UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION

                             WASHINGTON, D.C. 20549

                               -------------------

                                   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, 2005

 [ ]   TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
       ACT OF 1934
       For the transition period from                 to                  .
                                      ---------------    -----------------

                         Commission File Number: 0-22390
                               -------------------

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

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

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: $9,001,177.

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
12, 2005:$3,527,787.

Number of shares outstanding of the issuer's Common Stock as of September
12, 2005: 10,547,311.


                      DOCUMENTS INCORPORATED BY REFERENCE:

Portions of the Registrant's definitive Proxy Statement for the 2006 Annual
Meeting of Stockholders to be held on November 17, 2005 are incorporated by
reference in Part III hereof.

Transitional Small Business Disclosure Format (check one):  Yes []  No [x]


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                             SHARPS COMPLIANCE CORP.
                               TABLE OF CONTENTS *
                          ANNUAL REPORT ON FORM 10-KSB
        --------------------------------------------------------------------------------

                                                                                        Page
                                     PART I

<S>  <C>                                                                                  <C>
Item 1   Description of Business .......................................................  2
Item 2   Description of Property ....................................................... 10
Item 3   Legal Proceedings ............................................................. 10
Item 4   Submission of Matters to a Vote of Security Holders ........................... 11

                                     PART II

Item 5   Market for Common Equity and Related Stockholder Matters ...................... 12
Item 6   Management's Discussion and Analysis or Plan of Operation ..................... 13
Item 7   Financial Statements .......................................................... 16
Item 8   Changes In and Disagreements with Accountants on Accounting and Financial
           Disclosure .................................................................. 16
Item 8A Controls and Procedures ........................................................ 16
Item 8B Other Information .............................................................. 16

                                    PART III

Item 9   Directors, Executive Officers, Promoters and Control Persons; Compliance with 16(a)
           of the Exchange Act ......................................................... 17
Item 10  Executive Compensation ........................................................ 17
Item 11  Security Ownership of Certain Beneficial Owners and Management and Related
           Stockholder Matters ......................................................... 17
Item 12  Certain Relationships and Related Transactions ................................ 17
Item 13  Exhibits ...................................................................... 18
Item 14  Principal Accountant Fees and Services ........................................ 19

         Signatures .................................................................... 20

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


</TABLE>



                                       1
<PAGE>
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 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 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.
Customers who use the Sharps Disposal by Mail System(R) are responsible for
mailing the system to the Company's disposal facility for incineration (i.e.
Sharps Environmental Services). 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.




                                       2
<PAGE>
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(TM) 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, 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 manage effectively 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 oversee directly 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.

                                       3
<PAGE>

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

Sharps' target markets include the home healthcare industry, assisted living
facilities and dental, veterinarian and physician markets (commercial
healthcare); hospitality and other industrial markets (commercial
non-healthcare); home self-injectors (retail) and other markets where Sharps'
products and services may be bundled or cross-sold to provide solutions to
prospective customers. Sharps is involved in the mission to help separate the
potentially infectious medical waste from the regular waste. The repeat order
nature of our business and an infrastructure, which is nationwide, has helped
drive our growth. Sharps has remained flexible and responsive to its customer
needs in industries that demand effective cost and logistical solutions, quick
response and technological innovation.

Home Healthcare Industry. Healthcare is increasingly provided in the home
setting, requiring healthcare professionals to dispose of contaminated syringes,
surgical supplies and other materials outside of medical facilities. The home
healthcare industry is a primary market for the Trip LesSystem(R), which
includes the Sharps Disposal by Mail System(R) Pitch-It(TM) IV Pole and asset
return box. Sharps' products are distributed to the home healthcare industry
through major national homecare equipment and supply distributors. The home
healthcare industry is a somewhat fragmented market; however, management
estimates that approximately 20 corporations dominate the home healthcare market
within the United States and Sharps currently maintains a relationship with a
majority of these corporations.

Sharps' current principal customers include many nationally recognized, leading
home healthcare customers. Among the leading national home healthcare companies,
Sharps has become part of the formulary for dealing with the disposal of the
sharps (syringes, needles, lancets, sutures, catheter needles or any item that
can puncture the skin), primarily because of the Trip LesSystem(TM). The system
is cost effective because it reduces the number of costly trips by the home
healthcare providers to patients' homes to retrieve medical waste or to deliver
or retrieve medical equipment.

Sharps sells its products and services to home health companies directly and
through distributors. Sharps' strategy is to obtain agreements with homecare
companies to use Sharps' products and arrange for the homecare company's
distributor of choice to sell and deliver the product and services directly to
the homecare company.

In recent publications, the Department of Transportation ("DOT") clarified the
exemptions to 49CFR Part 173.134(b) of the Hazardous Materials Regulations
("HMR"), thereby requiring home healthcare providers to follow most of the HMR
requirements for regulated medical waste during transport. Healthcare providers
who are transporting regulated medical waste must use DOT approved, tested and
registered containers. The Sharps Disposal by Mail System(R) meets all HMR
requirements through USPS permitting procedures. Sharps has started a marketing
and educational program informing home healthcare providers of this
clarification and offering the Sharps Disposal by Mail System(R) for their
transportation needs.

Assisted Living Facilities. Sharps believes that assisted living providers are
an excellent market for the Sharps Disposal by Mail System(R) because their
residents are more likely than the general populous to self-inject, thereby
generating a stream of medical waste requiring proper disposal. The volume
produced by each facility is particularly suited for disposal in Sharps Disposal
by Mail System(R).

Home Self-Injectors. A growing market is the home self-injector market.
Approximately three percent of the United States population, or individuals in
one out of every 12 households, use sharps in the treatment of conditions such
as diabetes, multiple sclerosis, infertility, migraines, allergies and
hemophilia, as well as infectious diseases like hepatitis and HIV. While medical
waste disposal in the home is largely unregulated, certain states require used
sharps from home self-injectors to be disposed as medical waste and not as solid
waste.



                                       4
<PAGE>

Sharps is actively marketing to a vast number of insulin dependent diabetics and
this market is expected to grow as testing for the condition increases and
modern dietary habits lead to growing numbers of diabetics. In May of 2002,
Sharps signed a three year, renewable agreement with BD Consumer Health Care, a
division of Becton Dickinson and Company ("BD"), the world's largest syringe
manufacturer. The agreement has been renewed through May 2006. The agreement
names Sharps as the exclusive supplier of Sharps Disposal by Mail System(R) for
retail sales nationally. BD will be marketing the mail-back disposal system to
Sharps' target market of home self-injectors in BD's syringe boxes, diabetic
newsletter and "Getting Started" kits for newly diagnosed diabetics. Sharps is
also marketing to the retail customer through a joint sales and marketing
agreement with Waste Management, Inc., a leading waste services provider.

Agricultural. During fiscal year 2004, Sharps began marketing and selling its
products to the agricultural industry. Specifically, Sharps has targeted the
dairy industry and other animal segments for the distribution and sale of its
Sharps Disposal by Mail System(R). Sharps markets to companies involved in the
production and/or distribution of injectables used for various purposes in the
agricultural industry. This industry is estimated to be $9 billion in potential
sales. Customers in the agricultural industry generally require safe and
efficient disposal of sharps.

