Edgar Filing: SHARPS COMPLIANCE CORP

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

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FORM 10-KSB

|x| ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 For the fiscal year ended June 30, 2006

|_| TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the transition period from to .
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Commission File Number: 0-22390

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SHARPS COMPLIANCE CORP.
(Name of small business issuer in its charter)

Delaware 74-2657168
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)

9350 Kirby Drive, Suite 300, Houston, Texas 77054
(Address of principal executive offices) (Zip Code)

Issuer's telephone number (713) 432-0300

Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 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 |_|

Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. |x|

Issuer's revenues for most recent fiscal year: $10,562,720.

Aggregate market value of the voting and non-voting common equity held by
non-affiliates computed by reference to the price at which the common equity was
sold, or the average bid and asked price of such common equity, as of September
7, 2006: $4,355,284.

Number of shares outstanding of the issuer's Common Stock as of September 7,
2006: 10,551,310.

DOCUMENTS INCORPORATED BY REFERENCE:

Portions of the Registrant's definitive Proxy Statement for the 2006 Annual
Meeting of Stockholders to be held on November 9, 2006 are incorporated by
reference in Part III hereof.

Transitional Small Business Disclosure Format (check one): Yes |_| No |x|

SHARPS COMPLIANCE CORP. AND SUBSIDIARIES
TABLE OF CONTENTS *
ANNUAL REPORT ON FORM 10-KSB
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Page
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PART I

Item 1 Description of Business ..............................................2
Item 2 Description of Property ..............................................9
Item 3 Legal Proceedings ....................................................9
Item 4 Submission of Matters to a Vote of Security Holders .................10

PART II

Item 5 Market for Common Equity and Related Stockholder Matters ............11
Item 6 Management's Discussion and Analysis or Plan of Operation ...........12
Item 7 Financial Statements ................................................15
Item 8 Changes In and Disagreements with Accountants on Accounting and
Financial Disclosure ...............................................15
Item 8A Controls and Procedures .............................................15
Item 8B Other Information ...................................................15

PART III

Item 9 Directors, Executive Officers, Promoters and Control Persons;
Compliance with 16(a) of the Exchange Act ..........................16
Item 10 Executive Compensation ..............................................16
Item 11 Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters ........................................16
Item 12 Certain Relationships and Related Transactions ......................16
Item 13 Exhibits ............................................................17
Item 14 Principal Accountant Fees and Services ..............................18

Signatures ..........................................................19

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* This Table of Contents is inserted for convenience of reference only and is
not a part of this Report as filed.

INFORMATION REGARDING FORWARD-LOOKING STATEMENTS

This annual report on Form 10-KSB contains certain forward-looking statements
and information relating to the Company and its subsidiaries that are based on
the beliefs of the Company's management as well as assumptions made by and
information currently available to the Company's management. When used in this
report, the words "anticipate", "believe", "expect", "estimate", "project" and
"intend" and words or phrases of similar import, as they relate to the Company
or its subsidiaries or Company management, are intended to identify
forward-looking statements. Such statements reflect the current risks,
uncertainties and assumptions related to certain factors, including without
limitations, competitive factors, general economic conditions, customer
relations, relationships with vendors, governmental regulation and supervision,
seasonality, distribution networks, product introductions and acceptance,
technological change, changes in industry practices, onetime events and other
factors described herein. Based upon changing conditions, should any one or more
of these risks or uncertainties materialize, or should any underlying
assumptions prove incorrect, actual results may vary materially from those
described herein as anticipated, believed, estimated, expected or intended. The
Company does not intend to update these forward-looking statements.

PART I

ITEM 1. DESCRIPTION OF BUSINESS

Sharps Compliance Corp. was formed in November 1992 as a Delaware Corporation.
The information presented herein is for Sharps Compliance Corp. and its wholly
owned subsidiaries, Sharps Compliance, Inc. of Texas (dba Sharps Compliance,
Inc.), Sharps e-Tools.com, Inc. ("Sharps e-Tools"), Sharps Manufacturing, Inc.,
Sharps Environmental Services, Inc. (dba Sharps Environmental Services of Texas,
Inc.) and Sharps Safety, Inc. (collectively, "Sharps" or the "Company"). Sharps'
principal office is located at 9350 Kirby Drive, Suite 300, Houston, Texas
77054.

The Company provides access to all of its filings with the Securities and
Exchange Commission ("SEC") through its website www.sharpsinc.com, as soon as
reasonably practicable after the reports are filed with the SEC. The filings are
also available via the SEC's website at www.sec.gov/edgar/searchedgar/
companysearch.html.

PRODUCTS AND SERVICES

Sharps is a leading developer of cost effective solutions for improving safety
and efficiency related to the proper disposal of medical waste by healthcare
(outside of hospital), industry and consumers. These solutions include Sharps
Disposal by Mail System(R) Pitch-It(TM) IV Poles, Trip LesSystem(R), Sharps Pump
Return Box, Sharps Enteral Pump Return Box, Sharps Secure(R), Sharps SureTemp
Tote(R), IsoWash(R) Linen Recovery System, Biohazard Spill Clean-Up Kit and
Disposal System, Sharps e-Tools, Sharps Environmental Services and Sharps
Consulting. Some products and services facilitate compliance with state and
federal regulations by tracking, incinerating and documenting the disposal of
medical waste. Additionally, some products and services facilitate compliance
with educational and training requirements required by federal, state, and local
regulatory agencies.

The Sharps Disposal by Mail System(R) is a comprehensive solution for the
containment, transportation, destruction and tracking of medical waste for
commercial (healthcare and non-healthcare) and retail industries. The Sharps
Disposal by Mail System(R) contains a securely sealed, leak and puncture
resistant sharps container in several sizes; United States Postal Service
("USPS") approved shipping carton with priority mail (pre-paid) postage;
absorbent material inside the container that can safely hold up to 150
milliliters of fluids; a red bag for additional containment and complete
documentation and tracking manifest. The Sharps Disposal by Mail System(R) is
transported to the Company's disposal facility for incineration (i.e. Sharps
Environmental Services) in a pre-paid USPS approved shipping carton. Upon
destruction, Sharps supplies verification of destruction to the customer.

The Pitch-It(TM) IV Poles are designed as a cost effective, portable,
lightweight and disposable alternative to traditional IV poles used for
gravity-fed or pump-administered infusions. The innovative pole design provides
opportunities for the home healthcare industry to improve logistical
efficiencies by eliminating the costs and inconvenience of retrieving, cleaning,
bagging, tagging and storing of traditional IV poles. The Pitch-It(TM) poles are
available in three models: (i) tabletop, (ii) floor and (iii) full-size with
wheels.

The Trip LesSystem(R) is a solution for the home healthcare (commercial)
industry that eliminates costly trips by healthcare providers to the patient's
home after therapy has been completed. The Trip LesSystem(R) has combined three
complete programs for return and/or disposal. All systems contain the Sharps
Disposal by Mail System(R) along with either (i) a prepaid pump return box or
(ii) a Pitch-It(TM) IV Pole, depending on the patient's therapy.

Sharps' asset return boxes (i.e., the Sharps Pump Return Box and Sharps Enteral
Pump Return Box) are marketed to home healthcare providers, primarily for use
with home infusion patients. These products provide delivery and retrieval of
expensive equipment, like infusion and enteral pumps, phototherapy and TENS
units, between the healthcare provider and the patient.

The Sharps Secure(R) Needle Disposal System is the first commercially available
wall mounted needle collection and disposal by mail system specifically designed
for the retail and industrial markets. The system is mounted on the wall inside
of public restrooms to provide a visible collection point for self-injectors to
safely and privately dispose of used needles, which are often discarded in the
public waste at commercial and office buildings. The system consists of a Sharps
Disposal by Mail System(R) needle collection container, housed in the newly
designed (patent pending) Sharps Secure(R) metal collection cabinet. The
wall-mounted cabinet, which is manufactured from heavy gauge metal, has been
designed with numerous safety features to ensure that needles properly disposed
of will not present a hazard.

The Sharps SureTemp Tote(R) is a disposable cooler that maintains a safe range
for temperature-sensitive materials. Sharps primarily markets the product to
home healthcare providers to protect IV medications used in home infusion. Its
disposable nature relieves the home healthcare provider of tracking, cleaning
and maintaining reusable coolers.

The IsoWash(R) Linen Recovery System is designed to address the safe handling of
linens contaminated with blood, bodily fluids and other biohazards in the
hospitality market. Historically, contaminated linens are discarded at most
domestic hotels. IsoWash(R), however, provides an alternative for safely
handling and de-contaminating at a significant cost savings to linen
replacement. Contaminated linens are isolated from human contact by being placed
into the IsoWash(R) water-soluble bag, which is clear to reveal the bag's
contents and is marked with a biohazard warning. The isolated linens are placed
in industrial laundry equipment for recovery. Once the wash cycle begins, the
bag dissolves within two minutes allowing chemicals in the wash to safely clean
the contaminated laundry with minimal handling. Sharps is the exclusive
distributor for the patented product.

The Biohazard Spill Clean-Up Kit and Disposal System is a complete solution for
both cleanup and disposal by mail of bio-hazardous spill waste and materials.
This convenient system comes complete with everything necessary for clean up of
potentially bio-hazardous materials such as blood and bodily fluids. The Sharps
system provides a means to safely, easily and legally remove these materials
from your location and transport them to a destruction facility via the U.S.
Postal Service. Sharps Bio-Hazard Clean-Up Kit has the capacity to contain
spills of up to 1 liter of contaminant. Spill clean-up equipment, transportation
and proper disposal are all included in the price of the system.

The Sharps e-Tools online services include SharpsTracer(TM), AssetTracer(TM).
SharpsTracer(TM) is a manifest imaging and tracking program for registered
customers for the purpose of tracking and certifying the transportation and
disposal of regulated medical waste. SharpsTracer(TM) eliminates traditional
paper-based methods of manifest tracking and is designed to enhance customer
efficiencies with an automatic Proof of Destruction, Market Data Collection
abilities and Return to Store Programs capabilities. AssetTracer(TM) allows its
registered subscribers to effectively manage all types of capital assets through
a single, organized database. The program can be used in conjunction with other
Company products or independently and includes management reporting for
regulatory compliance, preventative maintenance and asset status and/or
location. ComplianceTrak offers a broad range of employee centered compliance
and education programs. The programs range from policy and procedure development
to specialized training and certification for all employees required to meet
certain Occupational Safety and Health Administration ("OSHA") standards.

Sharps Environmental Services provide environmental solutions for customers with
a wide variety of waste disposal needs. Primary services include the destruction
and disposal of (i) medical sharps waste, (ii) legal/confidential documents,
(iii) pharmaceutical products and (iv) non-hazardous industrial waste. This
service allows the Company to directly oversee the proper disposal of its Sharps
Disposal by Mail Systems(R). The Company has an agreement with the City of
Carthage, Texas, and Panola County to manage and operate the Panola County
Resources Recovery Facility ("PCRRF"), a municipally owned incinerator. The
agreement extends through June 30, 2012 with optional renewal periods through
June 2022.

Sharps Consulting provides a broad range of services including (i) analysis of
legal and regulatory implications of present waste handling practices, (ii)
communicating new legislation and industry best practices minimizing employee
exposure and liability, (iii) serving as intermediary with regulatory agencies
and (iv) educating employees on infection control practices and the dangers of
improperly handled medical waste.

MARKETS

The Company's key markets for its products and services are as follows:

- Healthcare
- Agriculture
- Retail
- Hospitality
- Professional
- Commercial / Industrial
- Pharmaceutical

Healthcare: The Company markets its Sharps Disposal by Mail System(R),
Pitch-It(TM) IV Poles, Trip LesSystem(R), Sharps Pump Return Box, Sharps Enteral
Pump Return Box and Sharps SureTemp Tote(R) products to the Healthcare segment.
This market consists primarily of home healthcare companies and generated 67% of
the Company's billings for the year ended June 30, 2006.

Agriculture: The Company markets its Sharps Disposal by Mail System(R) products
to the Agriculture segment. This market consists of companies that purchase the
products to properly dispose of syringes used to inject farm animals (ex., dairy
cattle) and generated 7% of the Companies billings for the year ended June 30,
2006.

Retail: The Company markets its Sharps Disposal by Mail System(R) products to
the Retail segment. This market consists of companies that purchase the products
to properly dispose of syringes utilized to administer flu shots and other
inoculations in the retail setting (grocery and drug stores). The Retail market
generated 5% of the Companies billings for the year ended June 30, 2006.

