANCIAL STATEMENT SCHEDULES.

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

1. Financial Statements.   The consolidated financial statements, and related notes thereto, of MTS with the independent auditors’ report thereon are included in Part IV of this Report on the pages indicated by the Index to Financial Statements and Schedule beginning on page 28 of this report.

2. Schedules not listed in the Index to Financial Statements have been omitted because they are not applicable, not required, or the information required to be set forth therein is included in the consolidated financial statements or notes thereto.

3. For Exhibits, see Item 15(b) below.

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

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

26

MTS MEDICATION TECHNOLOGIES, INC.

INDEX TO FINANCIAL STATEMENTS

	Page
Report of Independent Registered Public Accounting Firm	28
Consolidated Financial Statements
Consolidated Balance Sheets as of March 31, 2009 and 2008	29
Consolidated Statements of Income for the Years Ended March 31, 2009 and 2008	30
Consolidated Statements of Changes in Stockholders' Equity and Comprehensive Income for the Years Ended March 31, 2009 and 2008	31
Consolidated Statements of Cash Flows for the Years Ended March 31, 2009 and 2008	33
Notes to Consolidated Financial Statements	33 - 54
Exhibit 21.1 - Subsidiaries of MTS Medication Technologies, Inc.	58
Exhibit 23.1 - Consent of Independent Registered Public Accounting Firm	59

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

27

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Board of Directors and Shareholders
MTS Medication Technologies, Inc.

We have audited the accompanying consolidated balance sheets of MTS Medication Technologies, Inc. (a Delaware corporation) and subsidiaries as of March 31, 2009 and 2008, and the related consolidated statements of income, changes in stockholders’ equity and comprehensive income, and cash flows for the years then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

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

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of MTS Medication Technologies, Inc. and subsidiaries as of March 31, 2009 and 2008, and the results of their operations and their cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.

/s/ GRANT THORNTON LLP

Tampa, Florida

June 17, 2009

28

MTS MEDICATION TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
MARCH 31, 2009 AND 2008
In Thousands)

ASSETS

	2009		2008
Current Assets:
Cash	$	493	$	662
Restricted Cash		79		158
Accounts Receivable, Net		8,567		8,213
Inventories, Net		10,001		14,504
Prepaids and Other		708		2,528
Deferred Tax Asset		393		495
Total Current Assets		20,241		26,560
Property and Equipment, Net		8,127		7,746
Goodwill		1,196		1,161
Other Intangible Assets, Net		531		783
Other Assets, Net		1,831		2,198
Total Assets	$	31,926	$	38,448

LIABILITIES AND STOCKHOLDERS' EQUITY

Current Liabilities:
Accounts Payable and Accrued Liabilities	$	6,170		$	8,653
Current Maturities of Long-Term Debt		19			74
Current Maturities of Related Party Note Payable		–			106
Customer Deposits		1,330			4,123
Total Current Liabilities		7,519			12,956
Long-Term Debt, Less Current Maturities		8,196			11,691
Other Liabilities		1,211			834
Deferred Tax Liability, Net		612			376
Total Liabilities		17,538			25,857
Commitments and Contingencies (Note 18)
Stockholders’ Equity:
Common Stock		65			64
Capital In Excess of Par Value		10,500			10,137
Accumulated Other Comprehensive (Loss) Income		(674	)		374
Retained Earnings		4,825			2,344
Treasury Stock		(328	)		(328	)
Total Stockholders' Equity		14,388			12,591
Total Liabilities and Stockholders' Equity	$	31,926		$	38,448

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

29

MTS MEDICATION TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED MARCH 31, 2009 AND 2008
(In Thousands; Except Earnings Per Share Amounts)

	2009		2008
Net Sales	$	76,275	$	57,809
Costs and Expenses:
Cost of Sales		50,966		35,880
Selling, General and Administrative		18,266		15,716
Depreciation and Amortization		2,948		2,785
Total Costs and Expenses		72,180		54,381
Operating Income		4,095		3,428
Other Expenses:
Interest Expense		479		637
Income Before Taxes		3,616		2,791
Income Tax Expense		1,135		736
Net Income	$	2,481	$	2,055
Net Income Per Basic Common Share	$	0.38	$	0.32
Net Income Per Diluted Common Share	$	0.37	$	0.31

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

30

MTS MEDICATION TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY AND COMPREHENSIVE INCOME
YEARS ENDED MARCH 31, 2009 AND 2008
(In Thousands; Except Shares)

	Common Stock					Accumulated
	$.01 Par Value			Capital In		Other											Total
				Excess of		Comprehensive			Retained			Treasury		Treasury			Stockholders'
	Shares	Amount		Par Value		(Loss) Income			Earnings			Shares		Stock			Equity
Balance March 31, 2007	6,243,665	$	62	$	8,736	$	254		$	989		(60	)	$	(328	)	$	9,713
Tax Benefit of Stock Option Exercises					284													284
Exercise of Stock Options	190,400		2		948													950
Stock Grants Issued	10,000		–		125													125
Share-Based Compensation					44													44
Cumulative Effect of Initial Application of FIN 49										(700	)							(700	)
Comprehensive Income:
Net Income										2,055								2,055
Foreign Currency Translation Adjustment							120											120
Total Comprehensive Income																		2,175
Balance March 31, 2008	6,444,065	$	64	$	10,137	$	374		$	2,344		(60	)	$	(328	)	$	12,591
Tax Benefit of Stock Option Exercises					50													50
Exercise of Stock Options	5,000		–		9													9
Stock Grants Issued	5,000		1		57													58
Share-Based Compensation					247													247
Comprehensive Income:
Net Income										2,481								2,481
Interest Rate Swaps, Net of Tax of $90							(146	)										(146	)
Foreign Currency Translation Adjustment							(902	)										(902	)
Total Comprehensive Income																		1,433
Balance March 31, 2009	6,454,065	$	65	$	10,500	$	(674	)	$	4,825		(60	)	$	(328	)	$	14,388

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

31

MTS MEDICATION TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED MARCH 31, 2009 AND 2008
(In Thousands)