Hospitality and Other Industrial Markets. Sharps sells both directly and through
major distributors to the hospitality and other industrial markets, including
hotels, motels, resorts, schools, colleges, stadiums, daycare centers, planes,
trains, cruise ships, casinos, supermarkets, distribution centers, business
offices, restaurants, bars and clubs. The Company also sells directly to the end
customers in the industrial market. Management believes that OSHA enhanced
regulations will increase this important market for Sharps' products and
services. Sharps has developed specialized versions of its Sharps Disposal by
Mail System(R), which permit an institutional establishment to easily introduce
the product. Sharps developed custom-designed cones, one used to collect
contaminated sharps when discovered and a second used as a temporary receptacle
by transient individuals who need to dispose of syringes.

The large, fragmented medical waste industry has experienced significant growth
since its inception. The regulated medical waste industry arose with the Medical
Waste Tracking Act of 1988, which Congress enacted in response to media
attention after medical waste washed ashore on beaches, particularly in New
Jersey. Since the 1980s, the public and governmental regulators have
increasingly restricted the handling and disposal of medical waste generated by
the healthcare industry. The EPA has recently changed its guidance regarding the
safe disposal of medical sharps in the non-regulated markets. The new guidance
reflects information about alternative disposal methods including mail-back
programs. Additionally, California recently enacted legislation authorizing
state agencies and municipalities to expand the scope of the hazardous waste
plans to provide for the safe disposal of medical sharps.


Today, almost all businesses have some medical waste disposal concerns for
safety and liability reasons. Medical waste such as syringes, razor blades,
blood borne contaminated items, bio-hazard waste spills and other sharps waste
can occur in several situations. Those situations are as follows: treating cuts,
abrasions and burns; finding needles, syringes or blood-soaked items in the
workplace; laundering blood-soaked linens or finding needles or razor blades in
linens; and cleaning up broken glass with blood or other bio-hazardous waste.


While historically flu shots were administered in a doctor's office, they are
now being administered through businesses, drug stores, clinics, and grocery
stores. The Company has, and expects to continue to, provide syringe disposal to
this market.

Dentists, Veterinarians and Physicians. Sharps has a presence within these
healthcare markets with the Sharps Disposal by Mail System(R). Sharps' system is
ideal for these small volume waste generators. Sharps has grouped the dental,
physician and veterinarian market together due to their similar model and
duration usage.

Sharps utilizes distributors to reach the dental, veterinarian and physician
marketplace. In all areas, Sharps' products and services are distributed through
major distributors within each of the respective markets.




                                       5
<PAGE>
MARKET SIZE

Management believes many businesses that are not outsourcing medical waste
services are unaware of OSHA requirements regarding proper training of employees
that may handle medical waste. These businesses include restaurants, casinos,
hotels and generally all businesses in which employees may come into contact
with bloodborne pathogens. In addition, medical waste generated in the home is
currently unregulated and may become subject to similar bloodborne pathogen
regulations in the future. Use of the Company's products and services are
designed to significantly reduce the liabilities associated with improper
disposal of medical waste.

Home Healthcare Industry

Homecare target markets include Sharps' primary market, home infusion providers,
as well as home nursing agencies. There are approximately 4,500 sites in the
United States that provide home infusion services including local, national and
hospital-based providers generating approximately 4.5 billion dollars in annual
revenue. Twenty large chains and affiliations service a large percentage of the
patients in this market. The Company believes it has about 10% of this market.
Recent statistics on home nursing agencies show approximately 7,000 Medicare
Certified Agencies employing approximately 240,000 clinical full time employees.
The home nursing market, unlike the infusion market, downsized after the
Balanced Budget Amendment of 1997. Sharps' focus in the home nursing market is
secondary to infusion due to the potential business per site, but the Sharps
Disposal by Mail System(R) could service their total medical waste handling,
disposal and documentation needs. Sharps' sales force focuses on these accounts.

Dentist, Veterinarians and Physicians

Recent figures supplied by the American Dental Association, the American Medical
Association and the American Veterinary Medical Association, indicate that there
are approximately 160,000 dentists, 690,000 physicians and 72,000 veterinarians
in active practice in the United States. Management estimates that a large
majority of these offices would benefit from replacing waste hauling services
with the Sharps Disposal by Mail System(R).

Hospitality and Other Industrial Markets

The Lodging Industry Profile for 2003, published by the American Hotel & Lodging
Association, estimates there are approximately 48,000 properties consisting of
4.4 million rooms supporting more than 7.4 million jobs. In 30 states, the
tourism industry ranks as the first, second or third largest employer. According
to the National Restaurant Association 2005 Fact Sheet, the restaurant industry
employs approximately 12.2 million people. Management believes that a
comprehensive application of OSHA regulations would require the majority of
these employees to be trained in the proper handling of medical waste
encountered in the workplace which would include proper disposal.

Home Self-Injectors

The American Diabetes Association estimates approximately 18.2 million people in
the United States, or 6.3% of the population, have diabetes. Of diagnosed cases,
the ADA estimates 5.6 million require daily insulin injections.

Management believes that the overall demand for Sharps' solutions will grow,
with such growth being fueled by a number of factors, including the following:

     1.   The healthcare  industry is under pressure to reduce costs and improve
          efficiency.   Sharps  believes  that  the  Company's   solutions  help
          healthcare  providers  reduce costs by reducing  their  medical  waste
          tracking,  handling and  compliance  costs and equipment  delivery and
          return costs.

     2.   Recent changes in federal,  state and local regulations  regarding the
          proper transportation and/or disposal of medical sharps are increasing
          over time.

     3.   OSHA has issued regulations concerning employee exposure to bloodborne
          pathogens  and other  potentially  infectious  materials  that require
          special  procedures for the handling and disposal of medical waste and
          annual training of all personnel who may be exposed to blood and other
          body fluids.  Management  believes these  regulations  will expand the
          market for Sharps' products and services.


                                       6
<PAGE>
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 areas, since small quantity medical waste
generators can be found in many industries. 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, which are primarily
distributors. 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. For the year ended June 30, 2004, two customers represented
approximately 49% of revenues. Those same two customers represented
approximately 47%, or $460,000 of the total accounts receivable balance at June
30, 2004. 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 the
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.

Sharps continues to sole-source transportation, which consists of delivering the
Sharps Disposal by Mail System(R) from the end user to the Company's facility.
Transportation is currently sole-sourced to the USPS. Management believes the
risk of dependence is mitigated by the long-standing business relationship.
Although there are no assurances with regard to the continued future business
association, management believes that alternative sources would be available.

INTELLECTUAL PROPERTY

Sharps has applied in the United States for registration of a number of
trademarks and patents,  many of which have been registered and granted, and 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

Sharps has incurred cumulative losses from operations since its inception. 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 factoring line of credit, will be sufficient to
fund operations through fiscal year 2006. There can be no assurance that the
Company will be able to obtain financing, if necessary, on acceptable terms to
fund operations beyond that time frame; however, management believes that it
will be successful in raising such financing if necessary.

