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

FORM 10-Q

(Mark One)

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(dD) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended ~~December~~June 3130, ~~2008~~2009

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

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

Commission File Number: 001-31578

MTS Medication Technologies, Inc. (Exact ~~Name~~name of ~~Registrant~~registrant as ~~Specified~~specified in ~~Its~~its ~~Charter~~charter)

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

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

727-576-6311 (Registrant's ~~Telephone~~telephone ~~Number~~number, ~~Including~~including ~~Area~~area ~~Code~~code)

N/A (Former ~~Name~~name, ~~Former~~former ~~Address~~address and ~~Former~~former ~~Fiscal~~fiscal ~~Year~~year, if changed since last report)

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

Indicate by check mark whether the registrant 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 (§232.405 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 whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

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

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

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

	Class		Outstanding at ~~February~~August 1610, 2009
	Common Stock, $.01 par value per share		6,~~454~~473,~~005~~065

MTS MEDICATION TECHNOLOGIES, INC. AND SUBSIDIARIES

Index

			Page
Part I - Financial Information
	Item 1.	Financial Statements
		Consolidated Balance Sheets – December 31, 2008 (Unaudited) and March 31, 2008	1
		Consolidated Balance Sheets – June 30, 2009 and March 31, 2009 (Unaudited)	1
		Consolidated Statements of Income – Three and Nine Months Ended December 31, 2008 and 2007 (Unaudited)	2
		Consolidated Statements of Operations – Three Months Ended June 30, 2009 and 2008 (Unaudited)	2
		Consolidated Statement of Changes in Stockholders’ Equity and Comprehensive Income – Nine Months Ended December 31, 2008 (Unaudited)	3
		Consolidated Statement of Changes in Stockholders’ Equity and Comprehensive Income – Three Months Ended June 30, 2009 (Unaudited)	3
		Consolidated Statements of Cash Flows – Nine Months Ended December 31, 2008 and 2007 (Unaudited)	4
		Consolidated Statements of Cash Flows – Three Months Ended June 30, 2009 and 2008 (Unaudited)	4
		Notes to Consolidated Financial Statements (Unaudited)	5 - 1316
	Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	1417 - 2223
	Item 3.	Quantitative and Qualitative Disclosures About Market Risk	2223
	Item 4.	Controls and Procedures	23
Part II - Other Information
	Item 1.	Legal Proceedings	2425
	Item 1A.	Risk Factors	2425
	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	2526
	Item 3.	Default Upon Senior Securities	2526
	Item 4.	Submission of Matters to a Vote of Security Holders	2526
	Item 5.	Other Information	2526
	Item 6.	Exhibits	2627
	Signatures		2728
	Index to Exhibits		2829
	Certifications		2930 - 3234

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Forward Looking Statement

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

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

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

our ability to compete in a very competitive market;

the limited number of customers that we depend on for our net sales;

the additional risks inherent in our international operations;

the small number of suppliers that we depend on for raw materials;

our reliance on a single facility in which we manufacture a majority of our products;

our reliance on short-term contracts with most of our clients;

intellectual property rights and litigation;

risks in product and technology development;

the potential adverse effect of governmental regulation on our business, as well as our customers' businesses;

the changing U.S. healthcare environment; and

other factors that we may not have currently identified or quantified.

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

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PARTMTS 1MEDICATION -TECHNOLOGIES, FINANCIALINC. INFORMATIONAND SUBSIDIARIESCONSOLIDATED BALANCE SHEETS (In Thousands) (Unaudited)

~~Item 1. Financial Statements~~ASSETS

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

	June 30, 2009		March 31, 2009


Current Assets:
Cash	$	830	$	493
Restricted Cash		37		79
Accounts Receivable, Net		8,596		8,567
Inventories, Net		9,487		10,001
Prepaids and Other		827		708
Deferred Tax Asset		393		393

Total Current Assets		20,170		20,241
Property and Equipment, Net		7,877		8,127

Goodwill		1,324		1,196
Other Intangible Assets, Net		580		531
Other Assets, Net		1,719		1,831

Total Assets	$	31,670	$	31,926

ASSETS LIABILITIES AND STOCKHOLDERS' EQUITY

	December 31, 2008			March 31, 2008
Current Liabilities:
	(Unaudited)
Accounts Payable and Accrued Liabilities	$	6,022		$	6,170
Current Assets:
Current Maturities of Long-Term Debt		9			19
Cash	$	189		$	662
Customer Deposits		273			1,330
Restricted Cash		2			158
Total Current Liabilities		6,304			7,519
Accounts Receivable, Net		10,235			8,213
Long-Term Debt, Less Current Maturities		8,666			8,196
Inventories, Net		10,111			14,504
Other Liabilities		1,174			1,211
Prepaids and Other		1,418			2,528
Deferred Tax Liability, Net		654			612
Deferred Tax Asset		497			495
Total Liabilities		16,798			17,538
Total Current Assets		22,452			26,560
Stockholders' Equity:
Property and Equipment, Net		8,357			7,746
Common Stock		65			65
Goodwill		894			1,161
Capital In Excess of Par Value		10,622			10,500
Other Intangible Assets, Net		567			783
Accumulated Other Comprehensive Loss		(279	)		(674	)
Other Assets, Net		1,943			2,198
Retained Earnings		4,792			4,825
Total Assets	$	34,213		$	38,448
Treasury Stock		(328	)		(328	)
Total Stockholders' Equity		14,872			14,388
Total Liabilities and Stockholders' Equity	$	31,670		$	31,926

~~LIABILITIES~~The ~~AND~~accompanying notes ~~STOCKHOLDERS'~~are ~~EQUITY~~ an integral part of these financial statements.

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

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

1MTS MEDICATION TECHNOLOGIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (In Thousands; Except Earnings Per Share Amounts) (Unaudited)

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	Three Months Ended June 30,

	2009			2008


Net Sales	$	17,359		$	19,366

Costs and Expenses:
Cost of Sales		11,179			13,333
Selling, General and Administrative		5,133			4,525
Depreciation and Amortization		787			795

Total Costs and Expenses		17,099			18,653

Operating Income		260			713

Interest Expense		90			126

Income Before Taxes		170			587

Income Tax Expense		203			213

Net (Loss) Income	$	(33	)	$	374

Net (Loss) Income Per Common Share - Basic	$	(0.01	)	$	0.06

Net Income Per Common Share - Diluted	$	(0.01	)	$	0.06

Weighted Average Shares Outstanding - Basic		6,473			6,449

Weighted Average Shares Outstanding - Diluted		6,473			6,778

~~MTS~~The ~~MEDICATION~~accompanying ~~TECHNOLOGIES,~~notes are ~~INC.~~an ~~AND~~integral ~~SUBSIDIARIESCONSOLIDATED~~part ~~STATEMENTS~~of OFthese ~~INCOME~~financial ~~(In~~statements. ~~Thousands; Except Earnings Per Share Amounts)(Unaudited)~~

	Three Months Ended December 31,				Nine Months Ended December 31,
	2008		2007		2008		2007
Net Sales	$	19,234	$	14,720	$	59,302	$	43,658
Costs and Expenses:
Cost of Sales		13,042		9,075		40,416		26,691
Selling, General and Administrative		4,545		3,738		13,933		11,361
Depreciation and Amortization		677		719		2,264		1,919
Total Costs and Expenses		18,264		13,532		56,613		39,971
Operating Profit		970		1,188		2,689		3,687
Interest Expense		112		184		376		501
Income Before Taxes		858		1,004		2,313		3,186
Income Tax Expense		171		393		697		1,267
Net Income		687		611		1,616		1,919
Net Income Per Basic Common Share	$	0.11	$	0.10	$	0.25	$	0.30
Net Income Per Diluted Common Share	$	0.10	$	0.09	$	0.24	$	0.28
Weighted Average Shares Outstanding - Basic		6,454		6,393		6,454		6,324
Weighted Average Shares Outstanding - Diluted		6,600		6,809		6,672		6,763

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

MTS 2MEDICATION TECHNOLOGIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME THREE MONTHS ENDED JUNE 30, 2009 (In Thousands; Except Shares)(Unaudited)

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	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, 2009	6,454,065	$	65	$	10,500	$	(674	)	$	4,825		(60	)	$	(328	)	$	14,388
Stock Grants Issued	19,000		–		67													67
Share-Based Compensation					55													55
Comprehensive Income:
Net Loss										(33	)							(33	)
Interest Rate Swaps, Net of Tax of $15							25											25
Foreign Currency Translation Adjustment							370											370

Total Comprehensive Income																		362

Balance June 30, 2009	6,473,065	$	65	$	10,622	$	(279	)	$	4,792		(60	)	$	(328	)	$	14,872

~~MTS~~3 MEDICATION TECHNOLOGIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME NINE MONTHS ENDED DECEMBER 31, 2008 (In Thousands; Except Shares)(Unaudited)

	Common Stock					Accumulated
	$.01 Par Value			Capital In		Other										Total
				Excess of		Comprehensive			Retained		Treasury		Treasury			Stockholders'
	Shares	Amount		Par Value		Income (Loss)			Earnings		Shares		Stock			Equity
Balance March 31, 2008	6,444,065	$	64	$	10,137	$	374		$	2,344	(60	)	$	(328	)	$	12,591
Stock Grants Issued	5,000				57												57
Share-Based Compensation					176												176
Exercise of Stock Options and Warrants	5,000				9												9
Tax Benefit of Stock Option Exercises					43												43
Comprehensive Income:
Net Income										1,616							1,616
Mark to Market of Interest Rate Swaps, Net of Tax							(153	)									(153	)
Foreign Currency Translation Adjustment							(820	)									(820	)
Total Comprehensive Income																	643
Balance December 31, 2008	6,454,065	$	64	$	10,422	$	(599	)	$	3,960	(60	)	$	(328	)	$	13,519

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TheMTS accompanyingMEDICATION notesTECHNOLOGIES, areINC. an integralAND partSUBSIDIARIES ofCONSOLIDATED thisSTATEMENTS financialOF statement.CASH FLOWS (In Thousands) (Unaudited)

	Three Months Ended June 30,

	2009			2008


Operating Activities
Net (Loss) Income	$	(33	)	$	374
Adjustments to Reconcile Net (Loss) Income to Net Cash Provided By Operating Activities:
Depreciation and Amortization		779			786
Write-off of deferred financing costs		–			62
Tax Benefit of Options Exercised		–			(37	)
Deferred Income Taxes		2			20
Share-Based Compensation		122			82
Changes In Operating Assets and Liabilities:
Restricted Cash		42			(262	)
Accounts Receivable		182			(91	)
Inventories		763			1,501
Prepaids and Other		(236	)		(408	)
Accounts Payable and Other Accrued Liabilities		(27	)		(958	)
Customer Deposits		(1,057	)		11

Total Adjustments		570			706

Net Cash Provided By Operating Activities		537			1,080

Investing Activities
Expended For Property and Equipment		(339	)		(1,157	)
Expended For Product Development		(13	)		(86	)
Expended For Additional Consideration of Business Acquisition		(304	)		–

Net Cash Used By Investing Activities		(656	)		(1,243	)

Financing Activities
Payments On Notes Payable and Term Loans		(13	)		(26	)
Payments On Related Party Note Payable		–			(85	)
Paydowns on Revolving Line of Credit		(5,946	)		(5,504	)
Advances on Revolving Line of Credit		6,416			5,578
Tax Benefit of Options Exercised		–			37

Net Cash Provided By Financing Activities		457			–

Effect of Exchange Rate Changes On Cash		(1	)		32

Net Increase (Decrease) In Cash		337			(131	)
Cash at Beginning of Period		493			662

Cash at End of Period	$	830		$	531

Supplemental Disclosure of Cash Flow Information
Cash Paid for Interest	$	91		$	133
Cash Paid for Taxes	$	151		$	24

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

~~MTS~~4 ~~MEDICATION TECHNOLOGIES, INC. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF CASH FLOWS (In Thousands)(Unaudited)~~