	2009			2008
Operating Activities
Net Income	$	2,481		$	2,055
Adjustments to Reconcile Net Income to Net Cash
Provided by Operating Activities:
Depreciation and Amortization		2,919			2,768
Write-off of Deferred Financing Costs		62			–
Tax Benefit of Options Exercised		(50	)		(284	)
Deferred Income Taxes		242			(424	)
Share-Based Compensation		305			169
Loss on Disposal of Equipment and Patents		143			–
Changes in Assets and Liabilities
Restricted Cash		79			(158	)
Accounts Receivable, Net		(841	)		1,037
Inventories, Net		3,276			(8,593	)
Prepaids and Other		1,752			(1,601	)
Accounts Payable and Other Accrued Liabilities		(2,047	)		2,158
Customer Deposits		(2,793	)		3,732
Other Long-Term Liabilities		47			–
Total Adjustments		3,094			(1,196	)
Net Cash Provided by Operating Activities		5,575			859
Investing Activities
Contingent Consideration Expended for Acquisition of Business		(66	)		(271	)
Expended for Property and Equipment		(2,253	)		(4,204	)
Expended for Product Development		(140	)		(595	)
Expended for Patents and Other Assets		(56	)		(123	)
Net Cash Used in Investing Activities		(2,515	)		(5,193	)
Financing Activities
Payments on Notes Payable and Long-Term Debt		(66	)		(1,919	)
Payments on Related Party Note Payable		(106	)		(328	)
Paydowns on Revolving Line of Credit		(27,526	)		(55,290	)
Advances on Revolving Line of Credit		24,058			61,129
Expended for Financing Costs		(25	)		(79	)
Tax Benefit of Options Exercised		50			284
Proceeds from Exercise of Stock Options and Warrants		9			950
Net Cash (Used in) Provided by Financing Activities		(3,606	)		4,747
Effect of Exchange Rate Changes on Cash		377			(43	)
Net Change in Cash		(169	)		370
Cash at Beginning of Period		662			292
Cash at End of Period	$	493		$	662

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

32

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 – BACKGROUND INFORMATION

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

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

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

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Consolidation

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

Use of Estimates

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

Cash

        The Company considers all highly liquid instruments purchased with a maturity of three months or less at the time of purchase to be cash equivalents. As of March 31, 2009 and 2008, the Company’s cash includes the U.S. Dollar equivalent of approximately $492,000 and $468,000, respectively, maintained in banks primarily in the UK and Germany. There were no cash equivalents for either period presented.

33

Inventories

        Inventories are stated at the lower of cost or market, determined by the first-in, first-out (“FIFO”) method. The elements of costs included in the valuation of inventory are the direct costs associated with materials purchased, direct labor expended to manufacture the inventory and an allocation of general overhead expenses incurred to operate the manufacturing facilities. The allowance for inventory obsolescence and slow moving inventory is reviewed on a monthly basis. The Company reviews various information related to the age and turnover of specific inventory items to assist its assessment. As of March 31, 2009 and 2008, the Company established an inventory valuation allowance of approximately $612,000 and $616,000, respectively, to account for the estimated loss in value of inventory due to obsolescence.

Warranty

        The Company establishes a reserve for warranty costs it may incur during the warranty period that is provided as part of the machine sales agreements with its customers. The warranty period is generally for a six-month period. The balance was approximately $15,000 and $23,000 at March 31, 2009 and 2008, respectively. Warranty costs incurred during the years ended March 31, 2009 and 2008 totaled approximately $69,000 and $12,000, respectively. The reserve is an estimate based on historical trends, the number of machines under warranty, the cost of replacement parts and the expected reliability of the Company’s products. Warranty costs are charged against the accrual when incurred.

Revenue Recognition

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

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

        Revenue is reported net of rebates and discounts provided to customers and excludes sales tax. Rebates are generally determined based upon pricing agreements that offer certain customers incentives to purchase products from the Company. Discounts are provided from time to time primarily to compensate customers for inconveniences caused by late shipments, defective product or pricing errors. Rebates and discounts were $1.5 million for each of the fiscal years 2009 and 2008, respectively. Rebates and discounts are recorded at the time they are earned by the customer.

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        There were two customers whose sales accounted for approximately 44% and 24% of net sales for fiscal years 2009 and 2008, respectively.

Accounts Receivable

        Trade accounts receivable are recorded based upon the invoiced amount, are generally not interest bearing and are considered past due when full payment is not received by the specified credit terms. The invoiced amounts generally include any taxes due to various tax jurisdictions that the Company collects from the customer and remits to the appropriate tax jurisdictions. The Company does not typically require collateral when granting credit; however, customer credit worthiness is reviewed prior to granting credit. The Company continually estimates the uncollectibility of its accounts receivable. The Company considers many factors when making its estimates, including analyzing accounts receivable aging and historical bad debts, customer concentrations, customer credit worthiness, current economic trends and changes in its customer payment terms when evaluating the adequacy of the reserve for uncollectible accounts. The Company reviews the status of its accounts receivable monthly, assessing the customer’s ability to pay. When a specific account is deemed uncollectible, the account is written off against the reserve for doubtful uncollectible accounts.

Property and Equipment

        Property and equipment are recorded at cost. Additions to, and major improvements of, property and equipment are capitalized. Maintenance and repair expenditures are charged to expense as incurred. As property and equipment is sold or retired, the applicable cost and accumulated depreciation is eliminated from the accounts and any gain or loss is recorded. Depreciation of property and equipment is calculated using the straight-line method based upon the assets’ estimated useful lives, which are generally three to seven years. Leasehold improvements are amortized over the shorter of the life of the asset or the remaining term of the lease. The Company uses accelerated methods of depreciation for tax purposes.

Research and Development and Product Development Costs

        The Company expenses research and development costs as incurred. The Company incurred approximately $792,000 and $331,000 in research and development costs during the years ended March 31, 2009 and 2008, respectively.

        All costs incurred subsequent to the completion of research and development activities associated with the product’s software components achievement of technological feasibility are capitalized until the product is available for general release to customers. The Company capitalized approximately $140,000 and $595,000 of product development costs during the years ended March 31, 2009 and 2008, respectively.

        All product development costs are generally amortized on a straight-line basis over a three (3) year period, the estimated useful life of the related asset. Amortization expense related to product development costs was approximately $324,000 and $570,000 for the years ended March 31, 2009 and 2008, respectively.

Other Assets – Patents

        Other assets, primarily patents, are carried at cost less accumulated amortization. The cost of patents represents amounts paid to third parties, including legal costs associated with successfully defending or obtaining the patents. Amortization is being calculated on a straight-line basis over a three-year to seventeen-year period, the estimated useful life of the related asset.

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Goodwill and Other Intangible Assets

        The Company follows Statement of Financial Accounting Standards (“SFAS”) No. 142, Goodwill and Other Intangible Assets, and accordingly does not amortize goodwill, but will annually review it for impairment. No impairment of goodwill was identified during the years ended March 31, 2009 and 2008. Other intangible assets acquired in acquisitions are amortized on a straight-line basis over a period ranging from seven to fifteen years, the estimated useful lives of the assets.

Valuation of Long-Lived Assets and Certain Identifiable Intangibles

        Long-lived assets and certain identifiable intangibles that are held and used by the Company are reviewed for impairment whenever events or changes in circumstance indicate that the carrying amount of these assets may not be recoverable in accordance with SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. In performing the review for recoverability, the Company estimates the future cash flows expected to result from the use of the assets and their eventual disposition. If the sum of the expected undiscounted future cash flows is less than the carrying amount of the assets, an impairment loss may be recognized based on a discounted cash flow analysis. There were no impairment losses during the years ended March 31, 2009 and 2008.