Dependence on Certain Management Personnel

Sharps' growth and development to date has been largely dependent on the active
participation and leadership of its Chairman and Chief Executive Officer, Dr.
Burton Kunik. The Company believes that the business is dependent upon the
continued employment of the Chief Executive Officer as well as the senior
management team and has therefore entered into employment agreements with all
the above noted individuals in order to provide incentive for their continued
employment with the Company.


                                       7
<PAGE>


Competition

There are several competitors who offer disposal of medical waste services such
as a division of Stericycle, Inc.; however, no other company focuses primarily
on the disposal of sharps medical waste, nationally, through transport by the
USPS. While Sharps currently does not face any significant competition in the
mail sharps disposal business, the Company must compete with larger and
better-capitalized companies.

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 uses an incinerator facility for medical waste
disposal.  The Company  has an  agreement  for such a facility  with the City of
Carthage,  Texas,  and Panola County to operate the PCRRF through June 30, 2012.
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, 2005 was $18,460. 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. The Company entered
into an agreement with a secondary burn facility to provide services in the
event the PCRRF is unavailable. See proposed change in government regulation
below.

Governmental Regulation

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.

Fiscal year 2005 was a year of significant developments on the regulatory front.
The first development is 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


                                       8
<PAGE>


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 second regulatory development is 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.

The EPA has proposed a change in the Clean Air Act which could effect the
operations of the leased incineration facility located in Carthage, TX. The
proposed regulation modifies the emission limits and monitoring procedures
required to operate an incineration facility. The proposed rule could
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, if enacted in its current form, would
require the Company to incur significant capital expenditures in order to meet
the requirements of the proposed regulations. The proposed regulation, as
currently written, allows a period of a minimum of 3 years and a maximum of 5
years to comply after the date the final rule is published. Management is not
able to predict when, or if, the proposed rule change may be enacted; however,
based upon correspondence received from the EPA, the new regulation could be
enacted as early as November 30, 2005.

Postal Work Interruptions

Since Sharps transports its disposal products using the USPS, any interruption
in day-to-day postal 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.

Employees

Sharps employs 30 individuals, of which 29 are full-time employees.



                                       9
<PAGE>
ITEM 2. DESCRIPTION OF PROPERTY

Sharps currently leases 10,634 square feet of rentable (office and warehouse)
space in Houston, Texas. The lease period commenced October 1, 2002, and
terminates January 31, 2008.

The Company leases an incinerator facility located in Carthage, Texas for
medical waste disposal. The amended lease 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 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. For
accounting purposes and 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 MedSolutons
whereby MedSolutions was ordered to pay to the Company $170,765, plus interest
at 5%. Payments under the Garnishment Order are scheduled to be made monthly in
the amount of $4,375 (inclusive of interest) with a balloon payment of $137,721
due November 7, 2004. MedSolutions is currently in breach of the Garnishment
Order. During January 2005, the Company filed suit against MedSolutions and
Ameritech in the 234th Judicial District Court of Harris County, Texas. The suit
alleges collusion, fraudulent conveyance and fraudulent inducement by and
between MedSolutions and Ameritech to defraud payment to the Company for amounts
owed, as described above. The Company has also requested the Court to appoint a
Receiver for all sums owed to protect assets pending review by the Court.

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.

On or about February 25, 2003, Jason Jodway, a then employee of the Company
since April 1999,  resigned in lieu of termination of employment by the Company.
Thereafter,  Mr. Jodway formed Attentus Medical Sales,  Inc., a competing entity
of the  Company.  In March 2005,  the  Company's  wholly-own  subsidiary  Sharps
Compliance Inc) filed a lawsuit in Harris County  District Court,  Texas against
Mr. Jodway and Attentus Medical Sales, Inc. The lawsuit claims,  (i) breach of a
confidentiality  agreement,  (ii)  misappropriation  of trade  secrets and (iii)
tortiuous interference with the Company's existing and prospective contracts and
business  relationships.  The  Company  intends to  vigorously  pursue its claim
against Mr. Jodway and Attentus Medical Sales,  Inc., though the Company has not
quantified its damages to date. In April 2005,  Mr. Jodway and Attentus  Medical
Sales, Inc. filed a general denial in the 152nd District Court of Harris County.
Additionally,  the defendant  filed a counter-claim  against Sharps  Compliance,
Inc.  asserting  his last day of  employment  was March 29,  2003 and that he is
entitled to receive back wages.  The Company denies any obligation to Mr. Jodway
for such back wages.


                                       10
<PAGE>

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

During the three months ended June 30, 2005, no matter was submitted by the
Company to a vote of its stockholders through the solicitation of proxies or
otherwise.



                                       11
<PAGE>
                                     PART II

ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

Market Information: During the two years ended June 30, 2005, 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 109,708 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 Ended June 30, 2004
     -------------------------------
     First Quarter                                 $ 1.15           $ 0.82
     Second Quarter                                $ 1.15           $ 0.51
     Third Quarter                                 $ 1.01           $ 0.60
     Fourth Quarter                                $ 1.05           $ 0.58

     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 (September 12, 2005)            $ 0.94           $ 0.60

Stockholders: At September 12, 2005 there were 10,547,311 shares of common
stock held by 212 holders of record.  The last reported sale of the common stock
on September 12, 2005, was $ 0.65 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:
<TABLE>
<CAPTION>

                      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
<S>                                                    <C>                                 <C>                    <C>
      Equity compensation plans
        approved by security holders                   2,769,890                           0.94                   230,110
      Equity compensation plans not
        approved by security holders                     637,500                           0.76                       N/A
                                                     -----------                      ---------               ------------

      Total                                            3,407,390                           0.90                   230,110
                                                       =========                      =========                ==========

</TABLE>

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



                                       12
<PAGE>


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 Condensed Consolidated Financial Statements of Operations,
expressed as a percentage of revenue:

                                                    Year Ended June 30,
                                                     -------------------
                                                  2005                  2004
                                                  ----                  ----

Total revenues                                     100%                  100%
Costs and expenses:
     Cost of revenues                              (61%)                 (59%)
     Selling, general and administrative           (39%)                 (40%)
     Depreciation and amortization                  (2%)                  (2%)
                                             -----------------     -----------

Total operating expenses                          (102%)                (101%)
                                             -----------------     -----------
Operating loss                                      (2%)                  (1%)
Interest income (expense), net                       0%                    0%
                                             -----------------     -----------
Net loss                                            (2%)                  (1%)
                                             =================     ===========

YEAR ENDED JUNE 30, 2005 COMPARED TO YEAR ENDED JUNE 30, 2004

Total revenues for the year ended June 30, 2005 of $9,001,177 increased by
$381,784, or 4%, over the total revenues for the year ended June 30, 2004 of
$8,619,393. The increase in revenues is attributable to an increase in billings
in the following markets; (i) Agriculture of $ 365,868, (ii) Retail of $
176,328, and (iii) Health Care of $ 115,678.