Hospitality: The Company markets its Sharps Disposal by Mail System(R),
IsoWash(R) Linen Recovery System, Biohazard Spill Clean-Up Kit and Disposal
System products to the Hospitality segment. This market includes hotel,
retirement and assisted living and contract food service provider companies. The
Hospitality segment generated 5% of the Company's billings for the year ended
June 30, 2006.

Professional: The Company markets its Sharps Disposal by Mail System(R) products
to the Professional segment. This market includes physician, dental,
veterinarian and other service-related firms. The Professional segment generated
4.5% of the Company's billings for the year ended June 30, 2006.

Commercial / Industrial: The Company markets its Sharps Disposal by Mail
System(R), Sharps Secure(R),and Biohazard Spill Clean-Up Kit products to the
Commercial / Industrial market. This market includes a wide variety of customers
including those with safety, industrial, retail and other facilities. The
Commercial / Industrial segment generated 2% of the Company's billings for the
year ended June 30, 2006.

Pharmaceutical: The Company markets its Sharps Disposal by Mail System(R)
products to the Pharmaceutical segment. This market includes pharmaceutical
manufacturer and clinical drug trial companies. Although, the Pharmaceutical
segment generated only 1% of the Company's billings for the year ended June 30,
2006, it is believed to be a segment with significant growth potential.

RESEARCH AND DEVELOPMENT

Sharps' research and development costs for the last two fiscal years have not
been material. The Company is seeking new applications for the Sharps Disposal
by Mail System(R) in many different industries and markets, since small quantity
medical waste generators can be found throughout the country. Sharps is also
considering the development of new products to assist companies in complying
with OSHA regulations regarding medical waste handling. Development of new
products is completed when utilizing the services of the prospective
manufacturer, which kept development costs to a minimum. Currently, Sharps works
with several manufacturers regarding the development of any products.

MARKET RISKS

Although, Sharps has experienced growth in revenues over the past few years,
there is an inherent concentration of credit risk associated with accounts
receivable arising from sales to its major customers. For the year ended June
30, 2006, three customers represented approximately 48% of revenues. Those same
three customers represented approximately 38%, or $378,939 of the total accounts
receivable balance at June 30, 2006. For the year ended June 30, 2005, two
customers represented approximately 47% of revenues. Those same two customers
represented approximately 42%, or $409,000 of the total accounts receivable
balance at June 30, 2005. The Company may be adversely affected by its
dependence on a limited number of high volume customers. Management believes
that the risks are mitigated by, (i) the contractual relationships with key
customers, (ii) the high quality and reputation of the Company and its products
and (iii) the continued diversification of the Company's products and services
into additional markets outside of its traditional Healthcare customer base.

Currently, Sharps sole-sources transportation with the United States Post Office
("USPS"), which consists of delivering the Sharps Disposal by Mail System(R)
from the end user to the Company's leased incineration facility. The Company
recently entered into an arrangement with United Parcel Service Inc. ("UPS")
whereby UPS has agreed to transport the Company's Sharps Disposal by Mail
System(R) products from the end user to the Company's leased incineration
facility. The Company expects to offer a UPS product to its current and future
customers in fiscal year 2007. Management believes the risk of dependence on the
USPS is mitigated by (i) the new arrangement with UPS and (ii) the long-standing
business relationship with the USPS.

INTELLECTUAL PROPERTY

Although, Sharps has applied in the United States for registration of a number
of trademarks and patents, many of which have been registered and granted, it
can give no assurance that the Company will obtain and maintain registrations
for existing and the other trademarks and patents for which it has applied.

RISK FACTORS

Operating History; History of Losses

Until fiscal year 2006, Sharps has incurred annual operating losses. The future
success of Sharps is dependent upon many factors, including environmental
regulation, continuity of its distributorship and customer agreements,
successful completion of its product development activities and the
identification and penetration of additional markets for its products and
services. Management believes that the Company's current financial resources,
including cash on hand and its line of credit with JPMorgan Chase Bank, N.A.,
will be sufficient to fund operations through fiscal year 2007. There can be no
assurance that the Company will be able to obtain additional financing, if
necessary, on acceptable terms to fund operations beyond that time frame;
however, management believes that it would be successful in raising such
financing, if necessary.

Dependence on Key Management Personnel

Sharps' growth and development to date has been largely dependent on the active
participation and leadership of its senior management team. The Company believes
that the continued success of the business is dependent upon the continued
employment of the senior management team and has therefore entered into
individual employment agreements with the senior management team in order to
provide incentive for their continued employment with the Company.

Competition

There are several competitors who offer similar or identical products and
services that facilitate the disposal of medical waste. There are also a number
of companies that focus specifically on the marketing of products and services
which facilitate disposal through transport by the USPS (similar to the
Company's products). These companies are typically smaller organizations or
divisions of larger companies. While Sharps does not believe it currently faces
significant competition in the sharps disposal by mail business, it is likely
that this could change as the Company continues its success and the country
becomes more aware of the need for the proper disposal of medical sharps. It is
possible that future competition may also come from companies that are larger
and better capitalized than the Company.

Customer Relationships

Sharps generally has no firm long-term volume commitments from its customers and
enters into individual purchase orders or contracts. Although, Sharps has
contractual relationships with the majority of its customers, Sharps has
experienced fluctuations in order levels from period to period and expects to
continue experiencing such fluctuations in the near future. In addition,
customer purchase orders may be canceled and order volume levels can be changed,
or delayed with limited or no penalties. Sharps cannot assure the replacement of
canceled, delayed or reduced purchase orders with new business. Moreover, Sharps
financial condition and results of operations will depend in significant part
upon the Company's ability to obtain orders from new customers, as well as the
financial condition and success of its customers, its customers' products and
services and the general economy. The factors affecting any of the major
customers of Sharps, or their customers, could have a material adverse effect on
the businesses, financial condition and results of operations of Sharps.

Incinerator Facilities

The Company's business utilizes an incinerator facility for medical waste
disposal. The Company has a lease agreement for the facility with the City of
Carthage, Texas (Panola County) to operate the PCRRF through June 30, 2012 (with
options to extend the lease through June 30, 2022). The Company is responsible
for operating and maintaining the facility in compliance with all federal, state
and local laws and/or any other regulatory agency involving solid waste
disposal. The cost of such compliance for the period ending June 30, 2006 was
$13,791. The Company is also responsible for all operating and capital costs
associated with day-to-day operations of the incinerator facility. Although the
Company entered into an agreement with a secondary burn facility to provide
services in the event the PCRRF is unavailable, any disruption in the
availability of a disposal facility or increased governmental regulation may
have an adverse impact on the Company. The Company can make no assurances that
no such disruption or burdensome regulation will occur in the future.

The Company believes the facility is in compliance with all applicable federal,
state, local and/or regulatory agency requirements, air pollution and TCEQ
("Texas Commission on Environmental Quality") regulations. See change in
Government Regulation below.

Governmental Regulation

Operations and Incinerator

Sharps is required to operate within guidelines established by federal, state,
and/or local regulatory agencies. Such guidelines have been established to
promote occupational safety and health standards and certain standards have been
established in connection with the handling, transportation and disposal of
certain types of medical and solid wastes, including mailed sharps. Sharps
believes that it is currently in compliance in all material respects with all
applicable laws and regulations governing its business. However, in the event
additional guidelines are established to more specifically control the business
of Sharps, including the environmental services subsidiary, additional
expenditures may be required in order for Sharps to be in compliance with such
changing regulations. Furthermore, any material relaxation of any existing
regulatory requirements governing the transportation and disposal of medical
sharps products could result in a reduced demand for Sharps' products and
services and could have a material adverse effect on Sharps' revenues and
financial condition. The scope and duration of existing and future regulations
affecting the medical and solid waste disposal industry cannot be anticipated
and are subject to change due to political and economic pressures.

In November 2005, the EPA amended the Clean Air Act which will affect the
operations of the leased incineration facility located in Carthage, Texas. The

regulation modifies the emission limits and monitoring procedures required to
operate an incineration facility. The new rules will necessitate changes to the
Company's leased incinerator and pollution control equipment at the facility or
require installation of an alternative treatment method to ensure compliance.
Such change would require the Company to incur significant capital expenditures
in order to meet the requirements of the regulations. The regulation allows a
minimum period of three years and a maximum of five years to comply after the
date the final rule was published. The Company has studied the amended EPA Clean
Air Act and its options, but has not yet made a decision regarding how it will
comply with the new rules. Should the Company decide to upgrade its incineration
facility to comply with the new regulations or install alternative technology,
it would do so not only to comply with the new regulations but also to
potentially generate additional revenue sources including medical waste disposal
(in additional to the incineration of sharps, syringes, lancets, etc.).

Proper Disposal of Medical Sharps

The first significant regulatory development occurred in December 2004 with the
improved guidance issued by the Environmental Protection Agency ("EPA")
regarding the safe disposal of medical sharps (needles, syringes and lancets).
This new guidance is a result of disposal problems created by 3 billion syringes
discarded annually by self-injectors of medicines in homes and non-healthcare
commercial facilities. Until December 2004, the EPA guidance has instructed
consumers to place used sharps in a household container and to place the
container in the household garbage. New guidance posted on the EPA website
reflects information about alternative disposal methods including mail-back
programs. The improved guidance issued by the EPA is a significant step toward
the removal of needles, syringes and other sharps from the solid waste stream,
consistent with the current practice in healthcare facilities. The Company's
products and services, which are included in the EPA list of recommended
solutions, are designed to improve safety, efficiency and patient concerns
related to the proper disposal of medical sharps.

The next regulatory development was the enactment of California Senate Bill
1362, "The Safe Needle Disposal Act of 2004." This legislation authorizes
California agencies to expand the scope of their existing household hazardous
waste plans to provide for the safe disposal of medical sharps including
hypodermic needles and syringes. Authorized disposal programs include the
mail-back programs currently marketed by the Company.

In July 2006, the State of California passed Senate Bill 1305 ("SB 1305"), an
amendment to The Medical Waste Management Act. The new law requires the proper
disposal of home-generated sharps waste (syringes, needles, lancets, etc.) and
acknowledges mail-back programs as one of the most convenient alternatives for
the collection and destruction of home-generated sharps Effective January 1,
2007 (with enforcement beginning September 1, 2008), SB 1305 addresses the need
to meet the changing demands of healthcare provided in alternate sights that
currently allows hundreds of millions of home-generated sharps waste to be
disposed in solid waste and recycling containers. The new law is designed to
ensure appropriate disposal of sharps waste necessary to protect the general
public and workers from potential exposure to contagious diseases and health and
safety risks.

Also in July 2006, The Massachusetts Legislature enacted Senate Bill 2569 which
requires the Massachusetts department of public health, in conjunction with
other relevant state and local agencies and government departments, to design,
establish and implement a program for the collection and disposal of
non-commercially generated, spent hypodermic needles and lancets. Recommended
disposal methods include mail-back products approved by the U.S. Postal Service
such as the Sharps Disposal By Mail Systems(R). The Massachusetts legislation
addresses the need for proper disposal of used syringes, needles and lancets
outside of the traditional healthcare setting.

Postal Work Interruptions

Sharps currently transports its disposal products using the USPS, therefore, any
interruption in day-to-day USPS delivery services could have a material adverse
effect on Sharps' revenues and financial condition. Postal delivery
interruptions are rare and unpredictable. However, since USPS employees are
federal employees, such employees may be prohibited from engaging in or
continuing a postal work stoppage, although there can be no assurance that such
work stoppage can be avoided. As noted above, the Company recently entered into
an arrangement with UPS whereby UPS has agreed to transport the Company's Sharps
Disposal by Mail System(R) products from the end user to the Company's leased
incineration facility. The Company expects to offer a UPS product to its current
and future customers in fiscal year 2007. Management believes the risk of
dependence on the USPS is mitigated by the new arrangement with UPS and its long
standing relationship with the USPS.

Employees

Sharps employees 28 individuals, of which 26 are full-time employees.

ITEM 2. DESCRIPTION OF PROPERTY

Sharps currently leases 10,634 square feet of rentable (office and warehouse)
space in Houston, Texas. On July 13, 2006 Sharps executed a new lease agreement
for 18,231 square feet of rentable (office and warehouse) space ("New Lease")
near the existing leased facility in Houston, Texas ("New Premises"). The new
lease period will commence upon the completion of the construction of the New
Premises, which the Company anticipates to be in October or November of 2006.
The New Lease will expire on the five (5) year anniversary of the New Lease
commencement date. The existing lease will be terminated upon acceptance of the
New Premises by the Company in accordance with the terms of the New Lease.