Earnings Per Share

        Basic earnings per share is calculated by dividing net income available to common shareholders by the weighted average number of shares of common stock outstanding for the period and any warrants outstanding that are exercisable at a de minimus amount. Diluted earnings per share is calculated by dividing net income by the weighted average number of shares of common stock outstanding for the period, adjusted for the dilutive effect of common stock equivalents, using the “treasury stock” method.

Income Taxes

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

        The Company applies the provisions of Financial Accounting Standards Board (“FASB”) Interpretation No. 48 (“FIN 48”), Accounting for Uncertainty in Income Taxes–an Interpretation of FASB Statement No. 109. FIN 48 provides guidance regarding the recognition, measurement, presentation and disclosure in the financial statements of tax positions taken or expected to be taken on tax returns, including the decision whether to file or not to file in a particular jurisdiction. FSP FIN 48-1, Definition of Settlement in FASB Interpretation No. 48, provides further guidance on how a company should determine whether a tax position is effectively settled for the purpose of recognizing previously unrecognized tax benefits.

Treasury Stock

        The Company records its treasury stock at cost.

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Share-Based Compensation

        The Company awards share-based compensation as an incentive for employees to contribute to the Company’s long-term success. Historically, the Company has issued options and restricted stock. Share-based compensation is recognized based on the fair value of the awards in accordance with SFAS No. 123 (revised 2004) Share Based Payment “SFAS No. 123R”. Compensation expense is recognized over the requisite service period on a straight-line basis.

        The following disclosures provide information regarding the Company’s share-based compensation awards, all of which are classified as equity awards in accordance with SFAS No. 123R:

Restricted Stock Awards – The Company grants restricted stock to certain executive employees in exchange for services performed, which is based on the terms of their respective employment agreements. The restricted shares issued are valued based on the value of the Company’s common stock on the date of grant. During the years ended March 31, 2009 and 2008, the Company issued 5,000 shares of restricted common stock to its Chief Operating Officer as additional compensation under his employment agreement. The Company recorded share-based compensation expense in the amount of approximately $57,000 ($35,000 net of tax) and $56,000 ($34,000 net of tax) during the years ended March 31, 2009 and 2008, respectively. In addition, during the year ended March 31, 2008, the Company issued 1,000 shares of restricted stock to each of the five Board of Directors as additional compensation for their services and recorded share-based compensation expense of the $69,000 ($42,000 net of tax).

Stock Options – The Company grants stock options to employees that allow them to purchase shares of the Company’s common stock. Options are also granted to outside members of the Board of Directors of the Company. The Company determines the fair value of stock options at the date of grant using the Black-Scholes valuation model. Options generally vest over a three-year period. Awards generally expire ten years after the date of grant. The Company issues new shares upon the exercise of stock options and warrants. The Company granted 221,246 options to employees and members of the Board of Directors during the year ended March 31, 2009. The options had a fair value of approximately $458,000.

As of March 31, 2009 the Company has unrecognized compensation cost of approximately $444,000 expected to be recognized over the next three years for share-based awards granted.

Fair Value of Financial Instruments

        The carrying amounts of cash, receivables, accounts payable and accrued liabilities approximate fair value because of the short-term nature of the items. The carrying amount of current and long-term portions of long-term debt approximates fair value since the interest rates approximate current prevailing market rates.

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

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

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

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

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        The following table summarizes the valuation of the Company’s financial instruments by the above SFAS No. 157 categories as of March 31, 2009:

		Quoted Market Prices	Significant Other	Significant
		in Active Markets	Observable Inputs	Unobservable Inputs
	Total	(Level 1)	(Level 2)	(Level 3)
	(In Thousands)
Interest Rate Swaps	$   (236)	–	$   (236)	–

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

Foreign Currency Transactions and Translation

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

        During the year ended March 31, 2009, the Company recorded foreign currency losses of approximately $343,000. The losses are reported in Selling, General and Administrative on the consolidated statements of income. Foreign currency gains during the year ended March 31, 2008 were not material to the consolidated financial statements.

Recent Accounting Pronouncements

        In May 2009, the FSAB issued SFAS No. 165, Subsequent Events (“SFAS No. 165”). SFAS No. 165 is intended to establish general standards of accounting for and disclosure of events that occur after the balance sheet date, but before financial statements are issued or are available to be issued. It requires the disclosure of the date through which an entity has evaluated subsequent events and the basis for that date–that is, whether that date represents the date the financial statements were issued or were available to be issued. This disclosure should alert all users of financial statements that an entity has not evaluated subsequent events after that date in the set of financial statements being presented. SFAS No. 165 is effective for financial statements issued for fiscal years and interim periods ending after June 15, 2009. The Company is evaluating the impact that the adoption of SFAS No. 165 will have on its consolidated financial statements.

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

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

        In February 2008, the FASB issued FASB Staff Position No. 157-1 (“FSP 157-1”) and FASB Staff Position No. 157-2 (“FSP 157-2”), which, respectively, removed leasing transactions from the scope of SFAS No. 157 and deferred for one year the effective date for SFAS No. 157 as it applies to certain nonfinancial assets and liabilities. The deferral provided by FSP 157-2 applies to such items as nonfinancial assets and liabilities initially measured at fair value in a business combination (but not measured at fair value in subsequent periods) and nonfinancial long-lived asset groups measured at fair value for an impairment assessment.  The Company is evaluating the impact FSP 157-2 will have on its nonfinancial assets and liabilities.

NOTE 3 – RESTRICTED CASH

        In May 2007, the Company entered into an agreement to provide sixteen OnDemand® Express II™ and eight AccuFlex machines to its largest customer over an 18 month period.  The agreement provides that the customer will make certain deposits that will ultimately be applied towards the purchase price of the machines.  The agreement further provides that the deposits will be held in a separate bank account and used exclusively for costs associated with the manufacture of the machines.  The Company has used these cash deposits to pay an outsourced manufacturer, and to pay costs and expenses related to the manufacture and installation of the machines. The Company holds the remaining cash in a separate bank account to be used to fund future costs associated with the manufacture of the machines.  The unused balance was approximately $79,000 and $158,000 as of March 31, 2009 and 2008, respectively.

NOTE 4 – ACCOUNTS RECEIVABLE

        Accounts receivable are shown net of an allowance for doubtful accounts of $165,000 and $145,000 at March 31, 2009 and 2008, respectively. The changes in the allowance for doubtful accounts are summarized as follows:

	March 31, 2009		March 31, 2008
	(In Thousands)
Beginning Balance	$	145	$	149
Provision for Doubtful Accounts and Charge-Offs		20		(4	)
Ending Balance	$	165	$	145

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

        Concentration of Credit Risk - The Company extends credit to customers on terms of payment generally ranging from net 30 to 60 days without collateral or other forms of security. The credit worthiness of each customer is routinely assessed and credit is extended based upon a review of various information that is available. At March 31, 2009 and 2008, three customers comprised approximately 45% and 18%, respectively, of the total outstanding accounts receivable, and one of those customers represented 25% and 10%, respectively of the total outstanding accounts receivable.