Cost of revenues for the year ended June 30, 2005 of $5,499,355 was 61% of
revenues. Cost of revenues for the year ended June 30, 2004 of $5,108,635 was
59% of revenues for the corresponding period. The increase in costs as a
percentage of revenue is a result of an increase in materials and handling costs
incurred.

SG&A expenses for the year ended June 30, 2005 of $3,514,595 increased by
$95,344, or 3%, over the SG&A expenses for the year ended June 30, 2004. The
increase in the SG&A expenses is primarily a result of increases in the
following expenses, (i) compensation of $60,000, and (ii) professional fees of
$51,000.

LIQUIDITY AND CAPITAL RESOURCES

Cash and cash equivalents increased by $15,624 to $258,427 at June 30, 2005 from
$242,803 at June 30, 2004.

Property and equipment decreased by $101,736 to $438,064 at June 30, 2005 from
$539,800 at June 30, 2004. This decrease is attributable to depreciation for
2005 of $156,847 that was partially offset by the purchase of, (i) computer
equipment $45,208, (ii) upgrades to the incineration facility of $9,550, (iii)
operational tools and dies of $ 9,478 and (iv) office equipment of $9,026.

The Company's various debt and capital leases (including current portion)
decreased by $228,045 as of June 30, 2005 as compared to the June 30, 2004
balances. This decrease is attributable to the net reduction of $185,932 in the
working capital line of credit and payments on capital lease obligations of
$31,289.

The increase in the Company's net loss of $193,100 for the year ending June 30,
2005 compared the year ending June 30, 2004 is primarily a result of the $8,936
decrease in Gross Profit and an increase in SG&A expenses of $95,344. This was
partially offset by a decrease in interest expense of $25,923.


                                       13
<PAGE>

Management believes that the Company's current cash resources along with its
asset-based factoring line of credit will be sufficient to fund operations for
the twelve months ended June 30, 2006.

QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)

The following tables set forth selected quarterly information for 2005 and 2004.
We believe that all necessary adjustments have been included in the amounts
below to present fairly the results of such periods.
<TABLE>
<CAPTION>

                                                                  Quarter Ended
                               ------------------------------------------------------------------------------------
                                September 30, 2003      December 31, 2003      March 31, 2004      June 30, 2004
                               ------------------------------------------------------------------------------------
<S>                              <C>                      <C>                  <C>                 <C>
Total revenues                   $      1,997,212         $   2,074,220        $    2,079,946       $   2,468,015
Cost of revenues                 $      1,217,710         $   1,251,600        $    1,234,515       $   1,404,810
Operating income (loss)          $        (95,542)        $     (15,549)       $      (59,185)      $     101,139
Net income (loss)                $       (116,577)        $     (22,361)       $      (69,165)      $      90,224
Net income (loss) per share      $          (0.01)        $        0.00        $        (0.01)      $        0.01
Weighted average shares -
   basic and diluted                    9,960,811            10,538,114            10,538,114          10,538,114

                                                                  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)          $        121,036         $      (3,278)       $      (95,789)      $    (192,202)
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 -
   basic and diluted                   10,538,144            10,538,144           10,538,144           10,542,439
</TABLE>

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.

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.

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.

                                       14
<PAGE>
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 November 2004, the FASB issued FASB Statement No. 151, which revised ARB
No.43, relating to inventory costs. This revision is to clarify the accounting
for abnormal amounts of idle facility expense, freight, handling costs and
wasted material (spoilage). This Statement requires that these items be
recognized as a current period charge regardless of whether they meet the
criterion specified in ARB 43. In addition, this Statement requires the
allocation of fixed production overheads to the costs of conversion be based on
normal capacity of the production facilities. This Statement is effective for
financial statements for fiscal years beginning after June 15, 2005. Earlier
application is permitted for inventory costs incurred during fiscal years
beginning after the date of this Statement is issued. Management believes this
Statement will have no impact on the financial statements of the Company once
adopted.

In December 2004, the FASB issued Statement No. 123 (revised 2004) ("FAS 123
(R)"), Accounting for Share-Based-Payments. FAS 123 (R) 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
plans to apply FAS 123 (R) 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. In addition, the Company may elect
to adopt FAS 123 (R) by restating previously issued financial statements, basing
the amounts on the expense previously calculated and reported in their pro forma
disclosures that had been required by FAS 123. For public entities that file as
small business issuers, FAS 123 (R) is effective as of the beginning of the
first interim or annual reporting period that begins after December 15, 2005.
Management has not completed its evaluation of the effect that FAS 123 (R) will
have, but believes that the effect will be consistent with the application
disclosed in its pro forma disclosures.

In May 2005, the FASB issued Statement No. 154, Accounting Changes & Error
Corrections, which replaced APB Opinion No. 20 and FASB Statement No. 3. This
statement changes the requirements for accounting and reporting of a voluntary
change in accounting principle and changes required by an accounting
pronouncement when the specific transition provisions are absent. This statement
requires retrospective application to prior periods' financial statements of
changes in accounting principle. If it is impracticable to determine either the
period-specific effect or the cumulative effect of the change, this statement
requires that the new accounting principle be adopted prospectively from the
earliest practicable date. SFAS No. 154 is effective in the period that begins
after December 15, 2005, and early adoption is permitted in the fiscal years
beginning after SFAS No. 154 was issued. The Company does not expect the new
standard to have any material impact on our financial position and results of
operations.



                                       15
<PAGE>
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-19.

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

The information required by this item is not applicable.

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 13a-14. 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.



                                       16
<PAGE>
                                    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 17, 2005.

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, 2005, 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), Cooke, 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 five 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 17, 2005.

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 17, 2005.

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 17, 2005.


                                       17
<PAGE>

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 Form10-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.

    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  Financial  Officer in accordance with Section
          906 of the Sarbanes-Oxley Act (filed herewith).


                                       18
<PAGE>
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 17, 2005.






                                       19
<PAGE>



                                   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 14, 2005           By: /s/ BURTON J. KUNIK
                                        ----------------------------------------
                                        Dr. Burton J. Kunik
                                        Chairman of the Board and
                                        Chief Executive Officer

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

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











                                       20
<PAGE>
<TABLE>
<CAPTION>

                    SHARPS COMPLIANCE CORP. AND SUBSIDIARIES
                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS


  CONSOLIDATED FINANCIAL STATEMENTS                                                                          PAGE
                                                                                                             ----
<S>                                                                                                             <C>
     Report of Management and Internal Controls..........................................................     F-2

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

     Consolidated Balance Sheets as of June 30, 2005 and 2004 ...........................................     F-4

     Consolidated Statements of Operations for the Years Ended June 30, 2005
       and 2004 .........................................................................................     F-5

     Consolidated Statements of Stockholders' Equity (Deficit) for the Years
       Ended June 30, 2005 and 2004 .....................................................................     F-6

     Consolidated Statements of Cash Flows for the Years Ended June 30, 2005 and 2004 ...................     F-7

     Notes to Consolidated Financial Statements .........................................................     F-8
</TABLE>


                                      F-1
<PAGE>
                   REPORT OF MANAGEMENT AND INTERNAL CONTROLS

         The consolidated financial statements included herein have been
prepared in conformity with accounting principles generally accepted in the
United States of America. Management is responsible for preparing the
consolidated financial statements and maintaining and monitoring the Company's
system of internal accounting controls. The Company believes that the existing
system of internal controls provides reasonable assurance that errors or
irregularities that could be material to the consolidated financial statements
are prevented or would be detected in a timely manner. Key elements of the
Company's system of internal controls include careful selection of management
personnel, appropriate segregation of conflicting responsibilities, periodic
evaluations of Company financial and business practices, communication practices
that provide assurance that policies and managerial authorities are understood
throughout the Company, and periodic meetings between the Company's audit
committee, senior financial management personnel and independent public
accountants.