The Company leases an incinerator facility located in Carthage, Texas for
medical waste disposal. The lease agreement requires rental payments of $2,000
per month for the first year (year ended June 30, 2003) escalating by $6,000 per
year (or $500 per month) each year thereafter until initial termination of the
lease on June 30, 2012. The Company is required to pay additional rent equal to
$0.02 per pound for all materials burned, treated, received or transferred at
the incinerator facility exceeding 100,000 pounds per month. The Company is
responsible for the cost of operating and maintaining the facility, including
compliance with state and federal regulations. For accounting purposes, as a
result of the lease escalation clause, the Company records lease expense for
this facility on a straight-line basis over the life of the lease, which
computes to $4,250 per month, or $51,000 per year.

ITEM 3. LEGAL PROCEEDINGS

During September and October 2003, the Company secured judgments against
Ameritech Environmental, Inc. ("Ameritech") totaling $176,958 related to the
non-payment by Ameritech for services provided by the Company in 2002. Ameritech
sold the assets of Ameritech representing collateral for the judgments to
MedSolutions, Inc. of Dallas, Texas ("MedSolutions") in November 2003. During
January 2004, the Company secured a Garnishment Order against MedSolutions
whereby MedSolutions was ordered to pay to the Company $170,765, plus interest
at 5%, subject to the terms of the agreement by which MedSolutions purchased the
Ameritech assets. A balloon payment of $137,721 due November 7, 2004, under the
Garnishment Order, was not made by MedSolutions to the Company. It is the
position of the Company that MedSolutions is currently in breach of the
Garnishment Order. Additionally, the Company filed an amended suit, in August
2006, against Ameritech, its officers and directors (Jasper S. Howard, Alton H.
Howard and Jonathon S. Howard) alleging fraudulent conveyance, fraud on
creditors, civil conspiracy, breach of court order and conversion. Although the
Company will continue to aggressively pursue collection of the outstanding
amounts, no assurances can be made regarding ultimate collection.

On June 14, 2004, the Company provided Mr. Ronald E. Pierce, its then current
Chief Operating Officer ("Mr. Pierce"), with notice of non-renewal of his
employment agreement. As such, July 14, 2004 was Mr. Pierce's last day of
employment. The Company has advised Mr. Pierce that under the terms of the
employment contract no further compensation (including services) was due. The
Company then received various letters from Mr. Pierce's attorney advising that
Mr. Pierce is taking the position that the non-renewal of the employment
agreement was not timely and, therefore, Mr. Pierce was terminated without
cause. Additionally, Mr. Pierce claims that the Company had no right to
terminate him on the anniversary date of his Agreement without the obligation of
paying Mr. Pierce as if he were terminated without cause. Mr. Pierce has
demanded severance related payments totaling approximately $280,000 (including
an $80,000 bonus) along with the full accelerated vesting of 500,000 stock
options previously awarded to Mr. Pierce. The Company believes that notice of
such non-renewal was timely, and that in accordance with Mr. Pierce's employment
agreement, the Company was entitled to provide notice thirty (30) days prior to
the anniversary of its intent to terminate the agreement, and no severance would
therefore be due to Mr. Pierce. On July 30, 2004, the Company received notice
from Mr. Pierce's attorney requesting commencement of arbitration to resolve the
claim. No further communications have been received from Mr. Pierce's attorney
since July 30, 2004. The Company believes it has meritorious defenses against
Mr. Pierce's claims and has not recorded a liability related to this matter.

In March 2005, the Company's wholly-own subsidiary Sharps Compliance, Inc.,
filed a lawsuit in Harris County District Court, Texas against Mr. Jodway (a
former employee) and Attentus Medical Sales, Inc. ("Attentus"). The lawsuit
claimed, (i) breach of a confidentiality agreement, (ii) misappropriation of
trade secrets and (iii) tortuous interference with the Company's existing and
prospective contracts and business relationships. On April 7, 2005, the
defendant filed its answer and counter claims against Sharps Compliance, Inc.
asserting breach of contract, quantum merit and violation of the Texas Payday
Act. On September 19, 2005, the Company amended its pleadings and added claims
asserting conversion, unjust enrichment, unfair competition and trademark
infringement in violation of the Lanham Act, false advertising in violation of
the Lanham Act, trademark dilution under the Texas Business and Commerce Code,
and tortuous interference with existing and/or prospective customers. On July 6,

2006, the Company, Attentus and Mr. Jodway reached settlement on all matters
related to this litigation and dismissed all claims against each other. In
conjunction with the resolution of the matter, the Company entered into a
business relationship whereby Attentus now markets and sells the Company's
Sharps Disposal By Mail Systems(R) to its current and future customers.

In July 2006, the Company received a Notice of Charge of Discrimination from the
U.S. Equal Employment Opportunity Commission ("EEOC") filed by a former
employee, Sylvia Haist. The charge alleges sex discrimination and retaliation.
Sylvia Haist was an employee of the Company from July 1998 until her termination
in January 2006. The Company believes the charges to be totally without merit
and frivolous. The Company has filed a response with the EEOC in the form of a
position statement and believes the EEOC will rule in favor of the Company. The
Company intends to vigorously defend itself against the erroneous allegations.

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

During the three months ended June 30, 2006, no matter was submitted by the
Company to a vote of its stockholders through the solicitation of proxies or
otherwise.

PART II

ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

Market Information: During the two years ended June 30, 2006, the common stock
of the Company has been quoted on the over-the-counter ("OTC") Bulletin Board
under the symbol "SCOM". The Company's common stock has had limited trading
volume, averaging approximately 78,000 shares traded per month on the OTC
Bulletin Board. The table below sets forth the high and low closing prices on
the OTC Bulletin Board for each quarter within the last two fiscal years.

Common Stock
-----------------------
High Low
------- -------
Fiscal Year Ending June 30, 2005
--------------------------------
First Quarter $ 0.95 $ 0.57
Second Quarter $ 1.20 $ 0.70
Third Quarter $ 1.15 $ 0.60
Fourth Quarter $ 1.15 $ 0.75

Fiscal Year Ending June 30, 2006
--------------------------------
First Quarter $ 0.94 $ 0.60
Second Quarter $ 0.85 $ 0.61
Third Quarter $ 1.05 $ 0.62
Fourth Quarter $ 0.99 $ 0.85

Fiscal Year Ending June 30, 2007
--------------------------------
First Quarter (September 7, 2006) $ 0.98 $ 0.85

Stockholders: At September 7, 2006 there were 10,551,310 shares of common stock
held by 191 holders of record with approximately 500 held in street name. The
last reported sale of the common stock on September 7, 2006, was $ 0.85 per
share.

Dividend Policy: The Company has never declared nor paid any cash dividends on
its common stock. The Company currently intends to retain all of its earnings
for the operation and expansion of its business and does not anticipate paying
any dividends in the foreseeable future.

Securities Authorized for Issuance under Equity Compensation Plans:

Equity Compensation Plan Information

Number of securities to be Weighted average Number of securities
issued upon exercise of exercise price of remaining available
Plan category outstanding options, outstanding options, for future issuance
warrants and rights warrants and rights

Equity compensation plans
approved by security holders 3,066,390 $ 0.91 315,444
Equity compensation plans not
approved by security holders 637,500 0.76 N/A
--------- -------- -------
Total 3,703,890 $ 0.89 315,444
========= ======== =======

Recent Sales of Unregistered Securities: There have been sales of unregistered
securities in the last three years.

ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION

The discussion and analysis presented below should be read in conjunction with
the consolidated financial statements and related notes appearing elsewhere in
this Form-10KSB. See "Information Regarding Forward Looking Statements."

RESULTS OF OPERATIONS

The following table sets forth, for the periods indicated, certain items from
the Company's Consolidated Financial Statements of Operations, expressed as a
percentage of revenue:

Year Ended June 30,
-----------------------------------
2006 2005
------------- -------------
Total revenues 100% 100%
Costs and expenses:
Cost of revenues (57%) (61%)
Selling, general and administrative (37%) (39%)
Depreciation and amortization (1%) (2%)
------------- -------------
Total operating expenses (96%) (102%)
------------- -------------
Operating profit (loss) 4% (2%)
Interest income (expense), net 0% 0%
------------- -------------
Net income (loss) 4% (2%)
============= =============

YEAR ENDED JUNE 30, 2006 COMPARED TO YEAR ENDED JUNE 30, 2005

Total revenues for the year ended June 30, 2006 of $10,562,720 increased by
$1,561,543, or 17%, over the total revenues for the year ended June 30, 2005 of
$9,001,177. The increase in revenues is primarily attributable to an increase in
billings in the Retail ($336,098), Hospitality ($220,112), Professional
($150,540), Agriculture ($136,971) and Pharmaceutical ($101,158) markets. These
increases were partially offset by decreased billings in Health Care market of
$83,639. The increase in the billings in the Retail market is a result of the
increased use of our products in grocery stores and pharmacies to properly
dispose of syringes utilized to administer flu and other inoculations. The
increase billings in the Hospitality and Professional markets is being driven
higher by demand for the Company's products as industry and consumers become
more aware of the proper disposal of medical sharps (syringes, lancets, etc.).
The increased billings in the Agriculture market are a result of increased
demand of the Sharps Disposal by Mail System by a customer who uses the product
to facilitate the injection of dairy cattle. The increase in billings in the
Pharmaceutical market is a result of the demand for the Sharps Disposal By mail
System products in the clinical drug trial setting.

Cost of revenues for the year ended June 30, 2006 of $6,068,399 was 57% of
revenues. Cost of revenues for the year ended June 30, 2005 of $5,499,355 was
61% of revenues for the corresponding period. The improvement in the gross
margin (reduced cost of revenue) is a result of increased revenue and the mix of
products sold.

Selling, general and administrative ("SG&A") expenses for the year ended June
30, 2006 of $3,957,652 increased by $437,607, or 12%, over the SG&A expenses for
the year ended June 30, 2005. The increase in the SG&A expenses is primarily a
result of increases in the following expenses, (i) compensation of $163,000,
(ii) professional fees of $179,000 and (iii) recruiting fees and other totaling
$68,400 . The increase in compensation is a result of the increase in the number
of the Company's sales persons hired to facilitate the Company's growth plans.
The increase in professional fees is related to Company litigation and advisory
fees.

LIQUIDITY AND CAPITAL RESOURCES

Cash and cash equivalents increased by $38,532 to $296,959 at June 30, 2006 from
$258,427 at June 30, 2005. The increase in cash and cash equivalents is
primarily a result of cash generated from operations of $322,687, partially
offset by, (i) additions to property and equipment of $175,188, (ii) additions
to intangible assets of $63,258 and (iii) payments on capital lease obligations
of $48,601.

Property and equipment, net, increased by $35,323 to $473,387 at June 30, 2006
from $438,064 at June 30, 2005. This increase is attributable to the purchase
of, (i) software purchases and upgrades $77,241, (ii) incineration facility
equipment installed of $56,375, (iii) computer equipment $22,572, (iv)
operational tools and dies of $16,808 and (v) other of $2,192. These additions
were partially offset by depreciation expense for 2006 of $139,865. The software
purchases and upgrades and the computer equipment were purchased to accommodate
new employees and the growing customer/revenue base. The incineration facility
equipment additions were incurred to keep the facility operating efficiently.
The costs incurred for operational tools and dies are for new and updated
product designs.

The Company's obligations under capital leases (including current portion)
decreased by $48,601 as of June 30, 2006 as compared to the June 30, 2005
balances. This decrease is attributable to the corresponding payments on such
capital lease obligations.

Stockholder's equity increased by $395,556 from a deficit of $143,656 to equity
of $251,900. This increase is attributable to, (i) fiscal year 2006 net income
of $381,629, (ii) the effect of stock options exercised and (iii) the effect to
equity of the acceleration of stock option vesting.

Management believes that the Company's current cash resources along with its
$1.5 million line of credit will be sufficient to fund operations for the twelve
months ended June 30, 2007.

QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)

The following tables set forth selected quarterly information for 2006 and 2005.
We believe that all necessary adjustments have been included in the amounts
below to present fairly the results of such periods.