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NOTE 5 – INVENTORIES

        Inventories consist of the following:

	March 31, 2009			March 31, 2008
	(In Thousands)
Raw Material	$	4,328		$	3,894
Work in Process		1,282			4,280
Finished Goods		5,003			6,946
Less:  Inventory Valuation Allowance		(612	)		(616	)
	$	10,001		$	14,504

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

	March 31, 2009			March 31, 2008
	(In Thousands)
Beginning Balance	$	616		$	340
Provision for Obsolescence		120			768
Charge-Offs		(124	)		(492	)
Ending Balance	$	612		$	616

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

NOTE 6 – PROPERTY AND EQUIPMENT

        Property and equipment consists of the following:

	March 31, 2009			March 31, 2008
	(In Thousands)
Machinery and Equipment	$	13,182		$	11,971
Software and Computer Equipment		1,753			1,752
Furniture and Fixtures	$	937		$	915
Leasehold Improvements		1,346			1,148
		17,218			15,786
Less:  Accumulated Depreciation and Amortization		(9,091	)		(8,040	)
	$	8,127		$	7,746

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

        Depreciation of property and equipment and amortization of leasehold improvements was approximately $2.4 million and $2.8 million for fiscal years ending March 31, 2009 and 2008, respectively, which is included in depreciation and amortization on the consolidated statements of income.

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NOTE 7 – GOODWILL

        The changes in the carrying value of goodwill during the years ending March 31, 2009 and 2008 were as follows:

	March 31, 2009			March 31, 2008
	(In Thousands)
Beginning Balance	$	1,161		$	740
Contingent Consideration		356			375
Foreign Currency Translation		(321	)		46
Ending Balance	$	1,196		$	1,161

         During the year ended March 31, 2009, the Company paid approximately $66,000 in additional consideration for the acquisition of MTS GmbH and accrued approximately $290,000 in additional consideration, which was paid subsequent to March 31, 2009. During the fiscal year ended March 31, 2008, the Company paid approximately $300,000 in additional consideration for the acquisition of BAF and approximately $75,000 of additional consideration for the acquisition of MTS GmbH.

NOTE 8 – FINANCIAL DERIVATIVES

        In April 2008, the Company entered into interest rate swap agreements for notional amounts of $8 million. These swap agreements were entered into in order to fix variable interest rates on the revolving long-term debt at an average rate of 4.6%. The swaps mature on various dates through March 2011. The swap agreements were designated as cash flow hedges upon meeting the criteria for effectiveness and are recorded at fair value in the consolidated balance sheets. The Company calculates the effectiveness of the hedge on a quarterly basis. There was no ineffectiveness during the year ended March 31, 2009. The related gains or losses are recorded in stockholders’ equity as a component of other comprehensive (loss) income.

NOTE 9 – OTHER ASSETS AND OTHER INTANGIBLE ASSETS

        Other assets consist of the following:

	Amortization Period	March 31,			March 31,
	(Years)	2009			2008
		(In Thousands)
Product Development	3	$	4,366		$	4,226
Less:  Accumulated Amortization			(3,098	)		(2,774	)
		$	1,268		$	1,452
Patents	5 – 17	$	1,747		$	2,712
Less:   Accumulated Amortization			(1,263	)		(2,093	)
		$	484		$	619
Financing Costs	3 – 5	$	102		$	122
Less:   Accumulated Amortization			(67	)		(44	)
		$	35		$	78
Other		$	44		$	49
Total Other Assets, Net		$	1,831		$	2,198

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

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

	(In Thousands)
Fiscal Year 2010	$	36
Fiscal Year 2011	$	36
Fiscal Year 2012	$	36
Fiscal Year 2013	$	36
Fiscal Year 2014	$	36
Thereafter	$	304

        Patent amortization expense was approximately $133,000 and $261,000 for the years ended March 31, 2009 and 2008, respectively.

        Other intangible assets consist of the following:

	Amortization Period	March 31,			March 31,
	(Years)	2009			2008
		(In Thousands)
Customer Relationship	15	$	618		$	810
Less:  Accumulated Amortization			(110	)		(92	)
		$	508		$	718
Non-Compete	2 – 7	$	90		$	117
Less:   Accumulated Amortization			(67	)		(52	)
		$	23		$	65
Total Other Intangible Assets, Net		$	531		$	783

        The following is a schedule by year for the amortization of other intangible assets:

	(In Thousands)
Fiscal Year 2010	$	48
Fiscal Year 2011	$	48
Fiscal Year 2012	$	48
Fiscal Year 2013	$	48
Fiscal Year 2014	$	42
Thereafter	$	297

        Amortization expense for other intangible assets was approximately $78,000 and $95,000 and for the years ended March 31, 2009 and 2008, respectively.

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NOTE 10 – ACCOUNTS PAYABLE AND ACCRUED LIABILITIES

        Accounts payable and accrued liabilities consist of the following:

	March 31, 2009		March 31, 2008
	(In Thousands)
Accounts Payable	$	3,580	$	5,658
Accrued Liabilities:
Salaries, Commissions and Employee Benefits		1,184		1,953
Income, Franchise and Sales Taxes		430		409
Other		976		633
	$	6,170	$	8,653

        Accounts payable includes outstanding checks of approximately $150,000 and $378,000 as of March 31, 2009 and 2008, respectively.

NOTE 11 – LONG-TERM DEBT AND RELATED PARTY NOTE PAYABLE

        Long-term debt consists of the following:

	March 31, 2009			March 31, 2008
	(In Thousands)
Reducing revolving line of credit due in November 2010 with interest payable monthly at LIBOR plus 1.75% (2.28% at March 31, 2009) for approximately $1.2 million and 4.6% for approximately $8.0 million.	$	8,196		$	11,664
Note payable to related party with interest at 6.25% repaid in July 2008.		–			106
Capital leases expiring at various times through fiscal year 2010 at interest rates ranging from 6.29% to 9.5%.		19			101
Total Long-Term Debt		8,215			11,871
Less Current Portion (including $0 and $106,000, respectively due to a related party).		(19	)		(180	)
Long-Term Debt Due After One Year	$	8,196		$	11,691

        The Company has a reducing revolving credit facility (the “Credit Facility”) with a maximum borrowing limit of up to $12.3 million at March 31, 2009. Availability under the Credit Facility is permanently reduced by $335,000 each January 31, April 30, July 31 and October 31 through maturity in 2010.

        The Credit Facility contains provisions that require the Company to maintain certain financial ratios such as, “Debt Service Coverage”, “Funded Debt to EBITDA” and “Total Liabilities to Tangible Net Worth”. The Company was in compliance with all covenants as of March 31, 2009.

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        The Credit Facility is collateralized by a first security interest in all of the assets of the Company and a pledge of 100% of the shares of its domestic wholly-owned subsidiaries, and 65% of its foreign wholly-owned subsidiaries. There was approximately $8.2 million borrowed and an additional $4.1 million available under the Credit Facility at March 31, 2009.