	Nine Months Ended December 31,
	2008			2007
Operating Activities
Net Income	$	1,616		$	1,919
Adjustments to Reconcile Net Income to Net Cash
Provided by Operating Activities:
Depreciation and Amortization		2,241			1,983
Write-off of Deferred Financing Costs		62			–
Tax Benefit of Options Exercised		(43	)		(147	)
Deferred Income Taxes		(264	)		(74	)
Loss on Disposal of Patents and Equipment		53			–
Share-Based Compensation		233			145
(Increase) Decrease in:
Restricted Cash		156			(751	)
Accounts Receivable		(2,477	)		1,427
Inventories		3,773			(5,926	)
Prepaids and Other		1,069			(1,078	)
Increase (Decrease) in:
Accounts Payable and Accrued Liabilities		564			757
Customer Deposits		(2,753	)		3,461
Total Adjustments		2,614			(203	)
Net Cash Provided by Operating Activities		4,230			1,716
Investing Activities
Expended for Property and Equipment		(2,402	)		(3,856	)
Expended for Product Development		(180	)		(536	)
Expended for Patents and Other Assets		(47	)		–
Net Cash Used by Investing Activities		(2,629	)		(4,392	)
Financing Activities
Payments on Notes Payable and Long-Term Debt		(54	)		(1,894	)
Payments on Related Party Note Payable		(106	)		(244	)
Paydowns on Revolving Line of Credit		(19,342	)		(40,434	)
Advances on Revolving Line of Credit		17,187			55,300
Repayment of Previous Credit Facility		(153	)		(8,773	)
Tax Benefit of Options Exercised		43			147
Proceeds from Exercise of Options and Warrants		9			860
Expended on Financing Costs		(25	)		(7	)
Net Cash (Used) Provided by Financing Activities		(2,441	)		4,955
Effect of Exchange Rate Changes on Cash		367			(72	)
Net (Decrease) Increase in Cash		(473	)		2,207
Cash at Beginning of Period		662			292
Cash at End of Period	$	189		$	2,499
Supplemental Disclosure of Cash Flow Information
Cash Paid for Interest	$	436		$	549
Cash Paid for Taxes		407			1,072
Non-Cash Activities:
Reclassified machine rentals from Inventory to Equipment		430			9
Provision for Uncertain Tax Positions		–			700
Reclassified costs from product development to inventory		–			127

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TheMTS accompanyingMEDICATION notes areTECHNOLOGIES, anINC. integralAND partSUBSIDIARIESNOTES ofTO theseCONSOLIDATED financialFINANCIAL statements. STATEMENTS FOR THE THREE MONTHS ENDED JUNE 30, 2009 (Unaudited)

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

NOTE 1 – BASIS OF PRESENTATION

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

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

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

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the U.S. (“US U.S. GAAP”) for interim financial information and with the instructions to Form 10-Q and Rule 10 of Regulation S-X. Accordingly, they do not include all of the information and notes required by USU.S. GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three- ~~and nine-~~month ~~periods~~period ended ~~December~~June 3130, ~~2008~~2009 are not necessarily indicative of the results that may be expected for future ~~the~~quarters ~~fourth quarter~~ in the fiscal year ending March 31, ~~2009~~2010. The unaudited consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s annual report on Form 10-K for the fiscal year ended March 31, ~~2008~~2009.

NOTE 2 – RESTRICTED CASH

In May 2007, the Company entered into an agreement to provide sixteen OnDemand® Express II™ and eight AccuFlex® machines to its largest customer over an ~~eighteen-~~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. AsThe ofCompany ~~December~~has ~~31,~~used ~~2008,~~these ~~the~~cash ~~Company~~deposits ~~has~~to ~~deposits~~pay ofan ~~approximately~~outsourced ~~$1.3~~manufacturer, ~~million~~and ~~towards~~to ~~machines delivered,~~pay ~~but~~costs ~~not~~and expenses ~~accepted.~~related ~~This~~to ~~represents~~the amanufacture ~~decrease~~and installation of ~~approximately~~the $1machines.0 ~~million~~The ~~from~~Company holds the ~~previous~~remaining ~~quarter,~~cash ~~due~~in toa ~~the~~separate ~~acceptance~~bank ofaccount ~~five~~to ~~OnDemand~~be ~~machines.~~used to ~~The~~fund ~~Company~~future ~~has~~costs ~~used~~associated ~~these~~with ~~cash~~the ~~deposits~~manufacture toof ~~pay~~the ~~for~~machines. The ~~deposits~~unused tobalance anwas approximately ~~outsourced manufacturer~~$37,000 and to$79,000 ~~pay costs~~as ~~and~~of ~~expenses~~June ~~related~~30, to2009 ~~the manufacture~~ and ~~installation~~March of31, ~~the~~2009, ~~machines~~respectively.

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

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

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

NOTE 3 – INVENTORIES

The components of inventory consist of the following:

	December 31, 2008			March 31, 2008
	June 30, 2009			March 31, 2009
	(In Thousands)
Raw Material	$	4,~~374~~057		$	34,~~894~~328
Work in Process		21,~~159~~378			41,~~280~~282
Finished Goods		4,~~102~~638			65,~~946~~003
Less: Inventory Valuation Allowance		(~~524~~586	)		(~~616~~612	)
	$	109,~~111~~487		$	1410,~~504~~001

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

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

	Three Months Ended						Nine Months Ended
	Three Months Ended June 30,
	December 31, 2008			December 31, 2007			December 31, 2008		December 31, 2007
	2009				2008
	(In Thousands; Except Per Share Amounts)
	(In Thousands, Except Per Share Amounts)
Numerator:
Net Income	$	687		$	611		$	1,616	$	1,919
Net (Loss) Income	$	(33	)		$	374
Denominator:
Weighted Average Shares Outstanding - Basic		6,~~454~~473			~~6,393~~	6,449		~~6,454~~		~~6,324~~
Weighted Average Shares Outstanding - Diluted		6,600			6,809			6,672		6,763
Add: Effect of Dilutive Warrants and Options		–				329
New Income Per Common Share — Basic	$	0.11		$	0.10		$	0.25	$	0.30
Weighted Average Shares Outstanding - Diluted		6,473				6,778
Net Income Per Common Share — Diluted	$	0.10		$	0.09		$	0.24	$	0.28
Net Income Per Common Share - Basic	$	(0.01	)			0.06
Net Income Per Common Share - Diluted	$	(0.01	)		$	0.06

The effect of 834,496 and 77,500 options were not included in the calculation of net income per diluted common share for the three months ended June 30, 2009 and 2008, respectively, as the effect would have been anti-dilutive.

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

The Company awards share-based compensation as an incentive for employees to contribute to the Company’s long-term success. Historically, the Company has issued options and restricted stock under its Stock Incentive Plan (the “Stock Plan”). Share-based compensation is recognized based on the fair value of the awards in accordance with SFAS No. 123R (revised 2004) Share-Based Payment (“SFAS No. 123R”). Compensation expense is recognized over the requisite service period on a straight-line basis. As of ~~December~~June 3130, ~~2008~~2009, options to purchase ~~843~~834,496 shares were outstanding in the aggregate under the Stock Plan and the Company’s previous stock incentive plan, and there were ~~307~~312,754 options available for issuance under the Stock Plan.

Restricted Stock Awards — The Company grants restricted stock to certain executive employees in exchange for services performed, which is based on the terms of their respective employment agreements. The restricted shares issued are valued based on the value of the Company’s common stock on the date of grant. During the ~~nine~~three months ended ~~December~~June 3130, ~~2008 and 2007~~2009, the Company issued 5,000 and 14,000 shares of restricted common stock to its Chief Operating Officer and European Managing Director, respectively, as additional compensation under ~~his~~their employment ~~agreement~~agreements. The Company recorded share-based compensation expense in the amount of approximately $067,450 ~~and~~during ~~$57,000~~the ~~($35~~three months ended June 30,~~000~~ ~~net~~2009 based on the fair value of ~~tax)~~the ~~during~~shares at the ~~three~~date ~~and~~of ~~nine~~grant. During the three months ended ~~December~~June 3130, 2008, ~~and~~the $0Company ~~and~~issued ~~$56~~5,000 ~~($34,000~~shares ~~net~~of restricted stock to its Chief Operating Officer as additional compensation under his employment agreement. The Company recorded share-based compensation expense in the amount of ~~tax)~~$57,000 during the three ~~and nine~~ months ended ~~December~~June 3130, ~~2007~~2008, based on the fair value of the shares at the date of grant.

Stock Options ~~and~~— ~~Warrants –~~ The Company grants stock options to employees that allow them to purchase shares of the Company’s common stock. Options are also granted to outside members of the Board of Directors of the Company. The Company determines the fair value of stock options at the date of grant using the Black-Scholes valuation model. Options generally vest immediately; however, the Company has historically granted options that vest over three- to five-year periods. Awards generally expire ~~ten~~10 years after the date of grant. The Company issues new shares upon the exercise of stock options ~~and warrants~~. ~~The~~No ~~Company issued 10,000 and 221,246~~ options towere ~~employees~~granted ~~and members of the Board of Directors~~ during the three ~~and nine~~ months ended ~~December~~June 3130, ~~2008.~~2009 ~~The options had a fair value of approximately $13,000~~ and ~~$458,000, respectively~~2008.

~~The~~As ~~Company has 900 warrants outstanding at an exercise price~~ of ~~$1.88~~June ~~per share as of December 31~~30, ~~2008~~2009, ~~which~~the ~~expire~~Company inhas ~~August~~unrecognized ~~2009.~~compensation ~~These~~cost ~~warrants~~of ~~were~~approximately ~~issued~~$387,000 expected into ~~1998~~be ~~and~~recognized ~~no new~~over ~~warrants~~the ~~have~~next ~~been~~two ~~issued~~years ~~since~~for ~~that~~share-based ~~time~~awards.

~~During~~A ~~the~~summary ~~three~~of ~~and~~the ~~nine~~changes ~~months~~in ~~ended~~stock ~~December~~options ~~31,~~outstanding ~~2008,~~during the ~~Company~~three ~~received~~months ~~approximately~~ended ~~$0 and~~June $930,~~000~~ 2009 inis ~~cash~~as ~~from~~follows: ~~the exercise of 5,000 warrants.~~

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

								Weighted Average
	Number of		Range of					Exercise Price
	Shares		Exercise Prices					Per Share


Outstanding at March 31, 2009	835,496		$	1.45	-	$	13.70	$	5.24
Options Exercised	–				-				–
Options Expired	(1,000	)				$	2.00	$	2.00

Outstanding at June 30, 2009	834,496		$	1.45	-	$	13.70	$	5.24

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

								Weighted Average
	Number of		Range of					Exercise Price
	Shares		Exercise Prices					Per Share
Outstanding at March 31, 2008	625,250		$	1.45	-	$	13.70	$	5.09
Options Granted	221,246		$	4.05	-	$	5.85	$	5.75
Options Expired/Forfeited	(3,000	)				$	12.19	$	12.19
Outstanding at December 31, 2008	843,496		$	1.45	-	$	13.70	$	5.24

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Outstanding Options

		Weighted Average
Range of	Number	Remaining Contractual	Weighted Average
Exercise Prices	Outstanding	Life (Years)	Exercise Price
$1.45 - $2.30	~~233~~232,~~500~~000	21.27	$1.5554
$2.50 - $4.47	79,500	4.94	$3.82
$5.24 - $13.70	530,496	8.0	$7.08
$5.60 - $13.70	522,996	7.5	$7.10
	843,496
	834,496

Exercisable Options

		Weighted Average
Range of	Number	Remaining Contractual	Weighted Average
Exercise Prices	Outstanding	Life (Years)	Exercise Price
$1.45 - $2.30	~~233~~232,~~500~~000	21.27	$1.5554
$2.50 - $4.47	69,500	43.27	$3.79
$5.60 - $13.70	271,591	6.8	$6.96
$5.60 - $12.45	271,093	6.3	$7.00
	574,591
	572,593

The options outstanding at ~~December~~June 3130, ~~2008~~2009 expire on various dates through November 2018.

At ~~December~~June 3130, ~~2008~~2009, exercisable options had no aggregate intrinsic ~~value. At December 31, 2008, exercisable warrants had aggregate intrinsic~~ values ~~of approximately $3,300~~.

NOTE 6 – LONG-TERM DEBT

	December 31, 2008			March 31, 2008
	June 30, 2009			March 31, 2009
	(In Thousands)
Reducing revolving line of credit due in November 2010 with interest payable monthly at LIBOR plus 1.75% (2.19% at December 31, 2008). (See Note 7.)	$	9,509		$	11,664
Reducing revolving line of credit due in November 2010 with interest payable monthly at LIBOR plus 1.75% (2.07% at June 30, 2009) for approximately $1.7 million and 4.7% for approximately $7.0 million.	$	8,666		$	8,196
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%.		9			19
Capital leases expiring at various times through fiscal year 2010 at interest rates ranging from 6.29% to 9.5%.		31			101
Total Long-Term Debt		8,675			8,215
Total Long-Term Debt		9,540			11,871
Less Current Portion		(9	)		(19	)
Less Current Portion (including $0 and $106,000, respectively, due to a related party).		(31	)		(180	)
Long-Term Debt Due After One Year	$	8,666		$	8,196
Long-Term Debt Due After One Year	$	9,509		$	11,691

The Company has a reducing revolving credit facility (the “Credit Facility”) with a maximum borrowing limit of up to $12.0 million at June 30, 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.