Quarter Ended
------------------------------------------------------------------------------------
September 30, 2004 December 31, 2004 March 31, 2005 June 30, 2005
---------------------- ---------------------- ------------------- ------------------

Total revenues $ 2,419,386 $ 2,229,045 $ 2,232,644 $ 2,120,102
Cost of revenues $ 1,387,544 $ 1,330,947 $ 1,398,141 $ 1,382,723
Operating income (loss) $ 120,469 $ (4,356) $ (97,500) $ (194,296)
Net income (loss) $ 108,912 $ (9,135) $ (96,219) $ (196,658)
Net income (loss) per share $ 0.01 $ 0.00 $ (0.01) $ (0.02)
Weighted average shares -
diluted 10,887,750 10,538,144 10,538,144 10,543,794

Quarter Ended
------------------------------------------------------------------------------------
September 30, 2005 December 31, 2005 March 31, 2006 June 30, 2006
---------------------- ---------------------- ------------------- ------------------

Total revenues $ 2,660,112 $ 2,663,376 $ 2,531,210 $ 2,708,022
Cost of revenues $ 1,560,919 $ 1,496,692 $ 1,466,906 $ 1,543,882
Operating income (loss) $ 171,806 $ 171,119 $ (2,830) $ 37,110
Net income (loss) $ 164,532 $ 166,972 $ (2,513) $ 52,638
Net income (loss) per share $ 0.02 $ 0.02 $ 0.00 $ 0.00
Weighted average shares -
diluted 10,732,740 10,720,512 10,547,328 10,950,196

CRITICAL ACCOUNTING POLICIES

Inventory: Inventory consists primarily of finished goods and supplies held for
sale and are stated at the lower of cost using the average cost method or
market.

required, the estimated future undiscounted cash flows associated with the asset
are compared to the asset's carrying amount to determine if a write-down to
market value or discounted cash flow value is necessary.

Revenue Recognition: The Company adopted the Securities and Exchange
Commission's ("SEC") Staff Accounting Bulletin ("SAB") No. 101, "Revenue
Recognition", which provides guidance related to revenue recognition based on
interpretations and practices followed by the SEC. Under SAB No. 101, certain
products offered by the Company have revenue producing components that are
recognized over multiple delivery points (Sharps Disposal by Mail Systems,
referred to as "Mailback" and Sharps Return Boxes, referred to as "Pump
Returns") and can consist of up to three separate elements as follows: (1) the
sale of the container system, (2) the transportation of the container system and
(3) the treatment and disposal (incineration) of the container system. The
individual fair value of the transportation and incineration services are
determined by the sales price of the service offered by third parties, with the
fair value of the container being the residual value. Revenue for the sale of
the container is recognized upon delivery to the customer, at which time the
customer takes title and assumes risk of ownership. Transportation revenue on
Mailbacks is recognized when the customer returns the mailback container system
and the container has been received at the Company's treatment facility. The
Mailback container system is mailed to the incineration facility using the USPS.
Incineration revenue is recognized upon the destruction and certification of
destruction having been prepared on the container. Since the transportation
element and the incineration elements are undelivered services at the point of
initial sale of the container, the Mailback and Incinerator revenue is deferred
until the services are performed. The current and long-term portions of deferred
revenues are determined through regression analysis and historical trends.
Furthermore, through regression analysis of historical data, the Company has
determined that a certain percentage of all container systems sold may not be
returned. Accordingly, a portion of the transportation and incineration elements
are recognized at the point of sale.

Shipping and Handling Fees and Costs: The Company records amounts billed to
customers for shipping and handling as revenue. Costs incurred by the Company
for shipping and handling have been classified as cost of revenue.

Income Taxes: The liability method is used in accounting for deferred income
taxes. Under this method, deferred tax assets and liabilities are determined
based on differences between financial reporting and tax bases of assets and
liabilities and are measured using the enacted tax rates and laws that will be
in effect when the differences are expected to reverse. The realizability of
deferred tax assets is evaluated annually and a valuation allowance is provided
if the deferred tax assets, more likely than not, will not give rise to future
benefits in the Company's tax returns.

Segment Reporting: SFAS No. 131, "Disclosures about Segments of an Enterprise
and Related Information," requires that a public business enterprise report
financial and descriptive information about its operating segments. Generally,
financial information is required to be reported on the basis used internally
for evaluating segment performance and resource allocation. The Company operates
in a single segment, focusing on developing cost effective, logistical and
educational solutions for healthcare and non-healthcare institutional markets.

RECENTLY ISSUED ACCOUNTING STANDARDS

In December 2004, the FASB issued Statement No. 123 (revised 2004) ("FAS 123R"),
Share-Based Payments. FAS 123R requires all entities to recognize compensation
expense in an amount equal to the fair value of share-based payments, such as
stock options granted to employees. The Company has elected to apply FAS 123R on
a modified prospective method. Under this method, the Company is required to
record compensation expense (as previous awards continue to vest) for the
unvested portion of previously granted awards that remain outstanding at the
date of adoption. For public entities that file as small business issuers, FAS
123R is effective as of the beginning of the first interim or annual reporting
period of the first fiscal year beginning on or after December 15, 2005 (quarter
ended September 30, 2006). Although, management has completed its evaluation of
the effect that FAS 123R, the effect of the new standard to the Company's
statement of operations beginning with the quarter ended September 30, 2006,
will be significantly lower than that disclosed in its previous pro forma
footnote disclosures as a result of the June 30, 2006 acceleration of vesting of
unvested stock options previously awarded to employees, officers, and directors
(See Notes 2 and 9 of the Notes to the Consolidated Financial Statements).

No. 155 also eliminates a restriction on the passive derivative instruments that
a qualifying special purpose entity may hold. SFAS No. 155 is effective for
those financial instruments acquired or issued after December 1, 2006. At
adoption, any difference between the total carrying amount of the individual
components of the existing bifurcated hybrid financial instrument and the fair
value of the combined hybrid financial instrument will be recognized as a
cumulative-effect adjustment to beginning retained earnings. The Company does
not expect the new standard to have any material impact on its financial
position and results of operations.

In March 2006, the FASB issued SFAS No. 156, "Accounting for Servicing of
Financial Assets, an amendment of FASB Statement No. 140." SFAS No. 156 requires
all separately recognized servicing assets and servicing liabilities to be
initially measured at fair value, if practicable. The standard permits an entity
to subsequently measure each class of servicing assets or servicing liabilities
at fair value and report changes in fair value in the statement of income in the
period in which the changes occur. SFAS No. 156 is effective for the Company as
of December 1, 2006. The Company does not expect the new standard to have any
material impact on its financial position and results of operations.

In July 2006, the FASB issued FIN No. 48, "Accounting for Uncertainty in Income
Taxes - an interpretation of FASB Statement No. 109. This interpretation
clarifies the accounting for uncertainty in income taxes recognized in an
entity's financial statements in accordance with SFAS No. 109, "Accounting for
Income Taxes." It prescribes a recognition threshold and measurement attribute
for financial statement disclosure of tax positions taken or expected to be
taken on a tax return. This interpretation is effective for fiscal years
beginning after December 15, 2006. The Company will be required to adopt this
interpretation in the first quarter of fiscal year 2008. Management is currently
evaluating the requirements of FIN No. 48 but does not believe the new standard
will have a material impact on its consolidated financial statements.

ITEM 7. FINANCIAL STATEMENTS

The financial statements of the Company and the related report of the Company's
independent registered public accounting firm thereon are included in this
report and are referenced as pages F-1 to F-20.

ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

In order to effect a name change of UHY Mann Frankfort Stein & Lipp CPAs, LLP
("UHY-MFSL"), the partners of UHY-MFSL announced that they were joining a
currently affiliated firm, UHY LLP (a New York limited liability partnership).
Accordingly, UHY-MFSL notified the Company that it will provide audit services
to the Company under the affiliated entity UHY LLP.

ITEM 8A. CONTROLS AND PROCEDURES

Within the ninety days prior to the date of this report, the Company carried out
an evaluation, under the supervision and with the participation of the Company's
management, including the Company's Chief Executive Officer and Chief Financial
Officer, of the effectiveness of the design and operation of the Company's
disclosure controls and procedures pursuant to Exchange Act Rule 13(a)-15(e) and
15(d) - 15(e). Based upon that evaluation, the Chief Executive Officer and Chief
Financial Officer concluded that the Company's disclosure controls and
procedures are effective in timely alerting them to material information
relating to the Company (including its consolidated subsidiaries) required to be
included in the Company's periodic SEC filings. There were no significant
changes in the Company's internal controls or in other factors that could
significantly affect these controls subsequent to the date of the Company's
evaluation.

ITEM 8B. OTHER INFORMATION

The information required by this item is not applicable.

PART III

ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
WITH SECTION 16(a) OF THE EXCHANGE ACT

The information required by this item is incorporated herein by reference to the
information under the caption "Management" of the Registrant's definitive Proxy
Statement to be filed pursuant to Regulation 14A with the Securities and
Exchange Commission ("SEC") relating to its Annual Meeting of Stockholders to be
held on November 9, 2006.

Paragraph 16(a) of the Securities Exchange Act of 1934, as amended, requires the
Company's executive officers and directors, and persons who beneficially own
more than 10% of the Company's equity securities, to file reports of security
ownership and changes in such ownership with the SEC. Officers, directors and
greater than 10% beneficial owners also are required by SEC regulations to
furnish the Company with copies of all Section 16(a) forms they file.

To the Company's knowledge, based solely on review of the copies of such reports
furnished to the Company, during the fiscal year ended June 30, 2006, all
Section 16(a) filing requirements applicable to its officers, directors and
greater than 10% beneficial owners were complied with.

The Audit Committee is comprised of certain Directors who are not employees of
the Company or any of its subsidiaries. Messrs. Zerrillo (Chairman) and Parker
and are the current members of the Audit Committee. The Audit Committee meets
with the independent auditors and management representatives, recommends to the
Board of Directors appointment of independent auditors, approves the scope of
audits, interim reviews and other services to be performed by the independent
auditors, approves in advance all permissible non-audit services, considers
whether the performance of any professional services by the auditors other than
services provided in connection with the audit function could impair the
independence of the auditors and reviews the results of audits and interim
reviews and the accounting principles applied in financial reporting and
financial and operational controls. The independent auditors have unrestricted
access to the Audit Committee and vice versa.

The Company's Board has determined that Mr. Parker is an independent director
who qualifies as an audit committee accounting expert, as that term is defined
in Item 401(h) of Regulation S-K under the Securities Act of 1933, as amended.

The Company's Board adopted a Code of Ethics for all of our directors, officers
and employees, as defined in Item 406 of Regulation S-K under the Securities Act
of 1933, as amended. The Company's Code of Ethics was previously an exhibit to
the Annual Report on Form 10-KSB. Individuals may also request a free copy of
the Company's Code of Ethics from the Company's investor relations department.
Additionally, the Company posted its Code of Ethics on its website
(www.sharpsinc.com). The Company intends to disclose any amendments to, or
waivers from, the provisions of its Code of Ethics within four business days of
the amendment or waiver under of Form 8-K.

ITEM 10. EXECUTIVE COMPENSATION

The information required by this item is incorporated herein by reference to the
information under the captions "Management" and "Executive Compensation" of the
Registrant's definitive Proxy Statement to be filed pursuant to Regulation 14A
with the SEC relating to its Annual Meeting of Stockholders to be held on
November 9, 2006.

ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS

The information required by this item is incorporated herein by reference to the
information under the captions "Security Ownership of Management" and "Certain
Beneficial Owners" of the Registrant's definitive Proxy Statement to be filed
pursuant to Regulation 14A with the SEC relating to its Annual Meeting of
Stockholders to be held on November 9, 2006.

ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The information required by this item is incorporated herein by reference to the
information under the caption "Certain Relationships and Related Transactions"
of the Registrant's definitive Proxy Statement to be filed pursuant to
Regulation 14A with the SEC relating to its Annual Meeting of Stockholders to be
held on November 9, 2006.