        The following is a schedule by year of the regularly scheduled principal payments required on the notes payable and long-term debts as of March 31, 2009:

	(In Thousands)
Fiscal Year 2010	$	19
Fiscal Year 2011	$	8,196
Thereafter	$	–

        Interest expense for the years ended March 31, 2009 and 2008 amounted to approximately $479,000 and $637,000, respectively, of which $1,000 and $19,000, respectively, represent related party interest.

NOTE 12 – LEASE COMMITMENTS

        The following is a schedule by year of future minimum rental payments required under operating leases, primarily facility leases that have an initial or remaining non-cancelable lease term in excess of one year as of March 31, 2009.

	(In Thousands)
Fiscal Year 2010	$	973
Fiscal Year 2011	$	965
Fiscal Year 2012	$	963
Fiscal Year 2013	$	963
Fiscal Year 2014	$	883
Thereafter	$	2,046

        The Company has applied the provisions of SFAS No. 13, Accounting for Leases to account for the lease payments. Accordingly, the total lease payments that will be made over the term of the lease are being recorded as an expense on a pro-rata basis, adjusted for the consumer price index, over the term of the lease as opposed to recording the amount of lease payments actually made. As a result, the difference between the actual lease payments made and the amount of expense recorded is carried as a liability on the Company’s balance sheet. The amount of this liability was $435,000 and $388,000 at March 31, 2009 and 2008, respectively. Rent expense amounted to approximately $1,570,000 and $1,479,000 for the years ended March 31, 2009 and 2008, respectively.

        The Company received $400,000 from its landlord when its headquarters lease was executed. This payment was provided as an incentive to enter into the lease. The amount is recorded as a long-term liability on the balance sheet and is being amortized as a reduction of rent expense over the term of the lease. The unamortized balance was $250,000 and $283,000 as of March 31, 2009 and 2008, respectively. The amortization of the lease incentive was $33,000 in both years.

NOTE 13 – 401(K) PROFIT SHARING PLAN

        The Company has a 401(K) Profit Sharing Plan (the “Plan”). The Plan covers substantially all of its employees. Contributions are at the employees’ discretion and may be matched by the Company up to certain limits. For the years ended March 31, 2009 and 2008, the Company made matching contributions of approximately $55,000 and $64,000, respectively, to the Plan.

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NOTE 14 – SELF INSURANCE PLAN

        The Company has a medical health benefit self-insurance plan, which covers substantially all of its employees. During the year ended March 31, 2009, the Company was reinsured for claims that exceed $100,000 per participant and an annual maximum aggregate limit of approximately $1,345,000. Future claims experience may affect the reinsurance limits that may be available to the Company in subsequent fiscal years. The Company has established a reserve of approximately $70,000 and $75,000 at March 31, 2009 and 2008, respectively, for all unpaid claims incurred and reported during fiscal year 2009 and an estimate of claims incurred during fiscal year 2009 that have not been reported as of March 31, 2009. Self insured medical claims costs incurred during the years ended March 31, 2009 and 2008 totaled approximately $1,183,000 and $1,140,000, respectively. During the year ended March 31, 2009, the Company incurred claims that exceeded the $100,000 limit per participant, and as a result received $196,000 in reimbursements from the insurance carrier and expects to receive an additional $3,000 during fiscal 2010, which is recorded in accounts receivable in the accompanying consolidated balance sheets.

NOTE 15 – TAXES

        The components of income tax expense are as follows:

	2009			2008
	(In Thousands)
Federal
Current	$	470		$	636
Deferred		470			(202	)
State
Current		78			143
Deferred		19			(121	)
Foreign
Current		169			311
Deferred		(71	)		(31	)
Total Current		717			1,090
Total Deferred		418			(354	)
Total Taxes	$	1,135		$	736

        The differences between the effective tax rates and the U.S. statutory rate are as follows:

	Years Ended March 31,
	2009		2008
Tax Expense at United States Statutory Rate	34.0%		34.0%
State Income Tax, Net	3.7%		2.1%
Benefit from Reduction of Tax Uncertainties	(5.0%	)	(4.2%	)
Deferred Tax Asset for State of Florida NOL	–		(4.8%	)
Foreign Earnings Taxed at Lower Rates	(2.2%	)	(1.2%	)
IRS Section 199 Deduction	(1.1%	)	–
Shared-Based Compensation	1.7%		0.4%
Other Items	0.3%		(0.1%	)
Effective Tax Rate	31.4%		26.4%

45

        Earnings from operations before income tax expense by jurisdiction was a follows:

	Years Ended March 31,
	2009		2008
	(In Thousands)
United States	$	3,091	$	1,871
Outside the United States		525		920
	$	3,616	$	2,791

        We have not provided deferred taxes on undistributed earnings attributable to foreign operations that have been considered to be reinvested indefinitely. These earnings relate to ongoing operations and were $2.1 million at March 31, 2009. It is not practical to determine the income tax liability that would be payable if such earnings were not indefinitely reinvested.

        Deferred taxes consist of the following:

	March 31, 2009			March 31, 2008
	(In Thousands)
Current:
Deferred Tax Assets:
Reserves and Provisions		78			184
Tax Loss Carryforward	$	51		$	58
Inventory Valuation Allowance		204			201
Allowance for Doubtful Accounts		60			52
Current Deferred Tax Assets		393			495
Noncurrent:
Deferred Tax Assets:
Reserves and Provisions		305			298
Fair Value of Interest Rate Swap		90			–
Tax Loss Carryforward	$	7		$	49
Noncurrent Deferred Tax Asset		402			347
Deferred Tax Liability:
Depreciation/Amortization		(1,014	)		(723	)
Noncurrent Deferred Tax Liability		(1,014	)		(723	)
Noncurrent Deferred Tax Liability, Net		(612	)		(376	)
Net Deferred Tax (Liability) Asset	$	(219	)	$	119

46

        The Company adopted the provisions of FIN 48 as of April 1, 2007, which resulted in a reduction of our retained earnings by $700,000. FIN 48 clarifies the accounting for uncertainty in income taxes recognized in the financial statements in accordance with SFAS No. 109. This standard also provides that a tax benefit from an uncertain tax position may be recognized when it is more likely than not that the position will be sustained upon examination, including resolutions of any related appeals or litigation processes, based on the technical merits. Management considers anticipated future taxable income, the reversal of taxable temporary differences, and tax planning strategies in making the determination. The amount recognized is measured as the largest amount of tax benefit that is greater than 50 percent likely of being realized upon effective settlements. This interpretation also provides guidance on measurement, de-recognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. Unrecognized tax benefits, defined as the aggregate tax effect of differences between tax return positions and the benefits recognized in our financial statements and interest and penalties, amounted to approximately $324,000 and $584,000 at March 31, 2009 and 2008, respectively.

        The following table summarizes the activity related to only our unrecognized tax benefits.