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The ~~Company~~ ~~has~~Credit aFacility ~~reducing~~contains ~~revolving~~provisions ~~credit~~that ~~facility~~require (the ~~“Credit~~Company ~~Facility”)~~to ~~with~~maintain acertain ~~maximum~~financial ~~borrowing~~ratios ~~limit~~such ofas, up“Debt toService ~~$12.7 million at December 31~~Coverage”, ~~2008.~~“Funded ~~Availability~~Debt ~~under~~to ~~the~~EBITDA” ~~Credit~~and ~~Facility~~“Total isLiabilities ~~permanently~~to ~~reduced~~Tangible byNet ~~$335,000~~Worth”. ~~each~~The ~~January~~Company ~~31,~~was ~~April~~in ~~30,~~compliance ~~July~~with all 31covenants ~~and~~as ~~October 31~~of ~~through~~June ~~maturity~~30, ~~in 2010~~2009.

The Credit Facility ~~contains~~is ~~provisions~~collateralized ~~that~~by ~~require~~a first security interest in all of the assets of the Company toand ~~maintain~~a ~~certain~~pledge ~~financial ratios~~of ~~such~~100% ~~as,~~of ~~“Debt~~the ~~Service~~shares ~~Coverage”,~~of ~~“Funded~~its ~~Debt~~domestic towholly-owned ~~EBITDA”~~subsidiaries, and ~~“Total~~65% ~~Liabilities~~of toits ~~Tangible~~foreign ~~Net~~wholly-owned ~~Worth”~~subsidiaries. ~~The~~There ~~Company~~ was inapproximately ~~compliance~~$8.7 ~~with~~million ~~all~~borrowed ~~covenants~~and asan ofadditional ~~December~~$3.3 ~~31,~~million ~~2008~~available under the Credit Facility at June 30, 2009.

The CreditNOTE Facility7 is– collateralizedOTHER by a first security interest in all of the assets of the Company and a pledge of 100% of the shares of its domestic wholly-owned subsidiaries, and 65% of its foreign wholly-owned subsidiaries. There was approximately $9.5 million borrowed and an additional $3.2 million available under the Credit Facility at December 31, 2008. ASSETS

~~NOTE~~ Other assets 7consist –of ~~FINANCIAL~~the ~~DERIVATIVES~~following:

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

	Amortization Period	June 30,			March 31,
	(Years)	2009			2009

		(In Thousands)

Product Development	3	$	4,383		$	4,366
Less: Accumulated Amortization			(3,211	)		(3,098	)

		$	1,172		$	1,268


Patents	5 – 17	$	1,761		$	1,747
Less: Accumulated Amortization			(1,272	)		(1,263	)

		$	489		$	484


Financing Costs	3 – 5	$	42		$	102
Less: Accumulated Amortization			(9	)		(67	)

		$	33		$	35


Other		$	25		$	44

Total Other Assets, Net		$	1,719		$	1,831

~~NOTE~~ All 8of the –Company’s ~~OTHER~~other ~~ASSETS~~assets are pledged as collateral on bank notes under the Credit Facility.

Other assetsNOTE consist8 of– theRECENT following:ACCOUNTING PRONOUNCEMENTS

	Amortization Period	December 31,			March 31,
	(Years)	2008			2008
		(In Thousands)
Product Development	3 – 5	$	4,406		$	4,226
Less: Accumulated Amortization			(3,059	)		(2,774	)
		$	1,347		$	1,452
Patents	5 – 17	$	1,770		$	2,712
Less: Accumulated Amortization			(1,257	)		(2,093	)
		$	513		$	619
Financing Costs	3 – 5	$	102		$	122
Less: Accumulated Amortization and Write Offs			(66	)		(44	)
		$	36		$	78
Other		$	47		$	49
Total Other Assets, Net		$	1,943		$	2,198

In June 2009, the FASB issued SFAS No. 168, The “FASB Accounting Standards Codification” and the Hierarchy of Generally Accepted Accounting Principles. This standard replaces SFAS No. 162, The Hierarchy of Generally Accepted Accounting Principles, and establishes only two levels of U.S. generally accepted accounting principles (“GAAP”), authoritative and nonauthoritative. The FASB Accounting Standards Codification (the “Codification”) will become the source of authoritative, nongovernmental GAAP, except for rules and interpretive releases of the Securities and Exchange Commission (“SEC”), which are sources of authoritative GAAP for SEC registrants. All other nongrandfathered, non-SEC accounting literature not included in the Codification will become nonauthoritative. This standard is effective for financial statements for interim or annual reporting periods ending after September 15, 2009. The Company will begin to use the new guidelines and numbering system prescribed by the Codification when referring to GAAP in the second quarter of fiscal 2010. As the Codification was not intended to change or alter existing GAAP, it will not have any impact on our consolidated financial statements.

~~All of~~ ~~the Company’s other assets are pledged as collateral on bank notes under the Credit Facility.~~ 9

9Table of Contents

~~Table~~ In May 2009, the FSAB issued SFAS No. 165, Subsequent Events (“SFAS No. 165”). SFAS No. 165 is intended to establish general standards of ~~Contents~~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 evaluated all subsequent events through August 10, 2009.

~~NOTE~~ In March 2008, 9the –FASB ~~RECENT~~issued ~~ACCOUNTING~~SFAS ~~PRONOUNCEMENTS~~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 adopted the provisions of SFAS No. 133 on April 1, 2009 and included the additional disclosures in Note 11, Derivative Instruments, which are provided on a prospective basis.

In ~~March~~December ~~2008~~2007, the FASB issued SFAS No. ~~161,~~141 ~~Disclosures~~(revised ~~about~~2007), ~~Derivative~~Business ~~Instruments~~Combinations ~~and Hedging Activities, an amendment of SFAS No. 133~~ (“SFAS No. ~~161~~ 141R”). SFAS No. 141R ~~161~~significantly ischanges ~~intended~~the accounting ~~to improve financial standards~~ for ~~derivative~~business ~~instruments and~~combinations ~~hedging~~in ~~activities~~a bynumber ~~requiring~~of ~~enhanced~~areas ~~disclosures~~including tothe ~~enable~~treatment ~~investors to better~~of ~~understand~~contingent ~~the~~consideration, ~~effect~~preacquisition ~~these~~contingencies, ~~instruments~~transaction ~~and activities have on an entity’s financial position~~costs, ~~financial performance and cash flows. Entities are required to provide enhanced~~in-process ~~disclosures~~research ~~about: how~~ and ~~why~~development ~~an entity uses derivative instruments; how derivative instruments~~ and ~~related~~restructuring ~~hedged~~costs. ~~items~~In ~~are~~addition, ~~accounted for~~ under SFAS No. ~~133~~141R, changes ~~and~~in ~~its related~~an ~~interpretations;~~acquired ~~and~~entity’s ~~how~~deferred ~~derivative~~tax ~~instruments~~assets and ~~related~~uncertain ~~hedged~~tax ~~items~~positions ~~affect an~~after ~~entity’s~~the ~~financial~~measurement ~~position,~~period ~~financial~~will ~~performance~~impact ~~and~~income ~~cash~~tax ~~flows~~expense. SFAS No. ~~161~~ 141R is effective for ~~financial statements issued for~~ fiscal years ~~and interim periods~~ beginning after ~~November~~December 15, 2008. The Company ~~will~~adopted ~~adopt~~ SFAS No. ~~161~~141R ~~beginning in~~on ~~the~~April ~~fourth~~1, ~~quarter of fiscal year~~ 2009. The ~~Company is evaluating the impact that the~~ adoption of SFAS No. ~~161~~ ~~will~~141 ~~have~~had no material effect on ~~its~~the Company’s consolidated financial statements.

In ~~December~~February ~~2007~~2008, the FASB issued ~~SFAS~~FASB Staff Position No. ~~141(revised~~157-1 ~~2007~~(“FSP 157-1”), ~~Business Combinations~~and ~~(“SFAS~~FASB Staff Position No. 157-2 ~~141R~~(“FSP 157-2”)., which, respectively, removed leasing transactions from the scope of SFAS No. ~~141R~~157 ~~significantly changes the~~and ~~accounting~~deferred for ~~business~~one ~~combinations~~year inthe aeffective ~~number~~date offor ~~areas~~SFAS ~~including~~No. 157 ~~the~~Fair ~~treatment~~Value ofMeasurements ~~contingent~~“SFAS ~~consideration,~~No ~~preacquisition~~157”)as ~~contingencies,~~it ~~transaction~~applies ~~costs,~~to ~~in-process research~~certain ~~and~~nonfinancial ~~development~~assets and ~~restructuring costs~~ liabilities. The Indeferral ~~addition,~~provided ~~under~~by ~~SFAS~~FSP ~~No. 141R, changes~~157-2 inapplies anto ~~acquired~~such ~~entity’s~~items ~~deferred~~as ~~tax~~ nonfinancial assets and ~~uncertain~~liabilities ~~tax~~initially ~~positions~~measured ~~after the~~at ~~measurement~~fair ~~period~~value ~~will~~in ~~impact~~a ~~income~~business ~~tax~~combination ~~expense.~~(but ~~SFAS~~not measured ~~No. 141R~~at isfair ~~effective~~value ~~for fiscal~~in ~~years~~subsequent ~~beginning~~periods) ~~after~~and ~~December 15,~~nonfinancial ~~2008.~~long-lived ~~The~~asset ~~Company~~groups measured ~~will~~at ~~adopt~~fair ~~SFAS No. 141R~~value ~~beginning~~for inan ~~the~~impairment ~~first~~assessment. The ~~quarter~~Company ofadopted ~~fiscal~~FSP ~~year~~157-2 on ~~2010~~April 1, ~~which~~2009. ~~will~~The ~~change~~adoption ~~the accounting~~of ~~treatment~~FSP ~~for~~157-2 ~~business~~had ~~combinations~~no material effect on athe ~~prospective~~Company’s consolidated ~~basis~~financial statements.

In September 2006,NOTE the9 FASB– issuedSEGMENT SFAS No. 157, Fair Value Measurements (“SFAS No, 157”). SFAS No. 157 establishes a single definition of fair value and a framework for measuring fair value, sets out a fair value hierarchy to be used to classify the source of information used in fair value measurements, and requires new disclosures of assets and liabilities measured at fair value based on their level in the hierarchy. This statement applies under other accounting pronouncements that require or permit fair value measurements. In February 2008, the FASB issued FSAB Staff Position No. 157-1 (“FSP 157-1”) and FASB Staff Position No. 157-2 (“FSP 157-2”), which, respectively, removed leasing transactions from the scope of SFAS No. 157 and deferred for one year the effective date for SFAS No. 157 as it applies to certain nonfinancial assets and liabilities. On April 1, 2008, the Company adopted, on a prospective basis, the SFAS No. 157 definition of fair value and became subject to the new disclosure requirements (excluding FSP 157-2) with respect to fair value measurements of (a) nonfinancial assets and liabilities that are recognized or disclosed at fair value in its financial statements on a recurring basis (at least annually) and (b) all financial assets and liabilities. The adoption did not impact the consolidated financial position or results of operations. The additional disclosures required by SFAS No. 157 are included in Note 11, Fair Value of Financial Instruments. INFORMATION

The ~~deferral~~Company ~~provided~~evaluates byits ~~FSP~~business ~~157-2~~under ~~applies~~three tosegments: ~~such~~(a) ~~items~~Consumables; as(b) ~~nonfinancial~~Packaging Automation; ~~assets~~ and (c) Medication Administration Systems. The Consumables Segment primarily ~~liabilities~~consists ~~initially~~of ~~measured~~the atmanufacturing ~~fair~~of ~~value~~punch incards aand ~~business~~blisters ~~combination~~and ~~(but~~other ~~not~~consumable ~~measured~~medication atpackaging. ~~fair~~The ~~value~~Packaging inAutomation ~~subsequent~~segment ~~periods)~~consists ~~and~~of ~~nonfinancial~~products ~~long-lived~~that ~~asset~~provide ~~groups~~customers with ~~measured~~the atability to package medication into the Company’s consumable products in an ~~fair~~efficient ~~value~~manner. ~~for~~This type of automation allows the packaging of medication in either a pre-pack or an ~~impairment~~on-demand ~~assessment~~manner. The ~~Company~~Medication isAdministration ~~evaluating~~Systems ~~the~~segment ~~impact~~consists ~~FSP~~of ~~157~~automation products designed to provide customers with a system to administer medication to residents at long-2term ~~will~~care ~~have~~facilities. onThese ~~its~~segments ~~nonfinancial~~represent ~~assets~~the ~~and~~manner ~~liabilities~~in which the Company’s operations are managed.