ITEM 13. EXHIBITS

Exhibit
Number Description of Exhibit
------- ------------------------------------------------------------------------

2.1 Agreement and Plan of Reorganization between U.S. Medical Systems, Inc.,
Sharps Compliance, Inc. and its Stockholders, dated February 27, 1998
(incorporated by reference from Exhibit 2.1 to Form 8-K, dated February
27, 1998).
3.1 Bylaws of Company (incorporated by reference from Exhibit 3.4 to Form
10-KSB, dated June 30, 1994).
3.2 Certificate of Elimination of the Series A 10% Voting Convertible
Preferred Stock of Sharps Compliance Corp. (incorporated by reference
from Exhibit 3.6 to Form 10-KSB, dated June 30, 1998).
4.1 Specimen Stock Certificate (incorporated by reference from Exhibit 4.4
to Form-10KSB, dated June 30, 1998).
10.1 Employment Agreement by and between Sharps Compliance Corp. and Dr. Burt
Kunik effective January 1, 2003 (incorporated by reference from Exhibit
10.35 to Form 10-QSB dated December 30, 2002).
10.2 Employment Agreement by and between Sharps Compliance Corp. and Ronald
E. Pierce dated July 14, 2003 (filed herewith).
10.3 Employment Agreement by and between Sharps Compliance Corp. and David P.
Tusa dated July 14, 2003 (filed herewith).
10.4 Employment Agreement by and between Sharps Compliance Corp. and Michael
D. Archer dated July 14, 2003 (filed herewith).
10.5 Exclusive Distributorship Agreement between Pro-Tec Containers, Inc. and
Sharps Compliance, Inc., dated April 1, 1998 (incorporated by reference
from Exhibit 10.31 to Form 10-KSB, dated June 30, 1998).
10.6 Purchase Agreement between Ivy Green Corporation and Sharps Compliance,
Inc., dated June 19, 1998 (incorporated by reference from Exhibit 10.32
to Form 10-KSB, dated June 30, 1998).
10.7 Lease Agreement between Lakes Technology Center, Ltd. and Sharps
Compliance, Inc., dated August 1, 1998 (incorporated by reference from
Exhibit 10.33 to Form 10-KSB, dated June 30, 1998).
10.8 Severance Agreement between C. Lee Cooke, Jr. and Sharps Compliance
Corp. (formerly known as - U.S. Medical Systems, Inc.), dated September
2, 1998 (incorporated by reference from Exhibit 10.34 to Form 10-KSB,
dated June 30, 1998).
10.9 Employment Agreement Amendment by and between Sharps Compliance Corp.
and David P. Tusa dated June 21, 2004.
10.10 Employment Agreement Amendment by and between Sharps Compliance Corp.
and David P. Tusa dated August 19,2005.
10.11 Credit Agreement dated March 27,2006, by and between Sharps compliance
Corp. and JPMorgan Chase Bank, N.A.
10.12 Line of Credit Note dated March 27, 2006, by and between Sharps
Compliance Corp. and JPMorgan Chase Bank, N.A.
10.13 Security Agreement dated March 27, 2006, by and between Sharps
Compliance Corp. and JPMorgan Chase Bank, N.A.
10.14 Lease Agreement dated as of July 13, 2006, between Sharps Compliance,
Inc. and Warehouse Associates Corporate Centre Kirby II, Ltd.
10.15 Lease Termination Agreement dated as of July 13, 2006, between Sharps
Compliance, Inc. and Warehouse Associates Corporate Centre Kirby I & II,
Ltd.
14.1 Sharps Compliance Corp. Code of Ethics.
16.1 Letter regarding changes in Certifying Accountant to Arthur Andersen
LLP, dated April 22, 1998 (incorporated by reference from Exhibit 16.1
to Form 8-K, dated April 22, 1998).
16.2 Letter regarding changes in Certifying Accountant to Mann Frankfort
Stein & Lipp CPAs L.L.P. (incorporated by reference from Exhibit 16.1 to
Form 8-K, dated January 11, 2002).
31.1 Certification of Chief Executive Officer in accordance with Section 302
of the Sarbanes-Oxley Act (filed herewith).
31.2 Certification of Chief Financial Officer in accordance with Section 302
of the Sarbanes-Oxley Act (filed herewith).
32.1 Certification of Chief Executive Officer in accordance with Section 906
of the Sarbanes-Oxley Act (filed herewith).
32.2 Certification of Chief Fnancial Officer in accordance with Section 906
of the Sarbanes-Oxley Act (filed herewith).

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

The information required by this item is incorporated herein by reference to the
Registrant's definitive Proxy Statement to be filed pursuant to Regulation 14A
with the SEC relating to its Annual Meeting of Stockholders to be held on
November 9, 2006.

SIGNATURES

In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.

REGISTRANT:
SHARPS COMPLIANCE CORP.

Dated: September 13, 2006 By: /s/ BURTON J. KUNIK
--------------------------------------
Dr. Burton J. Kunik
Chairman of the Board,
Chief Executive Officer and President

By: /s/ DAVID P. TUSA
--------------------------------------
David P. Tusa
Executive Vice President
Chief Financial Officer, Business
Development and Corporate Secretary

By: /s/ RAMSAY GILLMAN
--------------------------------------
Ramsay Gillman
Director

By: /s/ JOHN R. GROW
--------------------------------------
John R. Grow
Director

By: /s/ PARRIS H. HOLMES, JR.
--------------------------------------
Parris H. Holmes, Jr.
Director

By: /s/ F. GARDNER PARKER
--------------------------------------
F. Gardner Parker
Director

By: /s/ PHILIP C. ZERRILLO
--------------------------------------
Philip C. Zerrillo
Director

SHARPS COMPLIANCE CORP. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

CONSOLIDATED FINANCIAL STATEMENTS PAGE
----
Report of Independent Registered Public Accounting Firm .................. F-2

Report of Independent Registered Public Accounting Firm .................. F-3

Consolidated Balance Sheets as of June 30, 2006 and 2005 ................. F-4

Consolidated Statements of Operations for the Years Ended
June 30, 2006 and 2005 .................................................. F-5

Consolidated Statements of Stockholders' Equity (Deficit) for the Years
Ended June 30, 2006 and 2005 ............................................ F-6

Consolidated Statements of Cash Flows for the Years Ended
June 30, 2006 and 2005 .................................................. F-7

Notes to Consolidated Financial Statements ............................... F-8

F-1

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of
Sharps Compliance Corp. and Subsidiaries
Houston, Texas

We have audited the accompanying balance sheet of Sharps Compliance Corp. (a
Delaware corporation) and subsidiaries (the "Company") as of June 30, 2006 and
the related consolidated statements of operations, stockholders' equity and cash
flows for the year then ended. These consolidated financial statements are the
responsibility of the company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audit.

We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. An audit
also includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall consolidated financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Sharps
Compliance Corp. and subsidiaries as of June 30, 2006, and the results of their
operations and their cash flows for the year then ended, in conformity with
accounting principles generally accepted in the United States of America.

/s/ UHY LLP

Houston, Texas
September 13, 2006

F-2

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of
Sharps Compliance Corp. and Subsidiaries
Houston, Texas

We have audited the accompanying balance sheet of Sharps Compliance Corp. (a
Delaware corporation) and subsidiaries (the "Company") as of June 30, 2005 and
the related consolidated statements of operations, stockholders' equity and cash
flows for the year then ended. These consolidated financial statements are the
responsibility of the company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audit.

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Sharps
Compliance Corp. and subsidiaries as of June 30, 2005, and the results of their
operations and their cash flows for the year then ended, in conformity with
accounting principles generally accepted in the United States of America.

/s/ UHY MANN FRANKFORT STEIN & LIPP CPAs, LLP

Houston, Texas
August 5, 2005

F-3

SHARPS COMPLIANCE CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
June 30,
--------------------------------
2006 2005
--------------- ---------------

ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 296,959 $ 258,427
Restricted cash 10,010 10,010
Accounts receivable, net of allowance for doubtful accounts of
$20,024 and 21,757, respectively 935,283 964,148
Inventory 325,688 368,495
Prepaid and other assets 88,348 79,320
--------------- ---------------
TOTAL CURRENT ASSETS 1,656,288 1,680,400

PROPERTY AND EQUIPMENT, net of accumulated depreciation of $790,397
and $650,532, respectively 473,387 438,064

INTANGIBLE ASSETS, net of accumulated amortization of $116,805 and
$102,195, respectively 60,427 11,779
--------------- ---------------
TOTAL ASSETS $ 2,190,102 $ 2,130,243
=============== ===============

LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)

CURRENT LIABILITIES
Accounts payable $ 526,582 $ 567,398
Accrued liabilities 262,219 283,953
Deferred revenue 826,764 996,597
Current maturities of capital lease obligations 40,260 48,558
--------------- ---------------
TOTAL CURRENT LIABILITIES 1,655,825 1,896,506

LONG-TERM DEFERRED REVENUE 211,568 272,781

OBLIGATIONS UNDER CAPITAL LEASES, net of current maturities 1,809 42,112

RENT ABATEMENT 69,000 62,500
--------------- ---------------
TOTAL LIABILITIES 1,938,202 2,273,899

COMMITMENTS - -

STOCKHOLDERS' EQUITY (DEFICIT)
Common stock, $0.01 par value per share; 20,000,000 shares authorized;
10,551,310 and 10,547,311 shares issued and outstanding, respectively 105,513 105,473
Additional paid-in capital 7,478,268 7,464,381
Accumulated deficit (7,331,881) (7,713,510)
--------------- ---------------
TOTAL STOCKHOLDERS' EQUITY (DEFICIT) 251,900 (143,656)
--------------- ---------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) $ 2,190,102 $ 2,130,243
=============== ===============

See accompanying notes to consolidated financial statements

F-4

SHARPS COMPLIANCE CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS

Year Ended June 30,
-------------------------
2006 2005
------------ ------------
REVENUES
Product $10,143,651 $ 8,637,397
Environmental services 394,318 331,103
Consulting services 24,751 32,677
----------- -----------
TOTAL REVENUES 10,562,720 9,001,177

COSTS AND EXPENSES
Cost of revenues 6,068,399 5,499,355
Selling, general and administrative 3,957,653 3,520,045
Depreciation and amortization 154,475 157,460
----------- -----------
TOTAL COSTS AND EXPENSES 10,180,527 9,176,860
----------- -----------

OPERATING INCOME (LOSS) 382,193 (175,683)

OTHER INCOME (EXPENSE)
Interest income 12,314 5,450
Interest expense (12,878) (22,867)
----------- -----------
NET INCOME (LOSS) $ 381,629 $ (193,100)
=========== ===========
NET INCOME (LOSS) PER COMMON SHARE
Basic $ .04 $ (.02)
=========== ===========
Diluted $ .03 $ (.02)
=========== ===========
WEIGHTED AVERAGE SHARES USED IN COMPUTING NET
INCOME (LOSS) PER COMMON SHARE
Basic 10,547,846 10,539,215
Diluted 10,953,831 10,539,215

See accompanying notes to consolidated financial statements

F-5

SHARPS COMPLIANCE CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)

Total
Common Stock Additional Stockholders'
--------------------- Paid-in Accumulated Equity
Shares Amount Capital Deficit (Deficit)
----------- --------- ----------- ------------ ------------

Balances, July 1, 2004 10,538,144 $105,381 $ 7,457,639 $(7,520,410) $ 42,610

Exercise of stock options 9,167 92 6,742 - 6,834

Net loss - - - (193,100) (193,100)
----------- --------- ----------- ------------ ------------
Balances, June 30, 2005 10,547,311 105,473 7,464,381 (7,713,510) (143,656)

Exercise of stock options 3,999 40 2,852 - 2,892

Accelerated vesting of stock options 11,035 11,035

Net income - - - 381,629 381,629
----------- --------- ----------- ------------ ------------
Balances, June 30, 2006 10,551,310 $105,513 $ 7,478,268 $(7,331,881) $ 251,900
=========== ========= =========== ============ ============

See accompanying notes to consolidated financial statements

F-6

SHARPS COMPLIANCE CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS

Year Ended June 30,
---------------------
2006 2005
---------- ----------

CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ 381,629 $ (193,100)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization 154,475 157,460
Stock option acceleration expense 11,035 -
Bad debt expense - 8,771
Loss on disposal of equipment - 126
Changes in operating assets and liabilities:
Decrease in restricted cash - 4,668
Decrease in accounts receivable 28,865 8,489
Decrease in inventory 42,807 24,743
(Increase) decrease in prepaid and other assets (9,028) 59,478
Decrease in accounts payable and accrued liabilities (56,050) (62,745)
Increase (decrease) in deferred revenue (231,046) 286,525
---------- ----------
NET CASH PROVIDED BY OPERATING ACTIVITIES 322,687 294,415

CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment (175,188) (64,333)
Proceeds from the disposal of property and equipment - 18,026
Intangible Assets (63,258) (2,341)
---------- ----------
NET CASH USED IN INVESTING ACTIVITIES (238,446) (48,648)

CASH FLOWS FROM FINANCING ACTIVITIES
Payments on long-term debt - (31,675)
Net payments on working capital bank debt - (165,083)
Payments on capital lease obligations (48,601) (40,219)
Proceeds from exercising of stock options 2,892 6,834
---------- ----------
NET CASH USED IN FINANCING ACTIVITIES (45,709) (230,143)
---------- ----------
NET INCREASE IN CASH AND CASH EQUIVALENTS 38,532 15,624

CASH AND CASH EQUIVALENTS, beginning of year 258,427 242,803
---------- ----------
CASH AND CASH EQUIVALENTS, end of year $ 296,959 $ 258,427
========== ==========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for interest $ 12,879 $ 22,867
========== ==========
NONCASH INVESTING AND FINANCING ACTIVITIES:

Property and equipment additions acquired under
capital lease obligations $ - $ 8,930
========== ==========

See accompanying notes to consolidated financial statements

F-7

SHARPS COMPLIANCE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2006 AND 2005

NOTE 1 - ORGANIZATION AND BACKGROUND

Organization: The accompanying consolidated financial statements include the
financial transactions and accounts of Sharps Compliance Corp. and its wholly
owned subsidiaries, Sharps Compliance, Inc. of Texas (dba Sharps Compliance,
Inc.), Sharps e-Tools.com, Inc. ("Sharps e-Tools"), Sharps Manufacturing, Inc.,
Sharps Environmental Services, Inc. (dba Sharps Environmental Services of Texas,
Inc.) and Sharps Safety, Inc. (collectively, "Sharps" or the "Company"). All
significant intercompany accounts and transactions have been eliminated upon
consolidation.