	March 31, 2009			March 31, 2008
	(In Thousands)
Beginning Balance	$	507		$	835
Net (reductions) additions based on tax positions related to the prior year		(102	)		3
Net additions based on tax positions related to current year		21			19
Reductions based on lapse of applicable statue of limitations		(54	)		(185	)
Reductions based on settlements made		(121	)		(165	)
Ending Balance	$	251		$	507

        At March 31, 2009, the Company accrued interest and penalties on unrecognized tax benefits of $139,000, and the Company recognized $39,000 of interest and penalties before any tax benefits, in its consolidated statements of operations during 2009. The total of $324,000 in unrecognized tax benefits at March 31, 2009 would reduce income tax expense and the effective tax rate if recognized. The Company continues to report interest and penalties on tax deficiencies as income tax expense. We do not expect any material amounts to reverse during the next twelve months.

        The Company filed a consolidated U.S. federal income tax return, as well as income tax returns in various states and foreign jurisdictions. The Company’s U.S. Federal Income Tax Return for the fiscal year ended March 31, 2008 is currently being audited by the Internal Revenue Service. With few exceptions, the Company is no longer subject to U.S. federal, state and local, or non-U.S., income tax examination by tax authorities for years before fiscal 2006.

        The Company has a net operating loss carry forward with the State of Florida of approximately $1.6 million, which will expire in fiscal year 2017. The company has recorded the tax benefit of this NOL because it believes that the benefit will be realized in future years based on its expectations regarding future profitability.

47

NOTE 16 – STOCKHOLDERS’ EQUITY

        Stockholders’ Equity consists of the following:

	March 31, 2009	March 31, 2008
Series A Convertible Participating Preferred Stock
Par Value $.001 Per Share:
Authorized Shares	10,000	10,000
Issued Shares	–	–
Outstanding Shares	–	–

	March 31, 2009	March 31, 2008
Common Stock
Par Value $.01 Per Share:
Authorized Shares	25,000,000	25,000,000
Issued Shares	6,454,065	6,444,065
Outstanding Shares	6,454,005	6,444,005

Stock Options

        The current MTS Medication Technologies, Inc. Stock Incentive Plan (the “Stock Plan”) provides for the granting to employees of restricted stock and incentive stock options within the meaning of Section 422 of the Internal Revenue Code. A total of 600,000 shares of common stock are reserved for issuance under the Stock Plan. As of March 31, 2009, options to purchase 835,496 shares were outstanding under the Stock Plan and the Company’s previous stock incentive plan, and there were 312,754 options available for issuance under the Stock Plan.

        Incentive stock options generally contain terms that provide for straight-line vesting over a three-year period and expire at the time the recipient ceases to be employed by the Company or ten years, whichever occurs first.

        In connection with the exercise of options under the Company’s Stock Plan, during the fiscal years ended March 31, 2009 and 2008, tax benefits to the Company of $50,000 and $284,000, respectively, were recorded as additional paid in capital.

48

        Activity related to options is as follows:

								Weighted Average
	Number of		Range of					Exercise Price
	Shares		Exercise Price					Per Share
Outstanding at March 31, 2007	763,250		$	1.45	-	$	12.45	$	4.27
Granted in Fiscal 2008:
Officers and Directors	20,000					$	13.70	$	13.70
Employees	49,000		$	12.19	-	$	13.70	$	13.47
Options Exercised	(190,400	)	$	1.50	-	$	6.55	$	4.99
Options Expired	(16,600	)	$	1.45	-	$	5.00	$	3.23
Outstanding at March 31, 2008	625,250		$	1.45	-	$	13.70	$	5.09
Granted in Fiscal 2009:
Officers and Directors	117,674					$	5.85	$	5.85
Employees	103,572		$	4.05	-	$	5.85	$	5.65
Options Exercised	–								–
Options Expired	(11,000	)	$	2.30	-	$	12.19	$	7.30
Outstanding at March 31, 2009	835,496		$	1.45	-	$	13.70	$	5.24

Outstanding Options

		Weighted Average
Range of	Number	Remaining Contractual Life	Weighted Average
Exercise Prices	Outstanding	(Years)	Exercise Price
$1.45 -   $2.30	233,000	1.9	$1.54
$2.50 -   $4.47	79,500	4.7	$3.82
$5.60 - $13.70	522,996	7.8	$7.10
	835,496

Exercisable Options

		Weighted Average
Range of	Number	Remaining Contractual Life	Weighted Average
Exercise Prices	Outstanding	(Years)	Exercise Price
$1.45 -   $2.30	233,000	1.9	$1.54
$2.50 -   $4.47	69,500	4.0	$3.79
$5.60 - $13.70	271,093	6.5	$7.00
	573,593

        The options outstanding at March 31, 2009 expire on various dates commencing in March 2010 and ending in November 2018.

        At March 31, 2009, exercisable options had no intrinsic value. At March 31, 2009, exercisable warrants had aggregate intrinsic values of less than $1,000.

49

        During the year ended March 31 2009, 5,000 warrants were exercised. The Company received approximately $9,000 in cash from the exercise of these warrants.

        The Company has 300 warrants outstanding at an exercise price of $1.88 per share as of March 31, 2009, which expire in 2009. There were 600 warrants that expired during the year ended March 31, 2009. These warrants were issued in 1998 and no new warrants have been issued since that time.

        There were no options exercised during the year ended March 31, 2009. The weighted average grant date fair values for options issued during the years ended March 31, 2009 and 2008 were $2.07 and $4.07, respectively. The fair values were estimated on the date of the grant using the Black-Scholes valuation model with the following weighted-average assumptions:

	Year Ended March 31,
	2009	2008
Expected Dividend Yield (1)	N/A	N/A
Expected Stock Price Volatility (2)	37%	27%
Risk-Free Interest Rate (3)	2.4%	2.0%
Expected Life in Years (4)	5	5

(1) The dividend yield assumption is based on the history and expectation of the Company’s dividend payouts. The Company has not paid dividends on common stock in the past and is prohibited from paying dividends without the consent of its secured lender.

(2) The determination of expected stock price volatility for options granted was based on historical MTS common stock prices over a period commensurate with the expected life of the option.

(3) The risk-free interest rate is based on the yield of a U.S. treasury bond with a similar maturity as the expected life of the options.

(4) The expected life in years for options granted was based on the historical exercise patterns experienced by the Company.

NOTE 17 – EARNINGS PER SHARE

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

50

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

	Year Ended March 31,
	2009		2008
	(In Thousands, Except Earnings Per Share Amounts)
Numerator:
Net Income	$	2,481	$	2,055
Denominator:
Add:
Weighted Average Shares Outstanding - Basic		6,452		6,352
Effect of Dilutive Options and Warrants		193		355
Weighted Average Shares Outstanding - Diluted		6,645		6,707
Net Income Per Basic Common Share	$	0.38		0.32
Net Income Per Diluted Common Share	$	0.37	$	0.31

        The effect of 137,000 and 69,000 options were not included in the calculation of net income per diluted common share for fiscal years 2009 and 2008, respectively, as the effect would have been anti-dilutive.