~~In February 2007,~~10 the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities (“SFAS No. 159”). SFAS No. 159 permits companies to choose to measure many financial instruments and certain other items at fair value. The objective is to improve financial reporting by providing companies with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. SFAS No. 159 is effective for fiscal years beginning after November 15, 2007. Companies are not allowed to adopt SFAS No. 159 on a retrospective basis unless they choose early adoption. The Company adopted SFAS No. 159 on April 1, 2008, and did not elect the fair value option for eligible items that existed at the date of adoption.

10Table of Contents

~~Table~~ Below are sales and operating income (loss) by segment for the three months ended June 30, 2009 and 2008 and a reconciliation of ~~Contents~~segment operating income to earnings before income taxes. Operating income is net sales less cost of sales and other operating expenses, excluding equity-based compensation expense and other corporate expenses. Cost of sales and other operating expenses are directly identifiable to the respective segment or allocated on the basis of sales or manpower.

NOTE 10 – SEGMENT INFORMATION

	Three Months Ended June 30,

	2009			2008

	(In Thousands, Except Percentages)
Net Sales
Consumables	$	13,421		$	13,092
Packaging Automation		3,911			6,191
Medication Administration Systems		27			83

Net Sales	$	17,359		$	19,366

Operating Income (Loss) and Operating Margins
Consumables	$	2,388		$	1,615
		17.8	%		12.3	%
Packaging Automation	$	(1,171	)	$	(246	)
		(29.9	%)		(4.0	%)
Medication Administration Systems	$	(316	)	$	(480	)
		(1170.4	%)		(578.3	%)
Corporate Expenses Not Allowed to Other Segments	$	(641	)	$	(176	)

Operating Income	$	260		$	713

Operating Margin		1.5	%		3.7	%

Deductions from Operating Income
Interest Expense	$	90		$	126
Income Before Taxes	$	170		$	587

~~During~~11 the first quarter of fiscal year 2009, the Company began to evaluate its business under three segments: (a) Consumables; (b) Packaging Automation; and (c) Medication Administration Systems. The Consumables segment primarily consists of the manufacturing of punch cards and blisters and other consumable medication packaging. The Packaging Automation segment consists of products that provide customers with the ability to package medication into the Company’s consumable products in an efficient manner. This type of automation allows the packaging of medication in either a pre-pack or an on-demand manner. The Medication Administration Systems segment consists of automation products designed to provide customers with a system to administer medication to residents at long-term care facilities. These segments represent the manner in which the Company’s operations are managed. Prior to this change, the Company managed its business as one segment.

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

	Three Months Ended December 31,						Nine Months Ended December 31,
	2008			2007			2008			2007
	(In Thousands)
Net Sales
Consumables	$	13,527		$	13,054		$	40,358		$	37,719
Packaging Automation		5,546			1,642			18,634			5,792
Medication Administration Systems		161			24			310			147
Net Sales	$	19,234		$	14,720		$	59,302		$	43,658
Operating Profit (Loss) and Operating Margins
Consumables	$	1,874		$	2,363		$	5,257		$	6,791
		13.9	%		18.1	%		13.0	%		18.0	%
Packaging Automation		(455	)		(863	)		(858	)		(2,112	)
		(8.2	%)		(52.6	%)		(4.6	%)		(36.5	%)
Medication Administration Systems		(271	)		(149	)		(1,176	)		(635	)
		(168.3	%)		(620.8	%)		(379.4	%)		(432.0	%)
Corporate Expenses Not Allocated to Other Segments		(178	)		(163	)		(534	)		(357	)
Operating Profit	$	970		$	1,188		$	2,689		$	3,687
Operating Margin		5.0	%		8.1	%		4.5	%		8.4	%
Deductions from Operating Income
Interest Expense		112			184			376			501
Income Before Taxes	$	858		$	1,004		$	2,313		$	3,186

Geographic Information

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

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	Three Months Ended June 30,

	2009			2008

	(In Thousands, Except Percentages)
Net Sales
U.S.	$	14,756		$	16,582
Non-U.S.		2,603			2,784

Total Net Sales	$	17,359		$	19,366

Operating (Loss) Income and Operating Margins
U.S.	$	(146	)	$	370
		(1.0	%)		2.2	%
Non-U.S.	$	406		$	343
		15.6	%		12.3	%

Total Operating Income	$	260		$	713

Total Operating Margin		1.5	%		3.7	%

~~Geographic~~ Total assets ~~Information~~ classified by major geographic areas in which the company operates was a follows:

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

	As of June 30, 2009		As of March 31, 2009

	(In Thousands)
Net Sales
U.S.	$	27,364	$	26,341
Non-U.S.		4,306		5,585

	$	31,670	$	31,926

	Three Months Ended December 31,						Nine Months Ended December 31,
	2008			2007			2008			2007
	(In Thousands)
Net Sales
U.S.	$	16,881		$	12,152		$	51,385		$	36,547
Non-U.S.		2,353			2,568			7,917			7,111
Total Net Sales	$	19,234		$	14,720		$	59,302		$	43,658
Operating Profit (Loss) and Operating Margins
U.S.	$	1,012		$	777		$	2,350		$	2,839
Non-U.S.		(42	)		411			339			848
Total Operating Profit	$	970		$	1,188		$	2,689		$	3,687
Total Operating Margin		5.0	%		8.1	%		4.5	%		8.4	%

NOTE 10 – FAIR VALUE OF FINANCIAL INSTRUMENTS

~~Total~~The Company adopted SFAS No. 157 effective April 1, 2008 for financial assets ~~classified~~and liabilities bymeasured ~~major~~on ~~geographic~~a ~~areas~~recurring inbasis. ~~which~~SFAS No. 157 applies to all financial assets and financial liabilities that are being measured and reported on a fair value basis. On April 1, 2009, the Company ~~operates~~adopted FSP No. 157-2 for all non-financial assets and liabilities accounted for at fair value on a non-recurring basis. There was asno ~~follows:~~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:

	December 31, 2008		March 31, 2008
	(In Thousands)
U.S.	$	29,340	$	32,606
Non-U.S.		4,873		5,842
	$	34,213	$	38,448

Level 1:

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

~~NOTE~~Level 112: –Quoted ~~FAIR~~prices ~~VALUE~~in OFmarkets ~~FINANCIAL~~that ~~INSTRUMENTS~~are not active, or inputs which are observable, either directly or indirectly, for substantially the full term of the asset or liability;

~~The Company~~12 adopted SFAS No. 157, effective April 1, 2008 for financial assets and liabilities measured on a recurring basis. SFAS No. 157 applies to all financial assets and financial liabilities that are being measured and reported on a fair value basis. There was no impact for the adoption of SFAS No. 157 to the consolidated financial statements. SFAS No. 157 establishes a framework for measuring fair value and expands disclosure about fair value measurements. The statement requires fair value measurements to be classified and disclosed in one of the following three categories:

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

Level 23: ~~Quoted~~Prices ~~prices~~or invaluation ~~markets~~techniques that ~~are~~require ~~not active, or~~ inputs ~~which~~that are ~~observable,~~both ~~either~~significant ~~directly~~to orthe ~~indirectly,~~fair ~~for~~value ~~substantially~~measurement ~~the~~and ~~full~~unobservable ~~term~~(i.e., ofsupported ~~the~~by ~~asset~~little or ~~liability;~~no ormarket activity).

~~Level~~ The following 3:table ~~Prices~~summarizes orthe valuation ~~techniques~~of ~~that~~the ~~require~~Company’s ~~inputs~~financial ~~that~~instruments ~~are both significant to~~ by the ~~fair~~above ~~value~~SFAS ~~measurement and unobservable (i~~No.~~e.,~~ 157 ~~supported~~categories byas ~~little~~of orJune no30, ~~market~~2009: ~~activity).~~

	June 30, 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	$ (196)	–	$ (196)	–

~~Table~~ 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 ~~Contents~~its derivatives using quotes determined by the swap counterparties.

~~The following table summarizes the valuation of the Company’s~~ Non-financial ~~instruments by~~Items ~~the~~Measured ~~above~~at ~~SFAS~~Fair ~~No. 157~~Value ~~categories~~on asa ofNonrecurring ~~December 31, 2008:~~ Basis

	December 31, 2008
		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	$ (246)	–	$ (246)	–

Non-financial assets, such as goodwill; intangible assets; and property, plant and equipment are measured at fair value when there is an indicator of impairment and recorded at fair value only when impairment is recognized. The Company performed impairment analyses in the fourth quarter of fiscal year 2009. Based on the results of impairments tests, the Company determined no impairment of goodwill; intangible assets; or property, plant and equipment existed.

Interest rateNOTE swaps11 are– includedDERIVATIVE 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. INSTRUMENTS

~~NOTE~~ The Company 12uses –derivative ~~THIRD~~instruments ~~QUARTER~~in ~~ADJUSTMENTS~~the form of interest rate swaps to manage risks related to interest rates. The interest rate swaps qualify for hedge accounting treatment under SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities.

~~Inventory~~ The Company ~~Adjustment~~has two interest rate swap agreements for notional amounts of $2 million and ~~Manufacturer~~$5 million, respectively. These swap agreements were entered into in order to fix variable interest rates on the revolving long-term debt at an average rate of 4.7%. The swaps mature in March 2010 and March 2011, respectively. The swap agreements were designated as cash flow hedges upon meeting the criteria for effectiveness and are recorded at fair value in the consolidated balance sheets and the Company calculates the effectiveness of the hedge on a quarterly basis. There was no ineffectiveness during the three months ending June 30, 2009. The related gains or losses are recorded in stockholders’s equity ~~Rebate~~ as a component of accumulated other comprehensive income (loss).

~~The~~ 13 Company conducted a physical inventory of certain items related to it's Packaging Automation Segment and its Medication Administration Segment in January/February of 2009 and determined that the quantities on hand according to its inventory records did not agree with the quantities counted. The amount of the adjustment, which was recorded in the third quarter ended December 31, 2008 was approximately $260,000.

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

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

	June 30, 2009

	Balance Sheet Location	Fair Value

	(In Thousands)

Assets
Derivatives designated as hedging instruments under Statement 133
None	N/A	$	–
Derivatives not designed as hedging instruments under Statement 133
None	N/A		–

Liabilities
Derivatives designated as hedging instruments under Statement 133
Interest rate contracts	Other Liabilities	$	(196	)
Derivatives not designated as hedging instruments under Statement 133
None	N/A		–

Total Derivatives		$	(196	)

~~Table~~ The following table summarizes the fair value of ~~Contents~~the interest rate contracts on the Condensed Consolidated Statement of Financial Position for the three months ended June 30, 2009.

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

				Location of Gain or	Amount of Gain or
				(Loss) Recognized in	(Loss) Recognized in
		Location of Loss	Amount of Gain or (Loss)	Income on Derivative	Income on Derivative
	Amount of Gain	Reclassified from Accumulated	Reclassified from Accumulated	(Ineffective Portion and	(Ineffective Portion and
Derivatives in Statement 133	Recognized in OCI on Derivative	OCI into Income	OCI into Income	Amount Excluded From	Amount Excluded From
Cash Flow Hedging Relationships	(Effective Portion)	(Effective Portion)	(Effective Portion)	Effectiveness Testing	Effectiveness Testing)

Interest Rate
Contracts	$ 121	Interest Expense	–	N/A	N/A

ItemNOTE 2.12 Management’s– DiscussionAGREEMENT andAND AnalysisPLAN ofOF Financial Condition and Results of OperationsMERGER

On August 7, 2009, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) with MedPak Holdings, Inc., a Delaware corporation (“Parent”), and MedPak Merger Sub, Inc., a Delaware corporation and a wholly owned subsidiary of Parent (“Merger Sub”). Parent is an affiliate of Excellere Partners, LLC, a Denver, Colorado based private equity firm (“Excellere Partners”).

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Pursuant to the terms of the Merger Agreement, Merger Sub will merge with and into the Company, with the Company as the surviving corporation of the merger (the “Merger”). In the Merger, each share of common stock of the Company, other than those shares held by the Company, any subsidiary of the Company, Parent or Merger Sub, and other than those shares with respect to which appraisal rights are properly exercised, will be converted into the right to receive $5.75 per share in cash (the “Merger Consideration”). Prior to the effective time of the Merger, a portion of the shares owned by certain of the Company’s executive officers (the “Rollover Investors”), including Todd E. Siegel, the Company’s President and CEO, will be contributed to Parent in exchange for a combination of preferred stock and voting common stock of Parent. In addition, all outstanding options to acquire shares of Company common stock will vest at the effective time of the Merger and holders of such options will receive an amount in cash equal to the excess, if any, of the Merger Consideration over the exercise price per share subject to the option for each share subject to the option.

Completion of the Merger is subject to customary closing conditions including (i) approval by the Company’s stockholders and (ii) no material adverse effect on the Company’s business or results of operations. The parties currently expect that the Merger will be completed in the fourth quarter of this calendar year.