Business Products: The Company focuses on developing cost effective, logistical
and educational solutions for healthcare and non-healthcare institutional
markets. These solutions include Sharps Disposal by Mail System(R), Pitch-It(TM)
IV Poles, Sharps Secure(R), Sharps SureTemp Tote(R), IsoWash(R) Linen Recovery
System, Trip LesSystem(R), Sharps asset return boxes, Sharps e-Tools, Sharps
Environmental Services, and Sharps Consulting. The Company's products and
services are provided primarily to create cost and logistical efficiencies.
These products and services facilitate compliance with certain state and federal
regulations, as well as compliance with educational and training requirements
required by federal, state, local and regulatory agencies.

The Sharps Disposal by Mail System(R) is a comprehensive solution for the
containment, transportation, destruction and tracking of medical waste for the
commercial, industrial and home healthcare industries. The Sharps Disposal by
Mail System(R) contains a securely sealed, leak and puncture resistant sharps
container in several sizes; United States Postal Service ("USPS") approved
shipping carton with priority mail postage; absorbent material inside the
container that can hold up to 150 milliliters of waste; a red bag for additional
containment; and complete documentation and tracking manifest. Customers who use
the Sharps Disposal by Mail System(R) are responsible for mailing the systems to
the Company's disposal facility for incineration (i.e. Sharps Environmental
Services).

The Pitch-It(TM) IV Pole systems are designed as a cost effective, portable,
lightweight and disposable alternative to traditional IV poles used for
gravity-fed or pump-administered infusions. The innovative pole design provides
opportunities for the home healthcare industry to improve logistical
efficiencies through elimination of traditional delivery and pickup of IV poles.
The Pitch-It(TM) poles are available in three models: (i) tabletop, (ii) floor
and (iii) full-size with wheels.

The Sharps Secure(R)Needle Disposal System is the first commercially available
wall mounted needle collection and disposal by mail system specifically designed
for the retail and industrial markets. The system is mounted on the wall inside
of public restrooms to provide a visible collection point for self-injectors to
safely and privately dispose of used needles, which are often discarded in the
public waste at commercial and office buildings. The system consists of a Sharps
Disposal by Mail System(R) needle collection container, housed in the newly
designed (patent pending) Sharps Secure(TM) metal collection cabinet. The
wall-mounted cabinet, which is manufactured from heavy gauge metal, has been
designed with numerous safety features to ensure that needles properly disposed
of will not present a hazard.

F-8

SHARPS COMPLIANCE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2006 AND 2005

NOTE 1 - ORGANIZATION AND BACKGROUND (continued)

The Trip LesSystem(R)is a solution for the home healthcare (commercial) industry
that will eliminate multiple trips to the patient's home by providers after
treatment has been completed. The Trip LesSystem(R) has combined two complete
programs for return and disposal. All systems contain the Sharps Disposal by
Mail System(R) along with either (i) a prepaid pump return box or (ii) a
Pitch-It(TM) IV Pole system, depending on the patient's therapy.

Sharps' asset return boxes (i.e., Sharps Pump Return Box and Sharps Enteral Pump
Return Box) are marketed to home healthcare providers, primarily for use with
home infusion patients. These products provide delivery and retrieval of
expensive equipment, like infusion and Enteral pumps.

The Biohazard Spill Clean Up Kit and Disposal System is a complete solution for
both cleanup and disposal by mail of bio-hazardous spill waste and materials.
This convenient system comes complete with everything necessary for clean up of
potentially bio-hazardous materials such as blood and bodily fluids. The Sharps
system provides a means to safely, easily and legally remove these materials
from your location and transport them to a destruction facility via the U.S.
Postal Service. Sharps Bio-Hazard Clean-Up Kit has the capacity to contain
spills of up to 1 liter of contaminant. Spill clean-up equipment, transportation
and proper disposal are all included in the price of the system.

The Sharps e-Tools online services include SharpsTracer(TM). SharpsTracer(TM) is
a manifest imaging and tracking program for registered customers with the
purpose of tracking and certifying the transportation and disposal of regulated
medical waste. SharpsTracer(TM) eliminates traditional paper-based methods of
manifest tracking and is designed to enhance customer efficiencies with an
automatic Proof of Destruction, Market Data Collection abilities and Return to
Store Program capabilities. AssetTracer(TM) allows its registered subscribers to
manage all types of capital assets through a single, organized database. The
program can be used in conjunction with other Company products or independently
and includes management reporting for regulatory compliance, preventative
maintenance, and asset status and/or location. ComplianceTrak offers a broad
range of employee centered compliance and education programs. The programs range
from policy and procedure development to specialized training and certification
for all employees required to meet certain Occupational Safety and Health
Administration ("OSHA") standards.

Sharps Environmental Services provides environmental solutions for customers
with a wide variety of waste disposal needs. Destruction and disposals are the
primary services which are available to the Company's affiliates, as well as to
its and other customers and includes destruction and disposal of, among other
things, (i) medical waste, (ii) legal and confidential documents, (iii)
pharmaceutical products and (iv) non-hazardous industrial waste. This service
also allows the Company to directly oversee the proper disposal of its Sharps
Disposal by Mail Systems(R) and allows the Company to provide its proprietary
SharpsTracer(TM). The Company has an agreement with the City of Carthage and
Panola County, Texas to manage and operate the Panola County Resources Recovery
Facility, a municipally owned incinerator. The agreement expires June 30, 2012.
The Company has the option of extending the lease through July 30, 2022.

Sharps Consulting provides a broad range of services including, (i) analysis of
legal and regulatory implications of present waste handling practices, (ii)
communicating new legislation and industry best practices for minimizing
employee exposure and liability, (iii) serving as intermediary with regulatory
agencies and (iv) educating staff on the dangers of improper medical wastes and
infection control practices.

Concentration of Customers and Suppliers: Although, Sharps has experienced
growth in revenues over the past few years, there is an inherent concentration
of credit risk associated with accounts receivable arising from sales to its
major customers, which are primarily distributors. For the year ended June 30,
2006, three customers represented approximately 48% of revenues. Those same
three customers represented approximately 38%, or $378,939 of the total accounts
receivable balance at June 30, 2006. For the year ended June 30, 2005, two
customers represented approximately 47% of revenues. Those same two customers

F-9

SHARPS COMPLIANCE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2006 AND 2005

NOTE 1 - ORGANIZATION AND BACKGROUND (continued)

represented approximately 42%, or $409,000 of the total accounts receivable
balance at June 30, 2005. The Company may be affected by its dependence on a
limited number of high volume customers. Management believes that the risk is
mitigated by, (i) the contractual relationships with the end user of the
products and reputation of Sharps' major customers, (ii) a loss of any
distributor does not necessarily mean the loss of the underlying customer base
of that distributor for the Company's products and (iii) the continued
diversification of the Company's products and services.

Currently, Sharps sole-sources transportation with the USPS, which consists of
delivering the Sharps Disposal by Mail System(R) from the end user to the
Company's leased incineration facility. The Company recently entered into an
arrangement with United Parcel Service Inc. ("UPS") whereby UPS has agreed to
transport the Company's Sharps Disposal by Mail System(R) products from the end
user to the Company's leased incineration facility. The Company expects to be
offering a UPS product to its current and future customers in fiscal year 2007.
Management believes the risk of dependence on the USPS is mitigated by the new
arrangement with UPS and its long-standing business relationship with the USPS.

Liquidity: Until fiscal year 2006, Sharps has incurred annual operating losses.
The future success of Sharps is dependent upon many factors, including
environmental regulation, continuity of its distributorship and customer
agreements, successful completion of its product development activities and the
identification and penetration of additional markets for its products and
services. Management believes that the Company's current financial resources,
including cash on hand and its line of credit with JPMorgan Chase Bank, N.A.,
will be sufficient to fund operations through fiscal year 2007. There can be no
assurance that the Company will be able to obtain additional financing, if
necessary, on acceptable terms to fund operations beyond that time frame;
however, management believes that it would be successful in raising such
financing, if necessary.

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Cash Equivalents and Short-term Investments: The Company considers all highly
liquid investments with a maturity of three months or less at the time of
purchase to be cash equivalents. Short-term investments consist of certificates
of deposit with original maturities greater than three months but less than one
year. Short-term investments are classified as held-to-maturity.

The Company maintains funds in bank accounts that, at times, may exceed the
limit insured by the Federal Deposit Insurance Corporation, or "FDIC". Accounts
are guaranteed by the FDIC up to $100,000. The risk of loss attributable to
these uninsured balances is mitigated by depositing funds only in high credit
quality financial institutions. The Company has not experienced any losses in
such accounts.

Accounts Receivable: Accounts receivable consist primarily of amounts due to us
from our normal business activities. Accounts receivable balances are determined
to be delinquent when the amount is past due based on the contractual terms with
the customer. We maintain an allowance for doubtful accounts to reflect the
expected uncollectibility of accounts receivable based on past collection
history and specific risks identified among uncollected accounts. Accounts
receivable are charged to the allowance for doubtful accounts when we have
determined that the receivable will not be collected and/or when the account has
been referred to a third party collection agency.

Inventory: Inventory consists primarily of finished goods and supplies held for
sale and are stated at the lower of cost using the average cost method or
market. At June 30, 2006 total inventory was $325,688 of which $162,634 was
finished goods and $163,054 was raw materials. At June 30, 2005 total inventory
was $368,495 of which $206,830 was finished goods and $161,665 was raw
materials.

Property and Equipment: Property and equipment is stated at cost less
accumulated depreciation. Depreciation is computed using the straight-line
method based on the estimated useful lives of the assets. Additions,
improvements and renewals significantly adding to the asset value or extending
the life of the asset are capitalized. Ordinary maintenance and repairs, which
do not extend the physical or economic life of the property or equipment, are
charged to expense as incurred. When assets are retired or otherwise disposed

F-10

SHARPS COMPLIANCE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2006 AND 2005

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

of, the cost and related accumulated depreciation are removed from the accounts,
and any resulting gain or loss is reflected in the results of operations for the
period. During the years ended June 30, 2006 and 2005, the Company recorded
depreciation expense of $139,865 and $156,847, respectively.

Intangible Assets: Intangible assets consist of (i) permit costs related to the
Company's leased incineration facility in Carthage, Texas and (ii) three
patents, two acquired in June 1998 and one in November 2003. The permit costs
are being amortized over the remaining initial term of the corresponding
incinerator lease. The two patents acquired in June 1998 have been amortized
over their estimated useful lives of five years and were fully amortized during
the year ended June 30, 2003. The one patent acquired in November 2003 is being
amortized over its estimated useful life of seventeen years. During the years
ended June 30, 2006 and 2005, the Company recorded amortization expense of
$14,610 and $613, respectively. Accumulated amortization at June 30, 2006 and
2005 was $116,805 and $102,195, respectively. Future amortization for intangible
assets is as follows: $14,610, $14,610, $14,610, $6,663, $819 and $9,115 for the
years ending June 30, 2007, 2008, 2009, 2010, 2011, and thereafter,
respectively, for a total amortization of $60,427.