     The consolidated financial statements were audited by UHY Mann Frankfort
Stein & Lipp CPAs, LLP, independent public accountants, who have also issued a
report on the consolidated financial statements.

/s/ BURTON J. KUNIK
---------------------------
Dr. Burton J. Kunik
Chairman of the Board, Chief Executive Officer
and President

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



                                      F-2
<PAGE>
             REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM


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

We have audited the accompanying consolidated balance sheets of Sharps
Compliance Corp. (a Delaware corporation) and subsidiaries (the "Company") as of
June 30, 2005 and 2004, and the related consolidated statements of operations,
stockholders' equity (deficit) and cash flows for the years 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 audits.

We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. An audit
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 audits provide a reasonable basis for our
opinion.

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Sharps
Compliance Corp. and subsidiaries as of June 30, 2005 and 2004, and the results
of their operations and their cash flows for the years then ended, in conformity
with accounting principles generally accepted in the United States of America.


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

Houston, Texas
August 5, 2005
--------------


                                      F-3
<PAGE>

<TABLE>
<CAPTION>


                    SHARPS COMPLIANCE CORP. AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS



                                                                                                       June 30,
                                                                                               -------------------------
                                                                                                   2005         2004
                                                                                               ------------ ------------
                                            ASSETS
CURRENT ASSETS
<S>                                                                                            <C>          <C>
  Cash and cash equivalents ...................................................................$   258,427  $   242,803
  Restricted cash .............................................................................     10,010       14,678
  Accounts receivable, net of allowance for doubtful accounts of $21,757 and 12,986,
   respectively ...............................................................................    964,148      981,408
  Inventory ...................................................................................    368,495      393,238
  Prepaid and other assets ....................................................................     79,320      138,798
                                                                                               ------------ ------------
   TOTAL CURRENT ASSETS .......................................................................  1,680,400    1,770,925

PROPERTY AND EQUIPMENT, net of accumulated depreciation of $650,532 and $507,945,
 respectively .................................................................................    438,064      539,800

INTANGIBLE ASSETS, net of accumulated amortization of $102,195 and $101,582, respectively .....     11,779       10,051
                                                                                               ------------ ------------

TOTAL ASSETS ..................................................................................$ 2,130,243  $ 2,320,776
                                                                                               ============ ============

                        LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)

CURRENT LIABILITIES
  Accounts payable ............................................................................$   567,398  $   592,943
  Accrued liabilities .........................................................................    283,953      338,153
  Deferred revenue - pump return ..............................................................     54,443      110,702
  Current portion of deferred revenue - incineration ..........................................    171,300      108,299
  Current portion of deferred revenue - transportation ........................................    770,854      553,938
  Notes payable and current portion of long-term debt .........................................          -      185,932
     Current maturities of capital lease obligations ..........................................     48,558       37,513
                                                                                               ------------ ------------
   TOTAL CURRENT LIABILITIES ..................................................................  1,896,506    1,927,480

LONG-TERM DEFERRED REVENUE - INCINERATION, net of current portion .............................     47,142       30,408

LONG-TERM DEFERRED REVENUE - TRANSPORTATION, net of current portion ...........................    225,639      179,506

LONG-TERM DEBT, net of current portion ........................................................          -       10,826

OBLIGATIONS UNDER CAPITAL LEASES, net of current maturities ...................................     42,112       84,446

OTHER LIABILITIES .............................................................................     62,500       45,500
                                                                                               ------------ ------------

   TOTAL LIABILITIES ..........................................................................  2,273,899    2,278,166

STOCKHOLDERS' EQUITY (DEFICIT)
  Common stock, $0.01 par value per share; 20,000,000 shares authorized; 10,547,311 and
   10,538,144 shares issued and outstanding, respectively .....................................    105,473      105,381
  Additional paid-in capital ..................................................................  7,464,381    7,457,639
  Accumulated deficit ......................................................................... (7,713,510)  (7,520,410)
                                                                                               ------------ ------------
   TOTAL STOCKHOLDERS' EQUITY (DEFICIT) .......................................................   (143,656)      42,610
                                                                                               ------------ ------------

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) ..........................................$ 2,130,243  $ 2,320,776
                                                                                               ============ ============



           See accompanying notes to consolidated financial statements

</TABLE>

                                      F-4
<PAGE>
<TABLE>
<CAPTION>

                    SHARPS COMPLIANCE CORP. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF OPERATIONS

                                                                                                 Year Ended June 30,
                                                                                              --------------------------
                                                                                                  2005          2004
                                                                                              ------------ -------------
REVENUES
<S>                                                                                           <C>          <C>
 Distribution, net ...........................................................................$ 8,637,397  $  8,224,232
 Consulting services .........................................................................     32,677        40,467
 Environmental revenue .......................................................................    331,103       354,694
                                                                                              ------------ -------------
   TOTAL REVENUES ............................................................................  9,001,177     8,619,393

COSTS AND EXPENSES
 Cost of revenues ............................................................................  5,499,355     5,108,635
 Selling, general and administrative .........................................................  3,514,595     3,419,251
 Depreciation and amortization ...............................................................    157,460       160,644
                                                                                              ------------ -------------
   TOTAL COSTS AND EXPENSES ..................................................................  9,171,410     8,688,530
                                                                                              ------------ -------------

OPERATING LOSS ...............................................................................   (170,233)      (69,137)

OTHER EXPENSE
 Interest expense ............................................................................    (22,867)      (48,742)
                                                                                              ------------ -------------

NET LOSS .....................................................................................$  (193,100) $   (117,879)
                                                                                              ============ =============


BASIC AND DILUTED NET LOSS PER COMMON SHARE ..................................................$      (.02) $       (.01)
                                                                                              ============ =============


WEIGHTED AVERAGE SHARES USED IN COMPUTING BASIC AND DILUTED NET LOSS PER COMMON SHARE ........ 10,539,215    10,392,994
                                                                                              ============ =============


           See accompanying notes to consolidated financial statements
</TABLE>

                                      F-5
<PAGE>
<TABLE>
<CAPTION>



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



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

<S>            <C>                                           <C>        <C>       <C>         <C>             <C>
Balances, July 1, 2003                                       9,910,356  $ 99,103  $6,963,918  $(7,402,531)    $(339,510)

Issuance of common stock for cash                              625,000     6,250     493,750            -       500,000

Other                                                            2,788        28         (29)           -            (1)

Net loss                                                             -         -           -     (117,879)     (117,879)
                                                           ------------ --------- ----------- ------------ -------------