NOTE 18 – COMMITMENTS AND CONTINGENCIES

        The Company has entered into certain agreements for the purchase of capital equipment, materials used to manufacture its products for resale and research and development expenditures.

        Capital equipment to be placed in service during the fiscal year ending March 31, 2010 is expected to be approximately $2,500,000.

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

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

51

NOTE 19 – SEGMENT INFORMATION

         The Company evaluates its business under three segments: (a) Consumables; (b) Packaging Automation; and (c) Medication Administration Systems. The Company has operations in the U.S., UK and Germany. Management also evaluates the Company’s business performance on a geographic basis based upon the country in which the sales originate. In computing operating profit for foreign subsidiaries, allocations of general corporate expenses have been made.

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

	Years Ended March 31,
	2009			2008
	(In Thousands, Except Percentages)
Net Sales
Consumables	$	53,948		$	50,415
Packaging Automation		21,710			7,161
Medication Administration Systems		617			233
Net Sales	$	76,275		$	57,809
Operating Profit (Loss) and Operating Margins
Consumables	$	7,259		$	7,438
		13.5	%		14.8	%
Packaging Automation		(1,093	)		(2,849	)
		(5.0	%)		(39.8	%)
Medication Administration Systems		(1,351	)		(594	)
		(219.0	%)		(254.9	%)
Corporate Expenses Not Allocated to Other Segments		(720	)		(567	)
Operating Profit	$	4,095		$	3,428
Operating Margin		5.4	%		5.9	%
Deductions from Operating Income
Interest Expense		479			637
Income Before Taxes	$	3,616		$	2,791

        Total assets classified by segment was as follows:

	March 31, 2009		March 31, 2008
	(In Thousands)
Consumables	$	17,096	$	18,597
Packaging Automation		9,422	$	13,267
Medication Administration Systems		1,623	$	1,632
Corporate and Unallocated		3,785		4,952
Total Assets	$	31,926	$	38,448

52

Geographic Information

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

	Years Ended March 31,
	2009			2008
	(In Thousands, Except Percentages)
Net Sales
U.S.	$	66,576		$	48,185
Non-U.S.		9,699			9,624
Total Net Sales	$	76,275		$	57,809
Operating Profit and Operating Margins
U.S.	$	3,041		$	2,173
Non-U.S.		1,054			1,255
Total Operating Profit	$	4,095		$	3,428
Total Operating Margin		5.4	%		5.9	%

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

	March 31, 2009		March 31, 2008
	(In Thousands)
U.S.	$	26,341	$	32,471
Non-U.S.		5,585		5,977
Total Assets	$	31,926	$	38,448

        Operating income is total sales and other operating income less operating expenses. Segment operating income does not include interest expense.

NOTE 20 – THIRD AND FOURTH QUARTER ADJUSTMENTS

Inventory Adjustments

        The Company performed a partial physical inventory of items related to the Packaging Automation and Medication Administration Systems segments at the end of the third quarter. In addition, the Company performed a complete physical inventory of all inventory items at the end of the fourth quarter. The Company determined that the quantities on hand, according to its inventory records, did not agree with the quantities counted. The losses were recorded in the periods in which they were identified. Approximately $260,000 was recorded during the third quarter ended December 31, 2008, and $444,000 was recorded during the fourth quarter ended March 31, 2009.

        The Company concluded that the physical inventory adjustments should be recorded in the respective quarters in which they were determined due to the fact that it is not possible to determine if these adjustments should have been made in prior periods.

53

Manufacturers Rebate

        The Company entered into an agreement with a third-party manufacturer related to manufacturing of OnDemand machines. The agreement provided that in the event the gross profit margin earned by the manufacturer exceeded certain amounts, the manufacturer would provide the Company with a rebate. During the second quarter, the manufacturer advised the Company that it believed a rebate may have been earned and estimated the amount of the rebate earned, at that point, to be approximately $100,000. The entire amount of the rebate earned by the Company ultimately was determined to be $150,000. The Company recorded $120,000 of the rebate in the third quarter and $30,000 of the rebate in the fourth quarter.

NOTE 21 – SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION

	2009		2008
	(In Thousands)
Supplemental Disclosure of Cash Flow Information:
Cash Paid for Interest	$	494	$	690
Cash Paid for Taxes	$	428	$	1,249

Non-Cash Activities

        During the fiscal year ended March 31, 2009 and 2008, the Company reclassified the following:

		2009		2008
		(In Thousands)
1.	Machine rentals from inventory to equipment	$	781	$	(12	)
2.	Product development costs to inventory	$	–	$	129
3.	Accrued contingent consideration for aquisitions	$	290	$	–

54

SIGNATURES

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

Dated:  June 19, 2009	MTS MEDICATION TECHNOLOGIES, INC.
	By:	/s/ Todd E. Siegel
		Todd E. Siegel, Chief Executive Officer

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

Signature	Title	Date
/s/ Todd E. Siegel	Chairman of the Board of Directors, President and Chief Executive Officer	June 19, 2009
Todd E. Siegel	(principal executive officer)
/s/ Michael P. Conroy	Chief Financial Officer, Vice President and Corporate Secretary	June 19, 2009
Michael P. Conroy	(principal financial officer)
/s/ Michael D. Stevenson	Chief Operating Officer	June 19, 2009
Michael D. Stevenson
/s/ James M. Conroy	Controller (principal accounting officer)	June 19, 2009
James M. Conroy
/s/ John Stanton	Director and Vice Chairman of the Board of Directors	June 19, 2009
John Stanton
/s/ Allen S. Braswell	Director	June 19, 2009
Allen S. Braswell
/s/ Irv I. Cohen	Director	June 19, 2009
Irv I. Cohen
/s/ David W. Kazarian	Director	June 19, 2009
David W. Kazarian
/s/ Chet Borgida	Director	June 19, 2009
Chet Borgida
/s/ Edgardo A. Mercadante	Director	June 19, 2009
Edgardo A. Mercadante