Stock-Based Compensation: The Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 123, "Accounting for Stock-Based Compensation", but
elected to continue to account for its employee stock-based compensation plan
under Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock
Issued to Employees" and its related interpretations in accounting for its stock
option plan (see Note 9). While the Company continues to use APB No. 25 (through
the quarter ended June 30, 2006), pro forma information regarding net income
(loss) and earnings per share is required under SFAS No. 123R, "Accounting for
Share-Based-Payment Arrangements", including that the information be determined
as if the Company had accounted for its stock options under the fair value
method prescribed by SFAS No. 123R.

The Company uses the Black-Scholes option valuation model to value options
granted. Because changes in input assumptions can materially affect the fair
value estimate, the existing model may not necessarily provide the only measure
of fair value for the employee stock options. The Company used the following
weighted-average assumptions for options granted during the years ended June 30,
2006 and 2005, as follows: risk-free interest rates of 4.7% and 3.74%,
respectively, expected annual dividend yield of 0%; volatility factors of the
expected market price of the Company's common stock of approximately 114% and
75.1%, respectively; and a weighted-average expected life of the options of 3.4
and 3.9 years, respectively.

Had compensation expense for stock based compensation been determined consistent
with the provisions of SFAS No. 123 (and as amended by SFAS No. 148), the
Company's net income (loss) would have been as follows:

Year Ended June 30,
---------------------
2006 2005
---------- ----------
Net income (loss), as reported $ 381,629 $(193,100)
Less: Total stock-based employee compensation
expense determined under fair value based
method for all awards, net of related tax effects $(724,361) $(298,075)
========== ==========
Net loss, pro forma $(342,732) $(491,175)
========== ==========
Diluted net income (loss) per share, as reported $ 0 .03 $ (0.02)
========== ==========
Diluted net loss per share, pro forma $ (0.03) $ (0.05)
========== ==========

Stock options issued to consultants or advisors in exchange for services (other
than those related to an equity offering) are valued utilizing the Black-Scholes
option valuation model and expensed over the corresponding service period.

F-11

SHARPS COMPLIANCE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2006 AND 2005

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

On June 20, 2006, the Company's Board of Directors approved the accelerated
vesting of unvested stock options previously awarded to employees, officers, and
directors as of June 30, 2006 in light of new accounting regulations that will
take effect on July 1, 2006 (see third paragraph below).

As a result of the vesting acceleration, options to purchase 757,696 shares of
Company common stock, which would otherwise have vested over the next one to
three years, became exercisable effective June 30, 2006. Based upon the closing
stock price of the Company's common stock on June 30, 2006 of $0.85 per share,
fifty-two percent (52%), or 391,028, of the total accelerated common stock
options are "in-the-money" and have exercise prices ranging from $0.52 to $0.84
per share. Thirty percent (30%), or 226,666, of the total accelerated stock
options have an exercise price of $0.85 per share. Eighteen percent (18%), or
140,001, of the total accelerated stock options are "under water" or
"out-of-the-money" and have exercise prices ranging from $0.86 to $1.15 per
share. Of the accelerated options, 328,408 options are held by executive
officers (of which 161,741 are "in-the-money"), 246,774 options are held by
non-employee directors (of which 133,441 are "in-the-money"), and 182,514
options are held by other employees (of which 95,846 are "in-the- money"). In
addition to the above, the vesting of annual grants to non-employee directors
totaling 260,000 stock options, granted on June 28, 2006, was also accelerated.

Under the recently issued Statement of Financial Accounting Standards No. 123R,
"Share-Based Payment" ("SFAS 123R"), the Company would be required to apply the
expense recognition provisions beginning July 1, 2006. As a result of the
acceleration, the Company eliminated future stock option expense of
approximately $232,000 in fiscal 2007, $132,000 in fiscal 2008, and $55,000 in
fiscal 2009 on a pre-tax basis, based upon the Company's value calculations
using the Black-Scholes methodology. The acceleration resulted in the recording
of non-cash compensation expense of $11,035 in the quarter ending June 30, 2006.

SFAS 123R requires all entities to recognize compensation expense in an amount
equal to the fair value of share-based payments, such as stock options granted
to employees. The Company has elected to apply SFAS 123R on a modified
prospective method. Under this method, the Company is required to record
compensation expense for the unvested portion of previously granted awards that
remain outstanding at the date of adoption. For public entities that file as
small business issuers (such as the Company), SFAS 123R is effective as of the
beginning of the first interim or annual reporting period of the first fiscal
year beginning on or after December 15, 2005 (quarter ended September 30, 2006).
The Company will recognize compensation expense under SFAS 123R beginning with
the quarter ended September 30, 2006.

Revenue Recognition: The Company adopted the Securities and Exchange
Commission's ("SEC") Staff Accounting Bulletin ("SAB") No. 101, "Revenue
Recognition", which provides guidance related to revenue recognition based on
interpretations and practices followed by the SEC. Under SAB No. 101, certain
products offered by the Company have revenue producing components that are
recognized over multiple delivery points (Sharps Disposal by Mail Systems,
referred to as "Mailbacks" and Sharps Return Boxes, referred to as "Pump
Returns") and can consist of up to three separate elements as follows: (1) the
sale of the container system, (2) the transportation of the container system and
(3) the treatment and disposal (incineration) of the container system. The
individual fair value of the transportation and incineration services are
determined by the sales price of the service offered by third parties, with the
fair value of the container being the residual value. Revenue for the sale of
the container is recognized upon delivery to the customer, at which time the
customer takes title and assumes risk of ownership. Transportation revenue on
Mailbacks is recognized when the customer returns the mailback container system
and the container has been received at the Company's treatment facility. The
Mailback container system is mailed to the incineration facility using the USPS.
Incineration revenue is recognized upon the destruction and certification of
destruction having been prepared on the container. Since the transportation
element and the incineration elements are undelivered services at the point of
initial sale of the container, the Mailback and Incinerator revenue is deferred
until the services are performed. The current and long-term portions of deferred
revenues are determined through regression analysis and historical trends.
Furthermore, through regression analysis of historical data, the Company has
determined that a certain percentage of all container systems sold may not be
returned. Accordingly, a portion of the transportation and incineration elements
are recognized at the point of sale.

F-12

SHARPS COMPLIANCE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2006 AND 2005

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Advertising Costs: Advertising costs are charged to expenses when incurred and
totaled $22,187 and $33,880 for the years ended June 30, 2006 and 2005,
respectively.

Realization of Long-lived Assets: The Company evaluates the recoverability of
property and equipment and intangible or other assets if facts and circumstances
indicate that any of those assets might be impaired. If an evaluation is
required, the estimated future undiscounted cash flows associated with the asset
are compared to the asset's carrying amount to determine if a write-down to
market value or discounted cash flow value is necessary.

Employee Benefit Plans: In addition to group health related benefits, The
Company maintains a 401(k) employee savings plan available to all full-time
employees. The Company matches a portion of employee contributions with cash
(25% of employee contribution up to 6%). Company contributions to the 401(k)
plan were $20,954 and $3,571 for the years ended June 30, 2006 and 2005,
respectively, and are included in selling and administrative expenses. For
purposes of the group health benefit plan, the Company self-insures an amount
equal to the excess of the employees' deductible ($1,000 for individual and
$4,000 for family coverage) up to the amount by which the third party insurance
begins coverage ($4,000 for individual and $8,000 for family coverage).

Net Income (Loss) Per Share: Earnings per share ("EPS") data for all years
presented has been computed pursuant to Statement of Financial Accounting
Standards ("SFAS") No. 128, "Earnings Per Share", that requires a presentation
of basic and diluted earnings per share. Basic EPS excludes dilution and is
determined by dividing income or loss available to common stockholders by the
weighted average number of common shares outstanding during the period adjusted
for preferred stock dividends, if any. Diluted EPS reflects the potential
dilution that could occur if securities and other contracts to issue common
stock were exercised or converted into common stock. Options outstanding during
each year have not been included in the calculation of diluted EPS, as they
would have an anti-dilutive effect on EPS.

Financial Instruments: The Company considers the fair value of all financial
instruments not to be materially different from their carrying values at
year-end based on management's estimate of the Company's ability to borrow funds
under terms and conditions similar to those of the Company's existing debt.

Use of Estimates: The preparation of consolidated financial statements in
conformity with accounting principles generally accepted in the United States
requires management to make estimates and assumptions that affect the reported
amounts of assets, liabilities and disclosure of contingent liabilities at the
date of the consolidated financial statements and the reported amounts of
revenue and expense during the reporting period. Actual results could differ
from these estimates.

F-13

SHARPS COMPLIANCE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2006 AND 2005

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Reclassifications: Certain items in the 2005 Consolidated Financial Statements
have been reclassified to conform with the 2006 presentation.

Recent Accounting Pronouncements: In December 2004, the FASB issued Statement
No. 123 (revised 2004) ("FAS 123R"), Share-Based Payments. FAS 123R requires all
entities to recognize compensation expense in an amount equal to the fair value
of share-based payments, such as stock options granted to employees. The Company
has elected to apply FAS 123R on a modified prospective method. Under this
method, the Company is required to record compensation expense (as previous
awards continue to vest) for the unvested portion of previously granted awards
that remain outstanding at the date of adoption. For public entities that file
as small business issuers, FAS 123R is effective as of the beginning of the
first interim or annual reporting period of the first fiscal year beginning on
or after December 15, 2005 (quarter ended September 30, 2006). Although
management has completed its evaluation of the effect that FAS 123R, the effect
of the new standard to the Company's statement of operations beginning with the
quarter ended September 30, 2006, will be significantly lower than that
disclosed in its previous pro forma footnote disclosures as a result of the June
30, 2006 acceleration of vesting of unvested stock options previously awarded to
employees, officers, and directors (See Notes 2 and 9 of the Notes to the
Consolidated Financial Statements).

In February 2006, the FASB issued SFAS No. 155, "Accounting for Certain Hybrid
Financial Instruments." which amends SFAS No. 133 and SFAS No. 140. SFAS No. 155
permits hybrid financial instruments that contain an embedded derivative that
would otherwise require bifurcation to irrevocably be accounted for at fair
value, with changes in fair value recognized in the statement of income. The
fair value election may be applied on an instrument-by-instrument basis. SFAS
No. 155 also eliminates a restriction on the passive derivative instruments that
a qualifying special purpose entity may hold. SFAS No. 155 is effective for
those financial instruments acquired or issued after December 1, 2006. At
adoption, any difference between the total carrying amount of the individual
components of the existing bifurcated hybrid financial instrument and the fair
value of the combined hybrid financial instrument will be recognized as a
cumulative-effect adjustment to beginning retained earnings. The Company does
not expect the new standard to have any material impact on our financial
position and results of operations.

In July 2006, the FASB issued FIN No. 48, "Accounting for Uncertainty in Income
Taxes - an interpretation of FASB Statement No. 109. This interpretation
clarifies the accounting for uncertainty in income taxes recognized in an
entity's financial statements in accordance with SFAS No. 109, "Accounting for
Income Taxes." It prescribes a recognition threshold and measurement attribute
for financial statement disclosure of tax positions taken or expected to be
taken on a tax return. This interpretation is effective for fiscal years
beginning after December 15, 2006. The Company will be required to adopt this
interpretation in the first quarter of 2008. Management is currently evaluating
the requirements of FIN No. 48 but does not believe the new standard will have a
impact on the consolidated financial statements.

NOTE 3 - ACCOUNT RECEIVABLE AND INVENTORY WRITE-DOWN

F-14

SHARPS COMPLIANCE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2006 AND 2005

NOTE 3 - ACCOUNT RECEIVABLE AND INVENTORY WRITE-DOWN (continued)

Ameritech assets. A balloon payment of $137,721 due November 7, 2004, under the
Garnishment Order, was not made by MedSolutions to the Company. It is the
position of the Company that MedSolutions is currently in breach of the
Garnishment Order. Additionally, the Company filed an amended suit, in August
2006, against Ameritech, its officers and directors (Jasper S. Howard, Alton H.
Howard and Jonathon S. Howard) alleging fraudulent conveyance, fraud on
creditors, civil conspiracy, breach of court order and conversion. Prior to year
ending June 30, 2003, the Company wrote-off all outstanding amounts due from
Ameritech. Any recovery that may be received by the Company will be reduced by
collection-related legal fees estimated at thirty-five percent of any amounts
collected plus expenses. Although the Company will continue to aggressively
pursue collection of the outstanding amounts, no assurances can be made
regarding ultimate collection.