Balances, June 30, 2004                                     10,538,144   105,381   7,457,639   (7,520,410)       42,610

Issuance of common stock for cash                                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)
                                                           ===========  ========  ==========  ===========     =========


           See accompanying notes to consolidated financial statements
</TABLE>

                                      F-6
<PAGE>
<TABLE>
<CAPTION>

                    SHARPS COMPLIANCE CORP. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS


                                                                                                    Year Ended June 30,
                                                                                                   ---------------------
                                                                                                      2005       2004
                                                                                                   ---------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES
<S>                                                                                                <C>        <C>
 Net loss .........................................................................................$(193,100) $(117,879)
 Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
   Depreciation and amortization ..................................................................  157,460    160,644
   Bad debt expense ...............................................................................    8,771          -
   Loss on disposal of equipment ..................................................................      126        556
 Changes in operating assets and liabilities:
 Decrease in restricted cash ......................................................................    4,668    138,173
   (Increase) decrease in accounts receivable .....................................................    8,489   (240,648)
   (Increase) decrease in inventory ...............................................................   24,743    (94,102)
   (Increase) decrease in prepaid and other assets ................................................   59,478     (1,295)
   Increase (decrease) in accounts payable and accrued liabilities ................................  (62,745)   155,251
   Increase (decrease) in deferred revenue ........................................................  286,525     (7,385)
                                                                                                   ---------- ----------
   NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES ............................................  294,415     (6,685)

CASH FLOWS FROM INVESTING ACTIVITIES
   Purchases of property and equipment ............................................................  (64,333)   (93,200)
   Proceeds from the disposal of property and equipment ...........................................   18,026          -
   Patent .........................................................................................   (2,341)   (10,408)
                                                                                                   ---------- ----------
   NET CASH USED IN INVESTING ACTIVITIES ..........................................................  (48,648)  (103,608)

CASH FLOWS FROM FINANCING ACTIVITIES
   Payments on long-term debt .....................................................................  (31,675)  (159,220)
   Net payments on factoring agreement ............................................................ (165,083)   (96,960)
   Payments on capital lease obligations ..........................................................  (40,219)   (26,608)
   Issuance of common stock .......................................................................    6,834    500,000
                                                                                                   ---------- ----------
    NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES ........................................... (230,143)   217,212
                                                                                                   ---------- ----------

NET INCREASE IN CASH AND CASH EQUIVALENTS .........................................................   15,624    106,919

CASH AND CASH EQUIVALENTS, beginning of year ......................................................  242,803    135,884
                                                                                                   ---------- ----------

CASH AND CASH EQUIVALENTS, end of year ............................................................$ 258,427  $ 242,803
                                                                                                   ========== ==========


SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
 Cash paid for interest ...........................................................................$  22,867  $  50,389
                                                                                                   ========== ==========
NONCASH INVESTING AND FINANCIING ACTIVITIES:
 Property and equipment additions acquired under capital lease obligations.........................$   8,930  $   9,752
                                                                                                   ========== ==========

           See accompanying notes to consolidated financial statements

</TABLE>

                                      F-7
<PAGE>
                    SHARPS COMPLIANCE CORP. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                             JUNE 30, 2005 AND 2004


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.

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.

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.


                                      F-8
<PAGE>
                    SHARPS COMPLIANCE CORP. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                             JUNE 30, 2005 AND 2004

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.

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, 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. For the year ended June 30, 2004, two
customers represented approximately 49% of revenues. Those same two customers
represented approximately 47%, or $460,000 of the total accounts receivable
balance at June 30, 2004. 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


                                      F-9
<PAGE>
                    SHARPS COMPLIANCE CORP. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                             JUNE 30, 2005 AND 2004

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.

Sharps continues to sole-source transportation, which consists of delivering the
Sharps Disposal by Mail System(R) from the end user to the Company's facility.
Transportation is currently sole-sourced to the USPS. Management believes the
risk of dependence is mitigated by the long-standing business relationship.
Although there are no assurances with regard to the continued future business
association, management believes that alternative sources would be available.

Liquidity: The Company has incurred cumulative losses since its inception. The
future success of Sharps is dependent upon many factors, including environmental
regulation, continuity of its distributorship 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 financial resources will be sufficient to fund operations through
fiscal year 2006. There can be no assurance that the Company will be able to
obtain financing on acceptable terms to fund operations beyond that time frame;
however, management believes that it will be successful in raising such
financing, if necessary. Additionally, the Company maintains an agreement with a
financial institution for a $1.25 million asset-based line of credit (see Note
5).


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.

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, 2005 total inventory was $368,495 of which $206,830 was
finished goods and $161,665 was raw materials. At June 30, 2004 total inventory
was $393,238 of which $240,895 was finished goods and $152,343 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
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, 2005 and 2004, the Company recorded
depreciation expense of $156,847 and $160,287, respectively.

Intangible Assets: Intangible assets consist of costs related to three patents,
two acquired in June 1998 and one in November 2003. 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, 2005 and 2004, the Company
recorded amortization expense of $613 and $357, respectively. Accumulated
amortization at June 30, 2005 and 2004 was $102,195 and $101,582, 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.


                                      F-10
<PAGE>
                    SHARPS COMPLIANCE CORP. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                             JUNE 30, 2005 AND 2004

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)


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, pro
forma information regarding net income (loss) and earnings per share is required
under SFAS No. 123(R), "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. 123(R).

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,
2005 and 2004, as follows: risk-free interest rates of 3.74%; expected annual
dividend yield of 0%; volatility factors of the expected market price of the
Company's common stock of approximately 75.1% and 52.76%, respectively; and a
weighted-average expected life of the options of 3.9 and 7 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 loss would have been increased, as follows:
<TABLE>
<CAPTION>
                                                                                                    Year Ended June 30,
                                                                                                   ---------------------
                                                                                                      2005       2004
                                                                                                   ---------- ----------

<S>                                                                                                <C>        <C>
Net loss, as reported .............................................................................$(193,100) $(117,879)
Less: Total stock-based employee compensation expense determined under fair value based method for
 all awards, net of related tax effects ...........................................................$(298,075)  (325,764)
                                                                                                   ========== ==========

Net loss, pro forma ...............................................................................$(491,175) $(443,643)
                                                                                                   ========== ==========

Basic and diluted net loss per share, as reported .................................................$   (0.02) $   (0.01)
                                                                                                   ========== ==========

Basic and diluted net loss per share, pro forma ...................................................$   (0.05) $   (0.04)
                                                                                                   ========== ==========
</TABLE>


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

                                      F-11
<PAGE>
                    SHARPS COMPLIANCE CORP. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                             JUNE 30, 2005 AND 2004

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

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 has been classified as cost of revenues.

Advertising Costs: Advertising costs are charged to expenses when incurred and
totaled $33,880 and $61,731 for the years ended June 30, 2005 and 2004,
respectively.

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.

Net 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. There are no differences in basic EPS and diluted EPS for either
year presented.

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.

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.