The Merger Agreement contains certain termination rights for both Parent and the Company. If the Company terminates the Merger Agreement prior to obtaining stockholder approval as a result of the Special Committee or the Board of Directors concluding in good faith that in light of a superior proposal, it would be inconsistent with the directors’ fiduciary obligations to the Company’s stockholders under applicable law to not withdraw or change its recommendation that the Company’s stockholders approve the Merger Agreement and concurrently with such termination the Company enters into a definitive agreement with respect to such superior proposal, the Company is required to pay to Parent a termination fee of $1,174,200 (the “Termination Fee”) and reimburse Parent for its fees and expenses incurred with respect to the transactions contemplated by the Merger Agreement, up to a maximum of $750,000 (the “Expense Payment”).

If Parent terminates the Merger Agreement because: (i) the Company’s Board of Directors has withdrawn or modified, or publicly proposed to withdraw or modify, in a manner adverse to Parent its recommendation with respect to the Merger Agreement; (ii) the Company’s Board of Directors or any committee thereof (a) does not reject any takeover proposal within seven days of the making thereof or (b) does not publicly reconfirm its recommendation that the Company stockholders approve the Merger within three days after receipt of a written request from Parent that it do so; (iii) the Company fails to include the Board of Directors recommendation to approve the Merger in its proxy statement; (iv) the Board of Directors of the Company approves, endorses, or allows the Company to enter into, or recommends to the Company stockholders a merger agreement, letter of intent, acquisition agreement, or other similar agreement with respect to a takeover proposal (other than a confidentiality agreement), (v) if the Company willfully breaches or fails to perform any of its representations, warranties, covenants or agreements set forth in the Merger Agreement (or if any such representations or warranties fails to be true), which breach or failure (a) would give rise to the failure of a condition to the Merger and (b) is incapable of being cured, or is not cured, after written notice (a “Breach”), or (vi) the Company or the Company’s Board of Directors or any committee thereof shall have announced its intention to do any of the items listed in clauses (i) through (iv) above, then the Company must pay the Termination Fee and the Expense Payment to Parent.

If: (i) the Merger Agreement is terminated (a) by Parent or the Company because the effective time of the Merger has not occurred by December 31, 2009 or within the financing cure period, if applicable, or (b) because stockholder approval was not obtained at the special meeting; and (ii) the Company enters into a definitive agreement with respect to, or consummates, a takeover proposal within six months (or 12 months in the case of a takeover proposal that had been publicly announced, made known to the Company or made directly to Company stockholders prior to the termination of the Merger Agreement) after the date the Merger Agreement is terminated, the Company must pay the Termination Fee and the Expense Payment to Parent. In the event that the circumstances described in clause (i), but not clause (ii), above have occurred, then, except in the case of a Payment Exception (as defined below) or if Parent is required to pay the Termination Fee to the Company, the Company will pay the Expense Payment, but not the Termination Fee, to Parent.

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In addition, if Parent terminates the Merger Agreement because: (i) the Company commits a Breach that is not willful; (ii) any events or changes occurred that, individually or in the aggregate, have had or could reasonably be expected to have a material adverse effect on the Company; or (iii) the voting agreement entered into among Parent and certain of the Company’s stockholders in connection with the Merger is not valid, binding and enforceable in accordance with its terms against the parties thereto, then the Company will pay the Expense Payment, but not the Termination Fee, to Parent.

If the Company terminates the Merger Agreement because Parent has: (i) failed to consummate the Merger on or before the later of (a) December 31, 2009 or (b) if Parent is entitled to attempt to amend, modify or replace its financing commitments, then after the 60 day financing cure period; or (ii) committed a Breach, then Parent must pay the Termination Fee to the Company. However, Parent shall have no obligation to pay the Termination Fee if Parent fails to consummate the Merger or otherwise breaches or fails to perform any of its representations, warranties, covenants or agreements set forth in the Merger Agreement as a result of failing to obtain financing primarily because of any material instituted, commenced, pending or threatened action, investigation, litigation or proceeding, provided that Parent has used commercially reasonable efforts to obtain financing (a “Payment Exception”).

Parent has obtained commitments for the financing for the Merger, which are subject to customary conditions.

In connection with the execution of the Merger Agreement, Todd E. Siegel and other members of the Company’s senior management team, who currently own approximately 30% percent of the Company’s outstanding shares, have agreed to vote their shares in favor of the Merger.

The foregoing description of the Merger Agreement and the Merger is qualified in its entirety by reference to the Merger Agreement which was attached as Exhibit 2.1 to the Form 8-K/A filed by the Company with the SEC on August 11, 2009.

During the three months ended June 30, 2009, the Company incurred approximately $421,000 in costs associated with the Merger Agreement. These costs are not deductible for tax purposes and as a result, our effective tax rate increased to 119.4% compared to 36.3% during the same period last year.

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MTS MEDICATION TECHNOLOGIES, INC. AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FOR THE THREE MONTHS ENDED JUNE 30, 2009

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

Overview

The Company ~~has~~ experienced ~~growth~~a decline in net sales ~~throughout~~during ~~this~~the ~~fiscal~~three ~~year.~~months Aended ~~significant portion~~June of30, ~~that~~2009 compared ~~growth~~with ~~has resulted from~~ the ~~installation~~same ~~and~~period ~~acceptance~~ of ~~OnDemand machines~~the ~~that~~prior ~~were~~fiscal ~~sold to our largest customer~~year. ~~Sales~~This ofdecline ~~OnDemand~~results ~~machines to other~~primarily ~~customers~~from ~~has~~the ~~slowed~~fact ~~recently.~~that Wein ~~have~~the ~~not~~three ~~determined~~months ~~convincingly~~ended ~~whether~~June ~~this~~30, ~~slowdown in~~2008, ~~sales~~the ~~results~~Company ~~from~~recognized ~~economic~~revenue for ~~conditions~~several orOnDemand ~~credit~~machines ~~restraints~~that ~~placed~~were onsold to our ~~customers~~largest ~~by financial institutions~~customer. WeThe ~~are~~Company ~~carefully~~did ~~monitoring~~not sell ~~this~~any ~~area~~OnDemand ofmachines ~~our business in order~~ to ~~react~~ tothis acustomer ~~continued~~during ~~slowdown~~the inthree ~~the~~months ~~Packaging~~ended ~~Automation~~June ~~segment~~30, ~~if one occurs~~2009.

Net sales in our Consumables segment ~~have~~grew ~~grown~~ approximately 74.2% in the U.S. long-term care market during ~~this~~the ~~fiscal~~three ~~year~~months ended June 30, 2009. Net sales of consumables in Europe ~~have grown~~ grew approximately 2216.6% when measured in the functional currency of the country in which the sales ~~are~~were made. However, as a result of ~~the~~fluctuations ~~recent~~in ~~strengthening~~foreign ~~of the U.S. dollar~~currency, our revenue declined ~~growth~~ in Europe isby approximately 116.6% ~~this~~for ~~year~~the three months ended June 30, 2009 when the revenue is translated into U.S. dollars.

~~Revenue~~The inoperating loss for our ~~Medication~~Packaging ~~Administration~~Automation segment isincreased ~~comprised~~during ~~solely~~the ofthree ~~sales of MedLocker®~~months ~~and~~ended ~~service~~June ~~and~~30, ~~support~~2009 ofover ~~existing~~the ~~MedLocker~~same ~~installations.~~period Weof ~~recently lowered~~ the ~~price of~~prior ~~our~~fiscal ~~MedLocker,~~year ~~which~~primarily ~~has~~due ~~resulted~~to inthe fact anthat ~~increase~~ in the ~~number~~prior offiscal ~~MedLocker~~year ~~units~~we ~~sold. The~~had ~~operations~~higher ofrevenue ~~this~~and ~~segment~~gross ~~have~~profit ~~resulted~~ in anthis ~~operating loss of approximately $1.2~~segment ~~million~~related ~~this~~to ~~fiscal~~a ~~year.~~contract Wefor ~~are~~OnDemand ~~optimistic~~machines ~~that~~with our ~~MedTimes®~~largest ~~product~~customer. ~~will~~In beaddition, during ~~released~~the ~~for~~three ~~sale~~months ~~shortly~~ended ~~and~~June ~~begin~~30, to2009, ~~result~~we inincurred ~~additional~~higher ~~gross~~research ~~profit~~and todevelopment ~~reduce~~costs ~~operating~~related ~~losses~~to ~~for~~enhancements ~~this~~to ~~segment~~products sold in ~~the~~our ~~future~~Packaging Automation segment.

~~Our~~Revenue ~~consolidated~~in ~~gross~~our ~~profit~~Medication ~~margins,~~Administration ~~consolidated~~Systems ~~operating~~segment ~~income~~is comprised solely of sales of MedLocker® and ~~net~~service ~~income~~and ~~declined~~support of existing MedLocker installations. The operations of this ~~fiscal~~segment ~~year~~have ~~compared~~resulted toin an operating loss of approximately $316,000 during the three ~~prior~~months ~~fiscal~~ended ~~year~~June ~~primarily~~30, ~~due~~2009. We are optimistic that our MedTimes® product will be released for sale shortly and begin to ~~several~~result ~~factors~~in additional gross profit to reduce operating losses for this segment in the future.

1. Our consolidated ~~Sales~~operating inincome ~~Europe~~and ~~are~~net ~~made~~income todeclined ~~customers~~during in the ~~functional~~three ~~currency~~months ofended ~~the country in which the sale is made~~June 30, ~~but~~2009 ~~product~~compared ~~that~~to ~~is sold in Europe is manufactured in~~ the ~~U.S.~~same ~~and~~period ~~paid~~of ~~for in U.S. dollars. As~~ the ~~U.S.~~prior ~~dollar~~fiscal ~~has~~year ~~strengthened,~~primarily ~~our~~due ~~gross profit margins have declined on these sales compared~~ to the following ~~previous~~factors: ~~year.~~

21. ~~The~~Sales ~~gross~~in ~~profit~~Europe ~~that~~are wemade ~~realized~~to oncustomers in the ~~sale~~functional currency of ~~OnDemand~~the ~~machines~~country toin ~~our~~which ~~largest~~the ~~customer~~sale ~~was~~is ~~significantly~~made, ~~lower~~but ~~than~~product that is sold in Europe is manufactured in the U.S. and paid for in U.S. dollars. The U.S. dollar has strengthened, and therefore, our gross profit ~~margin~~margins wehave ~~generally~~declined ~~realize~~ on ~~other~~these ~~products~~sales wecompared ~~sell~~to the same period of the previous year.

32. ~~Our~~Increased ~~operating~~ costs ~~have risen over the prior year primarily due to costs~~ associated with the ~~OnDemand~~Merger ~~system contract with our largest customer~~Agreement.

43. ~~Operating~~Increased ~~costs~~research weand ~~have~~development ~~incurred~~costs ~~this~~associated ~~year~~with inimprovements ~~our Medication Administration segment have increased compared~~ to ~~the~~OnDemand ~~prior year as we attempt to bring the MedTimes product to market~~technologies.

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

Revenue growth, gross profit margins, operating income and net income by segment and by geographic area;

Inventory turnover;

Account receivable collection days;

Consolidated net income and operating cash flow; and

Investing activities.

~~Each of~~17 ~~these key metrics is more fully discussed in the Management Discussion and Analysis.~~

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Each of these key metrics is more fully discussed in this “Part I, Item 2, Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

On August 7, 2009, the Company entered into the Merger Agreement, which contemplates that all outstanding shares of the Company’s common stock, other than those held by MTS, Parent, Merger Sub, those who properly exercise appraisal rights, and certain of our directors and officers who will be contributing a portion of the shares of the Company’s common stock held by each of them to Parent for a combination of preferred stock and voting common stock, will be purchased for $5.75 per share. The Merger Agreement is subject to stockholder approval at a special meeting that will be convened to vote on it and certain other conditions.