55

EXHIBIT INDEX

Exhibit No.	Description
3.1	Certificate of Incorporation and Amendments thereto. (1)
3.2	Certificate of Amendment of Certificate of Incorporation. (2)
3.3	Certificate of Amendment of Certificate of Incorporation. (3)
3.4	Certificate of Amendment of Certificate of Incorporation. (4)
3.5	Bylaws. (5)
4.1	Specimen Stock Certificate. (3)
4.2	Certificate of Designation of Series A Preferred Stock. (6)
10.1	Lease effective August 2, 1993 by and between C &C Park Building and Medical Technology Systems, Inc. for property located at 21540 Drake Road, Strongsville, Ohio. (7)
10.2	Form of Director/Officer Indemnification Agreement (7)
10.3	Stock Option Plan dated March 4, 1997 (8).
10.4	Industrial lease between Gateway Business Centre, Ltd. and Medical Technology Systems, Inc. dated April 13, 2004. (9)
10.5	Employment Agreement between MTS Medication Technologies, Inc. and Michael D. Stevenson dated April 1, 2004. (10)
10.6	Sub-Lease of the Property between BAF, Ltd. and MTS Medication Technologies, Ltd. dated February 22, 2006. (11)
10.7	Service Agreement between Angela Bond-Wallis and MTS Medication Technologies, Ltd. dated February 22, 2006. (11)
10.8	Service Agreement between David Woods and MTS Medication Technologies, Ltd. dated February 22, 2006. (11)
10.9	Service Agreement between CDH Consilio, GmbH and Dr. Anton F. Hasse dated February 6, 2007. (12)
10.1	Employment Agreement between MTS Medication Technologies, Inc. and Michael P. Conroy dated February 9, 2007. (12)
10.11	Agreement between Omnicare, Inc. and MTS dated May 7, 2007. (13)
10.12	MTS Medication Technologies Inc., 2007 Stock Incentive Plan (14)
10.13	Loan Agreement, dated December 19, 2007, between Wachovia Bank, National Association and MTS Medication Technologies, Inc. (15)
10.14	Promissory Note, dated December 19, 2007, between Wachovia Bank, National Association and MTS Medication Technologies, Inc. (15)
10.15	Security Agreement, dated December 19, 2007, between Wachovia Bank, National Association and MTS Medication Technologies, Inc. (15)
10.16	Service Agreement between Peter Williams and MTS Medication Technologies, Ltd. dated January 22, 2008. (16)
10.17	Employment Agreement between MTS Medication Technologies, Inc. and Todd E. Siegel, dated July 29, 2008. (17)
21.1	List of Subsidiaries. (*)
23.1	Consent of Grant Thornton LLP dated June 16, 2009. (*)
31.1	Certification by the Chief Executive Officer of MTS Medication Technologies, Inc. pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. (*)
31.2	Certification by the Chief Financial Officer of MTS Medication Technologies, Inc. pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. (*)
32.1	Certification by the Chief Executive Officer of MTS Medication Technologies, Inc. pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (*)
32.2	Certification by the Chief Financial Officer of MTS Medication Technologies, Inc. pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (*)

56

Exhibit No.	Description
(1)	Incorporated herein by reference to same Exhibit(s), respectively, Registration Statement on Form S-1 (File No. 33-17852) filed October 9, 1987.
(2)	Incorporated herein by reference to same Exhibit(s), respectively, Registration Statement on Form S-1 (File No. 33-40678) filed May 17, 1991.
(3)	Incorporated herein by reference to same Exhibit(s), respectively, Registration Statement on Form S-3 (File No. 333-112212) filed January 26, 2004.
(4)	Incorporated by reference to the Registrant’s Post-Effective Amendment No. 1 on Form S-8 (File No. 333-56384) filed November 5, 2007.
(5)	Incorporated herein by reference to Form 8-K filed June 15, 2007.
(6)	Incorporated herein by reference to Form 10-K (File No. 000-16594) for the year ending March 31, 2002.
(7)	Incorporated herein by reference to Form 10-K (File No. 000-16594) for the year ending March 31, 1995.
(8)	Incorporated herein by reference to the Registration Statement on Form S-8 (SEC File No. 333-56384) filed February 27, 2001.
(9)	Incorporated herein by reference to Form 10-K for the year ending March 31, 2004.
(10)	Incorporated herein by reference to Form 8-K filed September 24, 2004.
(11)	Incorporated herein by reference to Form 10-K for the year ending March 31, 2006.
(12)	Incorporated herein by reference to Form 10-Q for the quarter ending December 31, 2006.
(13)	Incorporated herein by reference to Form 10-Q for the quarter ending June 30, 2007.
(14)	Incorporated herein by reference to the Proxy Statement (File No. 001-31578) filed August 13, 2007.
(15)	Incorporated herein by reference to Form 8-K filed December 19, 2007.
(16)	Incorporated herein by reference to Form 10-Q for the quarter ending December 31, 2007.
(17)	Incorporated herein by reference to Form 8-K filed August 6, 2008.
(*)	Filed herein.

57

EXHIBIT 21.1

SUBSIDIARIES OF MTS MEDICATION TECHNOLOGIES, INC.

Name of Subsidiary	Jurisdiction of Organization
1.     MTS Packaging Systems, Inc.	Florida
2.     MTS Medication Technologies, Ltd.	United Kingdom
3.     MTS Medication Technologies GmbH	Germany

58

EXHIBIT 23.1

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

We have issued our report dated June 17, 2009, with respect to the consolidated financial statements, included in the Annual Report of MTS Medication Technologies, Inc. on Form 10-K for the year ended March 31, 2009. We hereby consent to the incorporation by reference of said report in the Registration Statements of MTS Medication Technologies, Inc. on Form S-3 (File No. 333-112212, effective February 6, 2004) and Forms S-8 (File No. 333-56384, effective November 5, 2007 and File No. 333-56384, effective March 1, 2001).

/s/ GRANT THORNTON LLP

Tampa, Florida

June 17, 2009

59

CERTIFICATIONS

EXHIBIT 31.1

I, Todd E. Siegel, certify that:

1. I have reviewed this annual report on Form 10-K of MTS Medication Technologies, Inc.;

2. Based on my knowledge, this 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)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

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

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

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

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

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent 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:   June 19, 2009	By:	/s/ Todd E. Siegel
		Todd E. Siegel
		President and Chief Executive Officer

60

CERTIFICATIONS

EXHIBIT 31.2

I, Michael P. Conroy, certify that:

1. I have reviewed this annual report on Form 10-K of MTS Medication Technologies, Inc.;

2. Based on my knowledge, this 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)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

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

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

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

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

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent 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:   June 19, 2009	By:	/s/ Michael P. Conroy
		Michael P. Conroy
		Vice President and Chief Financial Officer

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EXHIBIT 32.1

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

In connection with the Annual Report of MTS Medication Technologies, Inc. (the “Company”) on Form 10-K for the fiscal year ended March 31, 2009 as filed with the Securities and Exchange Commission on the date hereof (the “Form 10-K”), I, Todd E. Siegel, President and Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. §1350, as adopted pursuant to §906 of the Sarbanes-Oxley Act of 2002, that:

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

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

Dated:  June 19, 2009

/s/ Todd E. Siegel                                      

Todd E. Siegel

President and Chief Executive Officer

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EXHIBIT 32.2

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

In connection with the Annual Report of MTS Medication Technologies, Inc. (the “Company”) on Form 10-K for the fiscal year ended March 31, 2009 as filed with the Securities and Exchange Commission on the date hereof (the “Form 10-K”), I, Michael P. Conroy, Vice President and Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. §1350, as adopted pursuant to §906 of the Sarbanes-Oxley Act of 2002, that:

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

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

Dated:   June 19, 2009

/s/ Michael P. Conroy                                      

Michael P. Conroy

Vice President and Chief Financial Officer

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