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-12
<PAGE>
                    SHARPS COMPLIANCE CORP. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                             JUNE 30, 2005 AND 2004


NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Recent Accounting Pronouncements: In November 2004, the FASB issued FASB
Statement No. 151, which revised ARB No.43, relating to inventory costs. This
revision is to clarify the accounting for abnormal amounts of idle facility
expense, freight, handling costs and wasted material (spoilage). This Statement
requires that these items be recognized as a current period charge regardless of
whether they meet the criterion specified in ARB 43. In addition, this Statement
requires the allocation of fixed production overheads to the costs of conversion
be based on normal capacity of the production facilities. This Statement is
effective for financial statements for fiscal years beginning after June 15,
2005. Earlier application is permitted for inventory costs incurred during
fiscal years beginning after the date of this Statement is issued. Management
believes this Statement will have no impact on the financial statements of the
Company once adopted.

In December 2004, the FASB issued Statement No. 123 (revised 2004) ("FAS 123
(R)"), Accounting for Share-Based-Payments. FAS 123 (R) 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 is
required to apply FAS 123 (R) 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. In addition, the Company may
elect to adopt FAS 123 (R) by restating previously issued financial statements,
basing the amounts on the expense previously calculated and reported in their
pro forma disclosures that had been required by FAS 123. For public entities
that file as small business issuers, FAS 123 (R) is effective as of the
beginning of the first interim or annual reporting period that begins after
December 15, 2005. Management has not completed its evaluation of the effect
that FAS 123 (R) will have, but believes that the effect will be consistent with
the application disclosed in its pro forma disclosures.

In May 2005, the FASB issued Statement No. 154, Accounting Changes & Error
Corrections, which replaced APB Opinion No. 20 and FASB Statement No. 3. This
statement changes the requirements for accounting and reporting of a voluntary
change in accounting principle and changes required by an accounting
pronouncement when the specific transition provisions are absent. This statement
requires retrospective application to prior periods' financial statements of
changes in accounting principle. If it is impracticable to determine either the
period-specific effect or the cumulative effect of the change, this statement
requires that the new accounting principle be adopted prospectively from the
earliest practicable date. SFAS No. 154 is effective in the period that begins
after December 15, 2005, and early adoption is permitted in the fiscal years
beginning after SFAS No. 154 was issued. The Company does not expect the new
standard to have any material impact on our financial position and results of
operations.

NOTE 3 - ACCOUNT RECEIVABLE AND INVENTORY WRITE-DOWN

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. The
assets of Ameritech representing collateral for the judgments were sold by
Ameritech to MedSolutions, Inc. of Dallas, Texas ("MedSolutions") in November
2003. During January 2004, the Company secured a Garnishment Order against
MedSolutons whereby MedSolutions was ordered to pay to the Company $170,765,
plus interest at 5%. Payments under the Garnishment Order are scheduled to be
made monthly in the amount of $4,375 (inclusive of interest) with a balloon
payment of $137,721 due November 7, 2004. MedSolutions is currently in breach of
the Garnishment Order. During January 2005, the Company filed suit against
MedSolutions and Ameritech in the 234th Judicial District Court of Harris
County, Texas. The suit alleges collusion, fraudulent conveyance and fraudulent
inducement by and between MedSolutions and Ameritech to defraud payment to the
Company for amounts owed, as described above. The Company has also requested the
Court to appoint a Receiver for all sums owed to protect assets pending review
by the Court.

                                      F-13
<PAGE>
                    SHARPS COMPLIANCE CORP. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                             JUNE 30, 2005 AND 2004

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

In the quarters ending March 31, 2003 and June 30, 2003, the Company wrote-off
all outstanding amounts, $75,996 and $106,397 respectively, due from Ameritech.
Any recovery that may be received by the Company will be reduced by
collection-related legal fees estimated at one-third of any amounts collected.
Although the Company will continue to aggressively pursue collection of the
outstanding amounts under the Garnishment Orders, no assurances regarding
collection can be made.

NOTE 4 - PROPERTY AND EQUIPMENT

At June 30, 2005 and 2004, property and equipment consisted of the following:
<TABLE>
<CAPTION>

                                                                               June 30,
                                                                  ------------------------------------
                                              Useful Life              2005                2004
                                             ----------------     ----------------    ----------------
<S>                                           <C>  <C>            <C>                 <C>
  Furniture and fixtures                      3 to 5 years        $        23,903     $        23,903
  Equipment                                        5 years                226,629             208,125
  Manufacturing                                   15 years                221,636             221,636
  Computers and software                      3 to 5 years                444,150             398,942
  Leasehold improvements                           3 years                172,278             162,728
  Automobiles                                      5 years                      -              32,411
                                                                  ----------------    ----------------
                                                                        1,088,596           1,047,745
  Less:  accumulated depreciation                                         650,532             507,945
                                                                  ----------------    ----------------

  Net property and equipment                                      $       438,064     $       539,800
                                                                  ================    ================
</TABLE>


NOTE 5 - NOTES PAYABLE AND LONG-TERM DEBT

Notes payable and long-term debt consisted of the following:

<TABLE>
<CAPTION>

                                                                                                            June 30,
                                                                                                         ---------------
                                                                                                          2005    2004
                                                                                                          ----    ----
<S>         <C>                               <C>                                                        <C>   <C>
Factoring agreement with financial institution, bearing interest at a rate of prime (4% as of June 30,
 2004) plus 2%, plus an administrative fee of 0.25% of gross receivables financed .......................$  -  $165,083

Note payable to Futura in monthly installments of $13,889, final payment due August 31, 2004 ............   -    13,889

Promissory note to a finance company for the purchase of an automobile, due in monthly installments of
 principal and interest of $674, bearing interest at 7.75% through November 2006, and is secured by the
 automobile .............................................................................................   -    17,786
                                                                                                         ----- ---------
                                                                                                            -   196,758
Less:  notes payable and current portion of long-term debt ..............................................   -   185,932
                                                                                                         ----- ---------

Total notes payable and long-term debt ..................................................................  $-  $ 10,826
                                                                                                         ===== =========
</TABLE>

                                      F-14
<PAGE>
                    SHARPS COMPLIANCE CORP. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                             JUNE 30, 2005 AND 2004

NOTE 5 - NOTES PAYABLE AND LONG-TERM DEBT (continued)

On October 1, 2002, Sharps completed a purchase of the Pro-Tec product line
assets from Futura Medical Corporation ("Futura") for $300,000. As consideration
for the asset purchase, the Company made payments of $50,000 at closing, $83,333
on March 1, 2003 and monthly payments of $13,889 from September 2003 through
July 2004. The Company remitted the final payment to Futura on August 1, 2004 of
$13,889, thereby reducing the balance to zero. This asset purchase consists of
all inventories, molds, fixtures, supplies, customer list and other fixed assets
used in the manufacturing of the Pro-Tec product line. The asset purchase
increased inventory by $78,364 and property and equipment by $221,636. The
Company did not assume any operations, other liabilities or employees as a part
of this asset purchase. Revenues generated from this product line were $435,221
and $469,790 the years ended June 30, 2005 and 2004, respectively.