RESULTS OF OPERATIONS

Three Months Ended ~~December 31~~June 30, ~~2008~~2009 and ~~2007~~2008

Net sales for the three months ended ~~December~~June 3130, ~~2008~~2009 ~~increased~~decreased 3010.74% to $1917.24 million ~~compared~~ compared with $1419.74 million during the same period of the prior fiscal year. ~~Revenue~~The decline primarily ~~associated~~relates ~~with~~to ~~the~~a ~~sale~~decline in revenue from sales of OnDemand machines ~~was $4~~.7 ~~million~~During ~~during~~ the three months ended ~~December~~June 3130, ~~2008 compared with $700~~2009,~~000~~ ~~during~~ the ~~same~~Company ~~period~~recorded ofapproximately ~~the prior fiscal year~~$2.7 ~~This~~million ~~increase~~in ~~relates~~net ~~primarily~~sales associated towith the ~~acceptance~~sale of ~~five~~three OnDemand machines bycompared ~~our largest~~to ~~customer during the three months ended December 31, 2008~~$5.1 Inmillion ~~addition,~~on ~~this increase is attributable to an increase in net~~ sales ~~for~~of nine ~~consumable~~OnDemand ~~punch~~machines ~~cards~~during ~~and prepack~~the ~~machines~~same ~~both~~period toin ~~new~~the ~~and~~prior ~~existing~~fiscal ~~customers~~year. ~~In addition,~~ Net sales ~~in Europe~~for ~~decreased~~consumables ~~8.4%~~increased approximately $329,000 during the three months ended ~~December~~June 3130, ~~2008. Although net sales in~~2009 ~~Europe~~compared ~~increased~~to bythe ~~15.9%,~~same ~~when~~period ~~expressed in~~ the ~~functional~~fiscal ~~currency~~prior ofyear. ~~the~~The ~~country~~increase ~~in which~~was ~~the~~primarily ~~sales~~related ~~are~~to increased ~~made, net~~ sales ~~declined 8.4% in terms~~ of ~~U.S.~~punch ~~dollars~~cards asto acustomers ~~result~~in ~~of exchange rate fluctuations between~~ the U.S. ~~dollar and the British Pound and Euro.~~

Cost of sales for the three months ended ~~December~~June 3130, ~~2008~~2009 was $1311.02 million compared with $913.13 million during the same period ofin the prior fiscal year. Cost of sales as a percentage of sales ~~increased~~decreased to 6764.84% from 6168.78% during the same period of the prior fiscal year. Cost of sales as a percentage of sales ~~increased~~decreased primarily because of the proportion of revenue associated with OnDemand machines, which have a higher cost of sales percentage than consumables, was higher during the prior fiscal year.

Selling, general and administration expenses for the three months ended ~~December~~June 3130, ~~2008~~2009 increased 2113.64% to $4.5.1 million from $34.75 million ofin the prior fiscal year primarily due to ~~travel~~ ~~and~~approximately ~~personnel~~$421,000 in costs associated with ~~support~~the ofMerger ~~our~~Agreement, ~~OnDemand~~as ~~machine~~well ~~installations,~~as ~~general~~an ~~administrative~~increase ~~costs~~of inapproximately ~~the U.S. and Europe~~$232,000 ~~foreign~~in ~~currency~~research ~~exchange~~and ~~fluctuations~~development ~~due~~costs toprimarily associated awith ~~stronger~~development ~~U.S.~~of ~~dollar~~new ~~and~~OnDemand ~~increased~~machine ~~research and development expenses~~technology.

Depreciation and amortization expense for the three months ended ~~December~~June 3130, ~~2008~~2009 decreased 51.80% to $~~677~~787,000 from $~~719~~795,000 during the same period of the prior fiscal year. The decrease resulted primarily from decreased amortization associated with ~~previously~~ capitalized ~~product~~ product development costs, which became fully amortized ~~during~~in ~~the~~March ~~three months ended December 31, 2008~~2009.

Interest expense for the three months ended ~~December~~June 3130, ~~2008~~2009 decreased 3928.16% to $~~112~~90,000 from $~~184~~126,000 during the same period of the prior fiscal year. The decrease results ~~primarily~~ from a decrease in interest rates asand ~~well~~lower ~~as a decrease in~~ long-term debt outstanding ~~resulting from increased operating cash flow~~.

Income tax expense decreased 564.57% to $~~171~~203,000 during the three months ended ~~December~~June 3130, ~~2008~~2009 compared with $~~393~~213,000 during the same period of the prior fiscal year. The decrease results from ~~lower~~the fact that our net income before ~~income~~taxes ~~tax~~decreased. ~~and~~Our ~~the fact that our~~ effective tax rate ~~decreased~~increased to 19119.94% from 3936.13%. ~~Our~~due ~~effective~~to ~~tax rate declined from~~ the ~~previous~~fact ~~year because we determined~~ that uncertain tax positions that we had previously provided for were no longer appropriate and therefore we reduced our liability for these items and recorded the amounts as a reduction in our current income tax provision. In addition$421,000 ~~we believe that we are eligible for certain US income tax credits available to manufacturing companies. The reduction~~ in ~~uncertain~~costs ~~tax~~incurred ~~positions caused our effective income tax rate to decline by 18.0%~~ in the first ~~third~~ quarter ~~and~~of ~~8.0%~~this infiscal ~~the~~year ~~nine~~associated ~~month period~~with ~~and~~ the USmerger ~~income~~agreement ~~tax~~are ~~credit~~not ~~related to manufacturing expenditures caused our~~deductible ~~effective~~for ~~income~~ tax ~~rate to decline by 2~~purposes.0% ~~in the third quarter and 1.6% in the nine month period.~~

~~Segments~~ 18

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

15 Segments

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

Segment Results of Operations

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

Consumables

	Three Months Ended December 31,
	2008			2007
	(In Thousands)
Net Sales	$	13,527		$	13,054
Operating Profit	$	1,874		$	2,363
Operating Margin		13.9	%		18.1	%

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

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

Packaging Automation

	Three Months Ended December 31,
	2008			2007
	(In Thousands)
Net Sales	$	5,546		$	1,642
Operating Loss	$	(455	)	$	(863	)
Operating Margin		(8.2	%)		(52.6	%)

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

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

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Medication Administration Systems

	Three Months Ended December 31,
	2008			2007
	(In Thousands)
Net Sales	$	161		$	24
Operating Loss	$	(271	)	$	(149	)
Operating Margin		(168.3	%)		(620.8	%)

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

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

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

Nine Months Ended December 31, 2008 and 2007

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

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

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

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

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

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

Segment Results of Operations

Operating ~~profit~~income (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~~income is reconciled to ~~income~~earnings before ~~taxes~~income taxes in Note 10 9 to the Consolidated Financial Statements included in the report.

Consumables

	Nine Months Ended December 31,
	Three Months Ended June 30,
	2008			2007
	2009			2008
	(In Thousands)
	(In Thousands, Except Percentages)
Net Sales	$	4013,~~358~~421		$	3713,~~719~~092
Operating Profit	$	5,257		$	6,791
Operating Income	$	2,388		$	1,615
Operating Margin		1317.08	%		1812.03	%

Net sales ~~during~~in the ~~nine~~three months ended ~~December~~June 3130, ~~2008~~2009 increased approximately $~~2.6 million~~329, 000, or 72.05% over the same period in the prior fiscal year, primarily due to growth in sales to the U.S. long-term care market of ~~approximately~~ ~~6.4% and growth in the European domiciliary and retail markets of~~ approximately 114.32%. The growth in the U.S. is primarily attributable to the increase in medications dispensed in long-term care facilities. ~~The~~Net sales ~~European~~of ~~growth~~consumable isproducts ~~primarily~~in Europe increased 16.6% when expressed in the functional ~~result~~currency of ~~increased~~the ~~penetration~~country in which the sales are made, but decreased 6.6% in terms of ~~our~~the U.S. ~~products~~Dollars ~~into~~as ~~that~~a ~~market~~result of the exchange rate fluctuations between the U.S. Dollar and the British Pound and Euro.

Operating margins ~~declined~~increased ~~during~~in the ~~nine~~three months ended ~~December~~June 3130, ~~2008~~2009 ~~primarily~~over ~~due~~the tosame ~~(a) increases~~period in ~~raw~~the prior ~~material~~fiscal ~~costs;~~year ~~(b)~~primarily ~~increased~~due ~~scrap rates; (c) additional personnel allocated~~ to ~~this segment based on revenue;~~ (da) ~~increased~~lower ~~research~~freight ~~and development expenses~~costs; (eb) ~~higher~~decreases ~~depreciation~~in ~~expense~~raw material ~~associated~~costs ~~with~~primarily ~~assets~~ related to ~~this~~materials ~~segment;~~that ~~(f)~~have ~~higher~~a ~~health~~high ~~plan benefit costs due to increased medical claims under the Company’s self~~petroleum-~~insured~~based ~~medical plan~~content; and (gc) ~~foreign~~decreased ~~currency~~scrap ~~fluctuations~~rates and labor costs.

Packaging Automation

	Nine Months Ended December 31,
	Three Months Ended June 30,
	2008			2007
	2009			2008
	(In Thousands)
	(In Thousands, Except Percentages)
Net Sales	$	183,~~634~~911		$	56,~~792~~191
Operating Loss	$	(~~858~~1,171	)	$	(~~2,112~~246	)
Operating Margin		(429.69	%)		(364.50	%)

19 18

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Net sales ~~during~~for the ~~nine~~three months ended ~~December~~June 3130, ~~2008~~2009 ~~increased~~decreased $122.83 million, or ~~221~~36.78%, ~~because~~ offrom anthe same ~~agreement~~period ~~with~~in ~~our~~the ~~largest~~prior ~~customer~~fiscal ~~for~~year ~~the~~due ~~sale~~to ofa ~~twenty-four~~decline in OnDemand ~~machines~~ sales. During the ~~nine~~ three months ended ~~December~~June 3130, ~~2008~~2009, wethe Company recorded $122.87 million in revenue associated with the ~~twenty-one~~sale ~~machines~~of ~~that~~three ~~were~~OnDemand ~~installed~~machines ~~and~~compared ~~accepted~~to ~~by the customer~~$5.1 Inmillion ~~addition,~~in werevenue ~~sold~~on ~~three~~the ~~OnDemand~~sale ~~AccuFlex~~of nine ~~machines~~OnDemand tomachined ~~other~~during ~~independent pharmacies,~~the ~~which~~same ~~resulted~~period inthe ~~approximately~~prior ~~$1.0~~fiscal ~~million in revenue~~year.

Our operating ~~loss~~margin during the ~~nine~~three months ended ~~December~~June 3130, ~~2008~~2009 ~~was~~decreased ~~lower~~from ~~than~~ the ~~prior~~same ~~year~~period ~~because~~in wethe ~~realized~~prior ~~additional~~fiscal ~~gross~~year ~~profit~~due onto ~~the~~decreased ~~increased~~ net sales, ~~which~~as ~~offset~~well as higher-than-normal engineering and research and development costs incurred in the first quarter of this fiscal year as a ~~portion~~result of investments in the ~~indirect~~development ~~costs~~of ~~associated~~new products, including a high-speed vision and infrared inspection system that will be used in conjunction with ~~this~~our OnDemand ~~segment~~Express II and CentraFill products.

Medication Administration Systems

	Nine Months Ended December 31,
	Three Months Ended June 30,
	2008			2007
	2009			2008
	(In Thousands)
	(In Thousands, Except Percentages)
Net Sales	$	~~310~~27		$	~~147~~83
Operating Loss	$	(~~1,176~~316	)	$	(~~635~~480	)
Operating Margin		(~~379~~1,170.4	%)		(~~432~~578.03	%)

Net sales ~~during~~in the ~~nine~~first ~~months~~quarter ~~ended~~decreased ~~December 31, 2008 increased~~ due to ~~increased~~decreased sales of our MedLocker systems.

Our operating loss ~~during~~for the ~~nine~~three months ended ~~December~~June 3130, ~~2008~~2009 ~~was~~decreased ~~higher~~from ~~than~~the same period of the prior fiscal year because wethere ~~have~~were ~~added~~less ~~personnel~~overhead tocosts ~~develop~~allocated ~~the~~to ~~MedTimes~~this ~~product~~segment ~~and increased~~due ~~research~~to ~~and~~lower ~~development expenditures for this product~~revenue.

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

LIQUIDITY AND CAPITAL RESOURCES

~~Our~~During ~~operating~~the ~~cash~~three months ended ~~flow~~June ~~has~~30, 2009, we ~~increased~~had ~~the~~a ~~first~~net ~~nine~~loss ~~months~~ of ~~this fiscal year~~ $33,000 compared to with net income of $374,000 during the same period of the prior fiscal year. Cash ~~primarily~~provided by operations ~~due~~ decreased to ~~a decrease in inventory that has resulted~~ $537,000 from $1.08 million during the ~~successful~~three months ended June ~~installation~~30, 2009 and ~~acceptance~~2008, ofrespectively, primarily due ~~the~~to ~~OnDemand~~lower net ~~machines~~income ~~that~~in ~~we sold~~the tothree ~~our~~months ~~largest~~ended ~~customer.~~June ~~In addition~~30, ~~although~~2009 compared ~~our~~to ~~total~~the ~~accounts~~same ~~receivable outstanding~~period ~~has~~in ~~increased,~~ the prior ~~average~~fiscal ~~number~~year, ofas ~~days~~well ~~that~~as ~~our~~due ~~customers are taking~~ to ~~pay us~~a ~~has~~decline ~~decreased~~in toinventory balances during 40the ~~days,~~prior fiscal year ~~compared~~from ~~to 58 days at~~ the ~~end~~sale of ~~the~~nine OnDemand machines. We ~~prior~~had ~~fiscal~~working capital ~~year.~~of ~~The~~$13.9 ~~increase~~ inmillion ~~total~~at ~~accounts~~June ~~receivable~~30, is2009 ~~therefore~~compared ~~related~~ to ~~the~~$13.8 ~~increase~~million inat ~~our~~June ~~net sales~~30, 2008.