NOTE 4 - PROPERTY AND EQUIPMENT

At June 30, 2006 and 2005, property and equipment consisted of the following:

June 30,
------------------------------------
Useful Life 2006 2005
---------------- ---------------- ----------------

Furniture and fixtures 3 to 5 years $ 25,026 $ 23,903
Equipment 5 years 250,058 226,629
Manufacturing 15 years 221,636 221,636
Computers and software 3 to 5 years 543,963 444,150
Leasehold improvements 3 years 223,101 172,278
---------------- ----------------
1,263,784 1,088,596
Less: accumulated depreciation 790,397 650,532
---------------- ----------------
Net property and equipment $ 473,387 $ 438,064
================ ================

NOTE 5 - NOTES PAYABLE AND LONG-TERM DEBT

On March 27, 2006, the Company entered into a Credit Agreement with JPMorgan
Chase Bank, N.A. which provides for a $1.5 million Line of Credit Facility the
proceeds of which may be utilized for, (i) for working capital, (ii) letters of
credit (up to $200,000), (iii) acquisitions (up to $500,000) and (iv) general
corporate purposes. Indebtedness under the Credit Agreement is secured by
substantially all of the Company's assets. Borrowings bear interest at a
fluctuating rate per annum equal to either, (i) prime rate or (ii) LIBOR plus a
margin of 2.75 %. Any outstanding revolving loans, and accrued and unpaid
interest, will be due and payable on March 27, 2008, the maturity date of the
facility. The aggregate principal amount of advances outstanding at any time
under the Facility shall not exceed the Borrowing Base which is equal to, (i)
80% of Eligible Accounts Receivable (as defined) plus (ii) 50% of Eligible
Inventory (as defined). The Credit Agreement contains affirmative and negative
covenants that, among other items, require the Company to maintain a specified
tangible net worth and fixed charge coverage ratio. The Credit Agreement also
contains customary events of default. Upon the occurrence of an event of default
that remains uncured after any applicable cure period, the lenders' commitment
to make further loans may terminate and the Borrower may be required to make
immediate repayment of all indebtedness to the lenders. The lender would also be
entitled to pursue other remedies against the Company and the collateral. As of
June 30, 2006, there were no borrowings under this Line Of Credit Facility and
the Company was in compliance with all loan covenants.

The above noted Line of Credit Facility replaces the Company's previous
arrangement with a financial institution for a $1.25 million asset-based
(accounts receivable factoring) line of credit.

F-15

SHARPS COMPLIANCE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2006 AND 2005

NOTE 6 - OBLIGATIONS UNDER CAPITAL LEASES

Capital lease obligations consist of the following:

June 30,
-----------------
2006 2005
-------- --------
Capital lease for the purchase of accounting and
operating system software and hardware, due in
monthly installments of $4,061, interest imputed
at 21% through February 2007 $30,160 $68,313

Capital lease for purchase of phone system due in
monthly installments of $455, interest imputed at
12% through August 2007 5,916 10,368

Capital lease for purchase of copier/printer due
in monthly installments of $157, interest imputed
at 21% through August 2006 155 1,811

Capital lease for purchase of phone system
upgrades due in monthly installments of $157,
interest imputed at 16% through December 2007 2,530 3,905

Capital lease for purchase of forklift due in
monthly installments of $290, interest imputed at
11% through June 2007 3,308 6,273
-------- --------
42,069 90,670
Less: current portion 40,260 48,558
-------- --------
$ 1,809 $42,112
======== ========

Minimum future lease payments for each of the next five years and in the
aggregate are as follows:

Year Ending June 30,
--------------------
2007 $43,469
2008 1,853
--------
Total future minimum lease payments 45,322
Less: amount representing interest 3,253
--------
Present value of future minimum lease payments 42,069
Less: current maturities 40,260
--------
Long-term portion of capital lease obligations $ 1,809
========

The following describes leased equipment held under capital leases:

June 30,
-----------------
2006 2005
-------- --------
Equipment $ 34,954 $ 34,954
Computers and accounting software 138,450 138,450
-------- --------
173,404 173,404
Less: accumulated amortization 111,492 76,443
-------- --------
Net equipment under capital lease $ 61,912 $ 96,961
======== ========

F-16

SHARPS COMPLIANCE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2006 AND 2005

NOTE 7 - INCOME TAXES

The reconciliation of the statutory income tax rate to the Company's effective
income tax rate for the years ended June 30, 2006 and 2005 are as follows:

Year Ended June 30,
-------------------
2006 2005
-------- --------
Statutory rate 34.0% (34.0)%
State income taxes, net 99.3 (3.0)
Meals and entertainment 5.1 11.7
Expiration of net operating losses 60.3 0.0
Adjustment of net operating losses due to Internal
Revenue Code ss.382 Limitation 415.4 0.0
Change in valuation allowance (618.8) 24.8
Other 4.7 0.5
-------- --------
-% -%
======== ========

State income taxes were adjusted based on a review of available net operating
loss carryforwards and the recent changes made to the state tax law in Texas.
The net operating loss carryforwards were fully reserved in the valuation
allowance. Therefore, the expiration of net operating losses is offset by
changes in the valuation allowance.

At June 30, 2006 and 2005, significant components of deferred tax assets and
liabilities are approximated as follows:

June 30,
---------------------
2006 2005
---------- ---------
Deferred tax assets relating to:
Accounts receivable allowance $ 6,808 $ 8,050
Deferred revenue 353,033 469,669
Contribution Carryover - 1,036
Net operating loss carryforwards and
other credits 1,921,863 4,114,250
---------- ---------
Total deferred tax assets 2,281,704 4,593,005

Deferred tax liabilities related to:
Depreciation differences (23,378) (27,802)
---------- ---------
2,258,326 4,565,203
Valuation allowance (2,258,326)(4,565,203)
---------- ---------
Net deferred tax $ - $ -
========== =========

At June 30, 2006, the Company had total net operating loss carryforwards for
income tax purposes of approximately $10.2 million. The carryforwards will begin
to expire in 2010 if not otherwise used. There is a limitation under Internal
Revenue Code ss.382 on the Company's net operating losses prior to 1998. This
limitation will result in $4.6 million of losses expiring unused. Therefore,
only $5.6 million of the Company's net operating loss carryforwards are
available for use in future years. A valuation allowance has been established to
fully offset the Company's deferred tax assets due to the Company's history of
losses since inception.

In May 2006, the state of Texas enacted a new law that substantially changes its
tax system. The law replaces the taxable-capital and earned surplus components
of the current franchise tax with a new tax that is based on modified gross
revenue. This new tax is referred to as the "Margin Tax" and is effective
January 1, 2007. The Company has assessed the impact of the change in tax law
and does not believe it will have a material effect on the Company's financial
statements.

F-17

SHARPS COMPLIANCE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2006 AND 2005

NOTE 8 - STOCK TRANSACTIONS

The following represents the significant stock transactions for the years ending
June 30, 2006 and 2005. In May 2005 stock options to purchase 9,167 of common
shares were exercised. Total proceeds to the Company were $6,834. In March and
June 2006 stock options to purchase 1,499 and 2,500, respectively, of common
shares were exercised. Total proceeds to the Company were $2,852. In June 2006,
the Company accelerated vesting of unvested stock options resulting in
compensation expense of $11,035. (See Note 2 - Stock-Based Compensation).

NOTE 9 - STOCK OPTIONS

The Company sponsors a Stock Plan (the "Plan") covering employees, consultants
and non-employee directors. The Plan, as amended, provides for the granting of
options to purchase up to 3,500,000 shares of the Company's common stock of
which 3,066,390 are outstanding as of June 30, 2006. The Company also has issued
637,500 non-Plan options to purchase common stock. Options granted generally
vest over a period of three years and expire seven years after the date of
grant.

The following summary of activity for all stock options during the years ended
June 30, 2006 and 2005 is presented in the table below:
Weighted
Average
Options Exercise
Outstanding Price
------------- ----------
Balance, July 1, 2004 3,521,390 $ 0.94
Granted 541,000 $ 0.85
Exercised (9,167) $ 0.75
Forfeited or Canceled (645,833) $ 1.25
-------------

Balance, June 30, 2005 3,407,390 $ 0.94
Granted 393,500 $ 0.79
Exercised (3,999) $ 0.72
Forfeited or Canceled (93,001) $ 1.27
-------------

Balance, June 30, 2006 3,703,890 $ 0.88
=============
Exercisable at June 30, 2006 3,703,890 $ 0.88

As of June 30, 2006 and 2005, there were 315,444 and 230,110 options,
respectively, available for grant under the Plan.

F-18

SHARPS COMPLIANCE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2006 AND 2005

The following table summarizes information about stock options outstanding as of
June 30, 2006:

Options Outstanding And Exercisable
----------------------------------------------
Weighted
Average Weighted
Range of Outstanding Remaining Average
Exercise as of Life Exercise
Price June 30, 2006 (in Years) Price
----------------- --------------- ------------- ------------
$0.50 - $1.00 2,726,390 4.47 $ 0.75
$1.01 - $1.50 762,500 2.64 1.17
$1.51 - $2.00 215,000 2.82 1.53
--------------- ------------
3,703,890 4.00 $ 0.88
=============== ============

NOTE 10 - COMMITMENTS AND CONTINGENCIES

Operating Leases: The Company currently leases 10,634 square feet of rentable
(office and warehouse) space in Houston, Texas. On July 13, 2006 Sharps executed
a new lease agreement for 18,231 square feet of rentable (office and warehouse)
space ("New Lease") near the existing leased facility in Houston, Texas ("New
Premises"). The new lease period will commence upon the completion of the
construction of the New Premises, which is anticipated to be in October or
November of 2006. The New Lease will expire on the five (5) year anniversary of
the New Lease commencement date. The existing lease will be terminated upon
acceptance of the New Premises by the Company in accordance with the terms of
the New Lease. The Company also leases an incinerator facility located in
Carthage, Texas for medical waste disposal. The lease agreement requires rental
payments of $2,000 per month for the first year (year ended June 30, 2003)
escalating by $6,000 per year (or $500 per month) each year thereafter until
initial termination of the lease on June 30, 2012. The Company is required to
pay additional rent equal to $0.02 per pound for all materials burned, treated,
received or transferred at the incinerator facility exceeding 100,000 pounds per
month. The incineration fee has not been included in the table below. Rent
expense for the years ended June 30, 2006 and 2005 was $184,313 and $189,806,
respectively. Future minimum lease payments under non-cancelable operating
leases as of June 30, 2006, including the lease commitment related to the lease
executed on July 13, 2006, are as follows:

Year Ending June 30,
--------------------
2007 $ 269,249
2008 303,417
2009 301,867
2010 306,660
2011 312,660
Thereafter 138,165
-----------
$1,632,018
===========

For accounting purposes, the Company records lease expense for the incinerator
facility on a straight-line basis over the life of the lease that computes to
$4,250 per month, or $51,000 per year. As a result, a deferred portion (rent
abatement) is recorded, which, at June 30, 2006 was $69,000 and is reflected in
the Company's Consolidated Balance Sheet.

F-19

SHARPS COMPLIANCE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2006 AND 2005

NOTE 10 - COMMITMENTS AND CONTINGENCIES (continued)

Former Employee Matters:

The Company believes the charges to be totally without merit and frivolous. The
Company has filed a response with the EEOC in the form of a position statement
and believes the EEOC will rule in favor of the Company. The Company intends to
vigorously defend itself against the erroneous allegations.

Attentus Medical Sales, Inc. Matter: In March 2005, the Company's wholly-own
subsidiary Sharps Compliance, Inc., filed a lawsuit in Harris County District
Court, Texas against Mr. Jodway (a former employee) and Attentus Medical Sales,
Inc. ("Attentus"). The lawsuit claimed, (i) breach of a confidentiality
agreement, (ii) misappropriation of trade secrets and (iii) tortuous
interference with the Company's existing and prospective contracts and business
relationships. On April 7, 2005, the defendant filed its answer and counter
claims against Sharps Compliance, Inc. asserting breach of contract, quantum
merit and violation of the Texas Payday Act. On September 19, 2005, the Company
amended its pleadings and added claims asserting conversion, unjust enrichment,
unfair competition and trademark infringement in violation of the Lanham Act,
false advertising in violation of the Lanham Act, trademark dilution under the
Texas Business and Commerce Code, and tortuous interference with existing and/or
prospective customers. On July 6, 2006, the Company, Attentus and Mr. Jodway
reached settlement on all matters related to this litigation and dismissed all
claims against each other. In conjunction with the resolution of the matter, the
Company entered into a business relationship whereby Attentus now markets and
sells the Company's Sharps Disposal By Mail Systems(R) to its current and future
customers.

F-20