Investing ~~activities~~ ~~have~~ activities used $~~2.6~~656,000 during ~~million in~~ the ~~first~~three ~~nine~~ months ofended ~~this~~June ~~fiscal~~30, ~~year~~ 2009 compared towith $41.42 million during in the ~~first~~same ~~nine~~period ~~months~~ of the prior fiscal year. The decrease resulted is primarily ~~attributable~~ from ~~to the fact that during our third quarter last year, we purchased~~ a ~~$2.0 million~~decrease ~~punch~~in ~~card~~expenditures ~~press. Also, as we examined our need~~ for ~~access~~manufacturing toequipment ~~our~~used ~~Credit Facility~~principally during the second and third quarters of this fiscal year, we began to carefully evaluate all capital expenditures and delayed, when possible, those that we considered not to be critical. We do not believe that any delays in ~~making capital expenditures will have an adverse affect on~~ our ~~operations~~Consumables segment.

WeFinancing ~~used~~ ~~our~~activities provided $457,000 during ~~operating~~the ~~cash~~three ~~flow~~months ended toJune ~~fund~~30, ~~our~~2009 compared with ~~investing~~$0 ~~activities~~used ~~and~~in ~~then~~the ~~utilized~~same period of the ~~remaining~~ ~~free~~prior ~~cash~~fiscal ~~flow~~year. The tochange results primarily ~~reduce~~from ~~our~~higher ~~borrowing~~net onadvances ~~our~~under the Credit Facility, ~~and~~which ~~other outstanding~~were ~~debt~~used byto ~~$2.2~~fund ~~million~~working capital requirements.

WeOur ~~are~~short-term inand ~~compliance~~long-term ~~with~~liquidity ~~the~~is ~~financial~~primarily ~~covenants~~dependent ~~that~~on ~~are~~our ~~contained~~ability into ~~our~~generate ~~Credit~~cash flow ~~Facility,~~from operations. Inventory levels may change significantly as we complete the manufacturing and ~~based~~installation ~~upon~~of our ~~expectations~~OnDemand ~~regarding~~machines ~~future~~pursuant ~~profitability~~to ~~and~~the ~~investing~~contract ~~activity~~with our ~~needs,~~largest wecustomer. ~~believe~~Increases ~~that~~in ~~the~~net sales may result in corresponding increases in accounts receivable. Cash flow from operations and borrowing availability onunder ~~our~~the Credit Facility is ~~sufficient~~anticipated to support ~~operations~~ an increase in accounts receivable and inventory.

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

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~~Our~~There ~~Credit Facility~~ was ~~originated~~$8.7 inmillion ~~November~~borrowed ~~2007~~and ~~with~~an ~~Wachovia~~additional ~~Bank~~$3.3 ~~Wachovia~~million ~~Bank~~available ~~was recently~~under ~~acquired by Wells Fargo Bank, however, we have not become aware of any changes in the relationship we have with~~ our ~~lender that would adversely affect our ability to use our~~ Credit Facility asat itJune ~~was~~30, ~~intended to be used~~2009.

AtThe ~~December 31, 2008, there was $9.5 million outstanding on our~~ Credit Facility. ~~The~~contains ~~maximum amounts~~financial covenants that, ~~could~~among beother ~~borrowed~~things, asrequire ofus ~~that~~to maintain ~~date~~certain ~~was~~financial ~~$12~~ratios.7 ~~million,~~We ~~however, we~~ were ~~limited to $11.6 million~~ in ~~borrowing~~compliance ~~due~~with toall ~~financial~~provisions ~~covenants~~of in the loan ~~agreement that limit~~ ~~borrowing~~agreements toat ~~two~~June ~~times our trailing four quarters earnings before interest~~30, ~~income taxes and depreciation expense~~2009.

We ~~expect~~believe that ~~our~~the ~~operating~~ cash ~~flow~~generated ~~for~~from ~~the~~operations ~~next~~during ~~twelve~~this ~~months~~fiscal ~~will~~year, beand ~~sufficient to fund~~amounts ~~our~~available ~~investing~~under ~~activities~~the ~~that~~Credit ~~are~~Facility ~~currently~~will ~~planned~~be ~~during~~sufficient ~~that~~to ~~period~~meet ~~and~~our ~~anticipate~~capital ~~that~~expenditures, ~~any~~product ~~excess~~development, ~~cash~~working ~~will~~capital beneeds ~~used~~and tothe ~~reduce~~principal payments required by our ~~outstanding~~term loan ~~debt~~agreements.

ESTIMATES AND CRITICAL ACCOUNTING POLICIES

The preparation of our ~~consolidated~~Consolidated ~~financial~~Financial ~~statements~~Statements in conformity with ~~generally accepted accounting principles in the~~ U.S. ~~requires~~GAAP 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 ~~these~~ circumstances. These estimates and our actual results are subject to the risk factors listed under Part II, “Item 1A. Risk Factors” of the Form 10-Q for the fiscal quarter ended ~~December~~June 3130, ~~2008~~2009 and those listed under “Item 1A. Risk Factors” in our Form 10-K for the fiscal year ended March 31, ~~2008~~2009. Nevertheless, our management believes the following items involve a higher degree of complexity and, judgment ~~and therefore, has commented on these items below~~.

Consolidation

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

Revenue Recognition

We recognize revenue on the sale of machines, other than OnDemand machines, and all consumables when title and risk of loss to the products shipped has transferred to the customer. We recognize revenue related to the sale of our OnDemand machines as prescribed in SOP 97-2, Software Revenue Recognition, because the software component of the OnDemand machine is significant and not incidental to the value and functionality of the machine. In addition, the sale of an OnDemand machine represents an arrangement that encompasses multiple deliverables and therefore each deliverable represents a separate unit of accounting. The separate deliverables are comprised of (a) the OnDemand machine installed at ~~the~~a ~~customers~~customer’s ~~locations~~location; (b) the user training; (c) certain component ~~parts~~ 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-) through (d) above has been determined based upon the value of these deliverables if they were sold separately. The fair value of the deliverable outlined in (a) above 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-) through (d) above. The terms of the sale arrangement for an OnDemand machine isare 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~~ 12-month period.

20 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.

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

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

Accounts Receivable

Trade accounts receivable are recorded based upon the invoiced amount, are generally not interest bearing and are considered past due when full payment is not received by the specified credit terms. We do not typically require collateral when granting credit; however, customer credit worthiness is reviewed prior to granting credit. We normally estimate the uncollectibility of our accounts receivable. We consider many factors when making our estimates, including analyzing accounts receivable and historical bad debts, customer concentrations, customer credit worthiness, current economic trends and changes in our customer payment terms when evaluating the adequacy of the reserve for uncollectible accounts. We review the status of our accounts monthly, assessing the customer’s ability to pay. When a specific account is deemed uncollectible, the account is written off against the reserve for uncollectible accounts. 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 $95,000.

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

Self-Insurance Plan Reserve

We have a medical health benefit self-insurance plan, which covers substantially all of our employees. During the three months ended ~~December~~June 3130, ~~2008~~2009, we were reinsured for claims ~~that~~ that exceed $100,000 per participant and an annual maximum aggregate limit of ~~approximately~~ approximately $1.36 million. Future claims may affect the reinsurance limits that may be available to us. ~~We had two participants in our plan reach the individual limit of $100,000 this fiscal year.~~

Income Taxes

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

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Product Development

All costs incurred subsequent to the completion of research and development activities associated with software components’ achievement of technological feasibility are capitalized until the product is available for general release to customers. Product development costs are generally amortized over a three-year period beginning on the date the product is released for sale to customers. We review the viability and recoverability of these costs on a regular basis.

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

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

Warranty

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

Goodwill and Other Intangible Assets

We ~~review~~follow ~~the~~SFAS ~~carrying~~No. ~~value~~142, ~~of our~~ Goodwill and Other Intangible Assets, ~~that~~and ~~was~~accordingly ~~recorded~~do atnot ~~the~~amortize ~~time~~goodwill, webut ~~made~~will ~~certain~~annually ~~acquisitions. These~~review ~~acquisitions~~it ~~were~~for ~~made~~impairment. inWe ~~both~~test ~~the~~goodwill for ~~United~~impairment ~~Kingdom~~at least annually and ~~Germany~~whenever events occur or circumstances change that indicate there may be impairment. ~~Our~~ ~~review~~These ofevents ~~these~~or ~~assets~~circumstances ~~includes,~~could ~~among~~include ~~other~~a significant ~~things~~adverse change in the business climate, an ~~analysis~~poor indicators of ~~the~~operating performance ~~anticipated~~or ~~future~~a ~~results~~sale or disposition of ~~operation~~a significant portion of ~~the~~a ~~entities~~reporting ~~acquired~~unit. Testing Atgoodwill ~~this~~for ~~time~~impairment werequires ~~believe~~us ~~that~~to determine the ~~carrying~~amount ~~value~~ of ~~these~~goodwill ~~assets~~associated ~~is appropriately stated in~~with ~~our~~reporting ~~financial statements. However~~units, ~~the~~estimate ~~recent~~fair ~~strengthening~~values of ~~the~~those USreporting ~~dollar~~units ~~compared~~and todetermine their ~~the~~carrying ~~British~~values. ~~Pound~~These processes are subjective and ~~the~~require ~~Euro~~significant ~~has~~estimates. ~~caused~~These estimates ~~our~~include ~~operating~~judgments ~~margins~~about infuture ~~Europe~~cash ~~to decline. The~~flows ~~effect~~that ofare ~~these~~dependent ~~changes~~on ininternal forecasts, ~~currency~~long-term growth rates, ~~could~~allocations ~~cause~~of ancommonly ~~adjustment~~shared inassets and estimates of the ~~carrying~~weighted-average ~~value~~cost of ~~the~~capital ~~Goodwill~~used ~~and~~to ~~Other~~discount ~~Intangible~~future ~~assets~~cash ~~related~~flows. ~~to our~~Changes in these ~~European~~estimates ~~operations~~and inassumptions could materially affect the ~~future~~results of our reviews for impairment of goodwill.

~~Off-Balance~~22 ~~Sheet Arrangements~~

~~We currently~~Table doof ~~not have any off-balance sheet arrangements.~~ Contents

~~Contractual~~ Other intangible ~~Obligations~~ 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.

Not Applicable.Off-Balance Sheet Arrangements

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

Contractual Obligations

Not Applicable.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Not Applicable.

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Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed by us in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer (principal executive officer) and Chief Financial Officer (principal financial officer), to allow timely decisions regarding required disclosure. We have established a Disclosure Committee, consisting of certain members of management, to assist in this evaluation. The Disclosure Committee meets on a regular quarterly basis, and as needed.

Our management, including our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) promulgated under the Exchange Act), at ~~December~~ 31June 30, ~~2008~~2009. Based on that evaluation, our Chief Executive Officer and Chief ~~Financial~~ Financial Officer concluded that, at ~~December~~June 3130, ~~2008~~2009, our disclosure controls and procedures were not effective in ensuring that material information relating to the Company required to be disclosed by the Company in reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and that such information is accumulated and communicated to management, including the chief executive officer and the chief financial officer, as appropriate, to allow timely decisions regarding required disclosure. Notwithstanding the material weakness described below, our management has concluded that the Consolidated Financial Statements fairly state, in all material respects, our financial condition, results of operations and cash flows for the periods presented in conformity with generally accepted accounting principles.

Based on the definition of “material weakness” in the Public Company Accounting Oversight Board’s Auditing Standard No. 25, “An Audit of Internal Control Over Financial Reporting Performed in Conjunction With an Audit of Financial Statements”, we determined that because effective controls regarding recording inventory transactions were not in place, the carrying value of our inventory could be misstated, and the related cost of goods sold could also be misstated, and therefore, a a material weakness existed in our internal control over financial reporting and have disclosed this to the audit committee and to the independent registered public accountants.

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Plan for Remediation of Material Weakness

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

Changes in Internal Control Over Financial Reporting

There has not been any significant change in our internal control over financial reporting during the quarter ended ~~December~~June 3130, ~~2008,~~2009 other than those described above, that has materially affected or is reasonably likely to materially affect our internal control over financial reporting.

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PART II — OTHER INFORMATION

Item 1. Legal Proceedings

None.

Item 1A. Risk Factors

~~Set~~You ~~forth~~should ~~below~~carefully ~~are~~consider the ~~material~~“Risk ~~changes~~Factors” ~~and~~section ~~updates~~of ~~from~~our Annual Report on Form 10-K filed with the SEC on June 22, 2009 in evaluating us and ~~should~~our bebusiness ~~read~~before making inan ~~conjunction~~investment decision. The specific risk factors set forth below have been updated ~~with~~to provide information as of March 31, 2009. There have been no other material changes from the risk factors previously disclosed in our ~~Annual~~Form ~~Report~~10-K onin response to Item 1A. to Part I of Form 10-K. ~~for~~If any of the risks identified herein or in our ~~year~~Form 10-K, or any ~~ended~~other ~~March 31~~risks and uncertainties that we have not yet identified or that we currently believe are not material, ~~2008~~actually occur and are material, ~~which~~it ~~was~~could ~~filed~~harm ~~with~~our ~~the~~business, ~~SEC~~financial condition onand ~~June~~results 30of operations. In such event, ~~2008~~the trading price of our common stock could decline and you may lose all or part of your investment.

~~The~~We ~~gross~~face ~~domestic~~a ~~product~~number ~~for the U.S. and Europe has declined, indicating that many~~ of ~~these~~risks associated ~~countries'~~with ~~economies, including~~ the ~~U.S.~~proposed ~~economy, are in a recession~~merger.

~~There~~On ~~has~~August ~~been an erosion of global consumer confidence amid concerns over declining asset values~~7, ~~potential inflation~~2009, ~~volatility~~we inentered ~~energy~~into ~~costs, geopolitical issues,~~ the ~~availability~~ ~~and~~Merger ~~cost~~Agreement ofwith ~~credit,~~Parent ~~rising unemployment,~~ and ~~the~~Merger ~~stability and solvency of financial institutions, financial markets, businesses, and sovereign nations~~Sub. ~~These concerns~~We ~~have slowed global economic growth and have resulted in recessions in many~~are ~~countries,~~subject ~~including~~to incertain ~~the~~risks ~~U.S.~~as ~~and Europe. If these economic conditions continue or worsen,~~ a ~~number of negative effects on our business could~~ result, ~~including customers or potential customers reducing or delaying orders, the insolvency~~ of ~~key suppliers, which could result in production delays,~~ the ~~inability~~Merger ~~of customers to obtain credit~~Agreement, ~~and~~including the ~~insolvency~~ offollowing: one or more customers. Any of these effects could impact our ability to effectively manage inventory levels and collect receivables, increase our need for cash, and ultimately decrease our net revenue and profitability.

We• ~~are~~There ~~exposed~~can tobe ~~intangible~~no ~~asset~~assurance ~~risk;~~that ~~specifically,~~ our ~~goodwill~~stockholders ~~may~~will ~~become~~approve ~~impaired.~~the Merger Agreement or that all of the other closing conditions will be satisfied;

~~As of~~• ~~December~~If ~~31,~~the ~~2008,~~Merger weis ~~have~~not ~~$894~~completed,~~000~~ ofthe ~~goodwill~~share ~~recorded~~price onof our ~~Condensed Consolidated~~common ~~Balance~~stock ~~Sheet. Future goodwill impairment charges~~ may ~~result from changes in economic and operating conditions, including foreign currency fluctuations, a further significant and sustained~~ decline ~~in our stock price and market capitalization~~, ~~a significant~~to ~~decline in our expected future cash flows, a significant adverse change in~~ the ~~business~~ ~~climate~~extent ~~or slower growth. If we were to conclude~~ that athe ~~write~~current ~~down~~market price of our ~~goodwill~~ iscommon ~~necessary,~~stock ~~then~~reflects wean ~~would~~assumption ~~record~~that the ~~appropriate~~Merger ~~charge,~~will ~~which~~be could result in material charges that are adverse to our operating results and financial position. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Estimates and Critical Accounting Policies – Goodwill and Other Intangible Assets.” completed;

• We ~~face~~must pay certain ~~risks~~costs inrelated ~~collecting~~to the Merger, including the fees and/or expenses of our ~~trade~~legal, ~~accounts~~accounting ~~receivable.~~and financial advisors, even if the Merger is not completed;

• We ~~generate~~ amay ~~significant~~be ~~amount~~required ~~of trade accounts receivable sales from our customers. Delays or defaults in payments owed~~ to uspay ~~could have~~ a ~~significant~~termination ~~adverse~~fee ~~impact~~of on$1,174,200 ~~our financial condition~~ and ~~results~~reimburse out-of-pocket ~~operations.~~fees ~~Factors~~and ~~that~~expenses ~~could~~incurred ~~cause~~with arespect ~~delay~~to orthe ~~default include~~transactions ~~but~~contemplated ~~are~~by ~~not~~the ~~limited~~Merger toAgreement, ~~business~~up ~~failures,~~to ~~turmoil~~a inmaximum ~~the~~of ~~financial and credit markets~~$750,000, ~~sluggish~~if orthe ~~recessionary~~Merger ~~U.S.~~Agreement oris ~~European~~terminated ~~economic~~under ~~conditions~~certain ~~and~~circumstances ~~declines~~set forth in the ~~credit~~ ~~worthiness~~Merger ~~of our customers.~~ Agreement;

~~Inflation~~• ~~may~~Stockholder ~~adversely~~lawsuits ~~affect~~may ~~our~~be ~~business~~filed ~~operations~~against us in connection with the ~~future.~~Merger Agreement;

~~Given the~~• ~~current~~Our ~~macroeconomic~~management ~~environment, it is possible that the U.S.~~ and ~~certain~~employees' ~~European governments~~attention may ~~attempt~~be indiverted ~~the~~from ~~near future~~ day-to-day ~~provide~~operations awhich ~~monetary stimulus, a fiscal stimulus, or both, to the economy. Such actions~~ may ~~lead~~disrupt ~~to inflationary conditions in~~ our ~~cost~~ base, particularly resulting in an increase in our cost of sales and our SG&A expenses. This may harm our margins and profitability if we are unable to increase prices or cut costs enough to offset the effects of inflation in our cost base. business;

• 24Our stockholders will receive $5.75 per share of our common stock in cash, despite any possible favorable changes in the market value of our common stock;

~~Table~~• ofExcellere ~~Contents~~Partners may be unable to obtain the necessary debt financing arrangements set forth in the commitment letter it received in connection with the Merger Agreement; and

~~The~~• ~~financial~~If ~~markets~~we ~~have recently~~are ~~experienced~~unable ~~significant~~to ~~turmoil~~complete ~~which~~the ~~may~~Merger ~~negatively~~the ~~impact~~investment ~~our~~community ~~liquidity~~could ~~and~~have ~~our ability to obtain financing, and may also cause~~ a ~~decrease~~negative inperception ~~demand~~of ~~for~~us and our ~~services~~business.

~~Our liquidity~~ and our ability to obtain financing may be negatively impacted if the lender under our Credit Facility, or another financial institution, suffers liquidity issues. In such an event, we may not be able to draw on all, or a substantial portion, of our Credit Facility. Also, if we attempt to obtain future financing in addition to our Credit Facility, the credit market turmoil could negatively impact our ability to obtain such financing. In addition, the credit market turmoil has negatively impacted certain of our customers which could lead to a decrease in demand for our services. 25

~~Fluctuations~~Table inof ~~foreign currency may negatively impact our profit margin.~~Contents

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

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

None.

Item 3. Defaults Upon Senior Securities

None.

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

None.

Item 5. Other Information

None.

25 26

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Item 6. Exhibits

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

27 26

Table of Contents

SIGNATURES

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

	MTS MEDICATION TECHNOLOGIES, INC.
Date: February 17, 2009	By:	/s/ Todd E. Siegel
Date: August 14, 2009	By:	/s/ Todd E. Siegel
		Todd E. Siegel
		President and Chief Executive Officer

Date: February 17, 2009	By:	/s/ Michael P. Conroy
Date: August 14, 2009	By:	/s/ Michael P. Conroy
		Michael P. Conroy
		Vice President and Chief Financial Officer

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Table of Contents

Exhibit Index

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

28 29

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CERTIFICATIONS

EXHIBIT 31.1

I, Todd E. Siegel, certify that:

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

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;

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;

The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

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

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

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

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

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

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

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

Date: February 17, 2009	By:	/s/ Todd E. Siegel
Date: August 14, 2009	By:	/s/ Todd E. Siegel
		Todd E. Siegel
		President and Chief Executive Officer

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EXHIBIT 31.2

I, Michael P. Conroy, certify that:

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

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

Date: February 17, 2009	By:	/s/ Michael P. Conroy
Date: August 14, 2009	By:	/s/ Michael P. Conroy
		Michael P. Conroy
		Vice President and Chief Financial Officer

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EXHIBIT 32.1

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

In connection with the quarterly report of MTS Medication Technologies, Inc. (the “Company”) on Form 10-Q for the quarter ended ~~December~~June 3130, 2008 as filed with ~~the~~ the Securities and Exchange Commission on the date hereof (the “Form 10-Q”), I, ~~Todd~~ Todd E. Siegel, President and Chief Executive Officer of the Company, certify, pursuant to 18 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:

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

(2)

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

Dated: ~~February~~August 1714, 2009 /s/ Todd E. Siegel Todd E. Siegel President and Chief Executive Officer

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EXHIBIT 32.2

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

In connection with the quarterly report of MTS Medication Technologies, Inc. (the “Company”) on Form 10-Q for the quarter ended ~~December~~June 3130, 2008 as filed with ~~the~~ the Securities and Exchange Commission on the date hereof (the “Form 10-Q”), I, Michael P. Conroy, Vice President and Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:

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

(2)

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

Dated: ~~February~~August 1714, 2009 /s/ Michael P. Conroy Michael P. Conroy Vice President and Chief Financial Officer

33 32

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

FORM 10-Q

MTS MEDICATION TECHNOLOGIES, INC. AND SUBSIDIARIES

Index

Forward Looking Statement

PARTMTS 1MEDICATION -TECHNOLOGIES, FINANCIALINC. INFORMATIONAND SUBSIDIARIESCONSOLIDATED BALANCE SHEETS (In Thousands) (Unaudited)

ASSETS LIABILITIES AND STOCKHOLDERS' EQUITY

1MTS MEDICATION TECHNOLOGIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (In Thousands; Except Earnings Per Share Amounts) (Unaudited)

MTS 2MEDICATION TECHNOLOGIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME THREE MONTHS ENDED JUNE 30, 2009 (In Thousands; Except Shares)(Unaudited)

TheMTS accompanyingMEDICATION notesTECHNOLOGIES, areINC. an integralAND partSUBSIDIARIES ofCONSOLIDATED thisSTATEMENTS financialOF statement.CASH FLOWS (In Thousands) (Unaudited)

TheMTS accompanyingMEDICATION notes areTECHNOLOGIES, anINC. integralAND partSUBSIDIARIESNOTES ofTO theseCONSOLIDATED financialFINANCIAL statements. STATEMENTS FOR THE THREE MONTHS ENDED JUNE 30, 2009 (Unaudited)

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

NOTE 1 – BASIS OF PRESENTATION

NOTE 2 – RESTRICTED CASH

NOTE 3 – INVENTORIES

NOTE 4 – EARNINGS PER SHARE

NOTE 5 – SHARE-BASED COMPENSATION

Exercisable Options

NOTE 6 – LONG-TERM DEBT

Other assetsNOTE consist8 of– theRECENT following:ACCOUNTING PRONOUNCEMENTS

NOTE 10 – SEGMENT INFORMATION

NOTE 10 – FAIR VALUE OF FINANCIAL INSTRUMENTS

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

ItemNOTE 2.12 Management’s– DiscussionAGREEMENT andAND AnalysisPLAN ofOF Financial Condition and Results of OperationsMERGER

MTS MEDICATION TECHNOLOGIES, INC. AND SUBSIDIARIES MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONSFOR THE THREE MONTHS ENDED JUNE 30, 2009

Overview

RESULTS OF OPERATIONS

15 Segments

Nine Months Ended December 31, 2008 and 2007

Segment Results of Operations

Consumables

Packaging Automation

Medication Administration Systems

LIQUIDITY AND CAPITAL RESOURCES

ESTIMATES AND CRITICAL ACCOUNTING POLICIES

Not Applicable.Off-Balance Sheet Arrangements

Contractual Obligations

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Item 4. Controls and Procedures

Plan for Remediation of Material Weakness

Changes in Internal Control Over Financial Reporting

PART II — OTHER INFORMATION

Item 1. Legal Proceedings

Item 1A. Risk Factors

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

Item 3. Defaults Upon Senior Securities

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

Item 5. Other Information

Item 6. Exhibits

SIGNATURES

Exhibit Index

CERTIFICATIONS

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

MTS MEDICATION TECHNOLOGIES, INC. AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FOR THE THREE MONTHS ENDED JUNE 30, 2009

Filing Compare · MTS MEDICATION TECHNOLOGIES, INC /DE/