The Company maintains an arrangement with a financial institution for a $1.25
million asset-based line of credit. The agreement allows the Company to factor
customer receivables generated out of its ordinary course of business. The
maximum amount available under the line of credit is $1.0 million (or $1.25
million of its gross receivable balance). The agreement automatically renews on
an annual basis (August 30 of each year) unless terminated by either party. The
Company may borrow up to 80% of the eligible receivables presented and incurs
interest on gross invoices financed at a prime rate of interest plus 2%, plus
administrative fees of .25% on gross receivables presented. The interest rate
decreases to prime plus 1.25% (versus 2%) at such times as the Company's
Adjusted Quick Ratio is 1.25 to 1.00 or greater. Adjusted Quick Ratio is defined
as cash plus accounts receivable (less than 90 days from invoice date), divided
by current liabilities less deferred revenue. During the quarter ended June 30,
2005, there were no borrowings under the arrangement.

NOTE 6 - OBLIGATIONS UNDER CAPITAL LEASES

Capital lease obligations consist of the following:
<TABLE>
<CAPTION>

                                                                                                           June 30,
                                                                                                      ------------------
                                                                                                        2005      2004
                                                                                                      -------- ---------
<S>                      <C>                         <C>                  <C>                         <C>      <C>
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 .......................$68,313  $ 99,315

 August 2007 ............................................................................. 10,368
 12% through August 2007 ............................................................................. 10,368    14,315

Capital lease for purchase of copier/printer due in monthly installments of $157, interest imputed at
 21% through August 2006 .............................................................................  1,811     3,252

Capital lease for purchase of phone system upgrades due in monthly installments of $157, interest
 imputed at 16% through December 2007 ................................................................  3,905     5,077

Capital lease for purchase of forklift due in monthly installments of $290, interest imputed at 11%
 through June 2007 ...................................................................................  6,273         -
                                                                                                      -------- ---------
                                                                                                       90,670   121,959
Less:  current portion ............................................................................... 48,558    37,513
                                                                                                      -------- ---------
                                                                                                      $42,112  $ 84,446
                                                                                                      ======== =========
</TABLE>

                                      F-15
<PAGE>
                    SHARPS COMPLIANCE CORP. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                             JUNE 30, 2005 AND 2004

NOTE 6 - OBLIGATIONS UNDER CAPITAL LEASES (continued)

Minimum futures lease payments for each of the next five years and in the
aggregate are as follows:
<TABLE>
<CAPTION>

      Year Ending June 30,
      --------------------
<S>        <C>                                                                                                 <C>
           2006 .............................................................................................. $ 61,441
           2007 ..............................................................................................   43,575
           2008 ..............................................................................................    1,854
                                                                                                              ---------
          Total future minimum lease payments ................................................................  106,870
          Less: amount representing interest .................................................................   16,200
                                                                                                              ---------
          Present value of future minimum lease payments .....................................................   90,670
          Less: current maturities ...........................................................................   48,558
                                                                                                              ---------
          Long-term portion of capital lease obligations .....................................................$ 42,112
                                                                                                              =========
</TABLE>


The following describes leased equipment held under capital leases:

<TABLE>
<CAPTION>
                                                                                                         June 30,
                                                                                                     -------------------
                                                                                                         2005      2004
                                                                                                     --------- ---------
<S>                                                                                                  <C>       <C>
Equipment ...........................................................................................$ 34,954  $ 26,023
Computers and accounting software ................................................................... 138,450   138,450
                                                                                                     --------- ---------
 .................................................................................................... 173,404   164,473
Less:  accumulated amortization .....................................................................  76,443    41,913
                                                                                                     --------- ---------
Net equipment under capital lease ...................................................................$ 96,961  $122,560
                                                                                                     ========= =========
</TABLE>

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, 2005 and 2004 are as follows:
<TABLE>
<CAPTION>

                                                                                                       Year Ended June 30,
                                                                                                       ------------------
                                                                                                        2005     2004
                                                                                                       -------- --------

<S>                                                                                                      <C>      <C>
      Statutory rate ..................................................................................  (34.0)%  (34.0)%
      State income taxes, net .........................................................................   (3.0)    (3.0)
      Meals and entertainment .........................................................................   11.7     17.2
      Change in valuation allowance ...................................................................   24.8     19.8
      Other ...........................................................................................    0.5        -
                                                                                                       -------- --------
                                                                                                             -%       -%
                                                                                                       ======== ========
</TABLE>

                                      F-16
<PAGE>
                    SHARPS COMPLIANCE CORP. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                             JUNE 30, 2005 AND 2004

NOTE 7 - INCOME TAXES (continued)

At June 30, 2005 and 2004, significant components of net deferred tax assets are
approximated as follows:
<TABLE>
<CAPTION>
                                                                                                       June 30,
                                                                                               -------------------------
                                                                                                   2005         2004
                                                                                               ------------ ------------
     Deferred tax assets relating to:
<S>                                                                                            <C>          <C>
      Accounts receivable reserve .............................................................$     8,050  $     5,000
      Deferred revenue ........................................................................    469,669      364,000
      Contribution Carryover ..................................................................      1,036            -
      Net operating loss carryforwards and other credits ......................................  4,114,250    4,163,000
                                                                                               ------------ ------------
        Total deferred tax assets .............................................................  4,593,005    4,532,000

     Deferred tax liabilities related to:
      Depreciation differences ................................................................    (27,802)     (73,000)
                                                                                               ------------ ------------
                                                                                                 4,565,203    4,459,000
     Valuation allowance ...................................................................... (4,565,203)  (4,459,000)
                                                                                               ------------ ------------
     Net deferred tax assets ..................................................................$         -  $         -
                                                                                               ============ ============
</TABLE>

At June 30, 2005, the Company had net operating loss carryforwards for income
tax purposes of approximately $7.7 million, of which approximately $2.2 million
was acquired in an acquisition in February 1998. The Company's ability to
utilize these net operating losses to reduce future taxable income may be
limited upon a change of ownership and amounts of separate Company taxable
income, as defined by the Internal Revenue Code. The carryforwards will begin to
expire in 2010 if not otherwise used. 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. The valuation allowance relates primarily to the
Company's net losses. The Company has not made any income tax payments since
inception.

NOTE 8 - STOCK TRANSACTIONS

The following represents the significant stock transactions for the years ending
June 30, 2005 and June 30, 2004, respectively:

On September 24, 2003, the Company completed a private placement of 625,000
shares of its common stock at a price of $0.80 per share. Certain members of the
Board of Directors of the Company participated in the financing as follows: (i)
Ramsay Gillman (150,000 shares), (II) Parris H. Holmes, Jr. (62,500 shares),
(III) F. Gardner Parker (50,000 shares) and (iv) Philip C. Zerrillo (5,000
shares).

In May 2005 stock options to purchase 9,167 of common shares were exercised.
Total proceeds to the Company were $6,834.

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, either incentive or non-statutory, to purchase up to 3,000,000 shares
of the Company's common stock. The Company also has issued 637,500 options to
advisors and consultants of the Plan. Options granted generally vest over a
period of three years. Options expire five to seven years after the date of
grant.

                                      F-17
<PAGE>
                    SHARPS COMPLIANCE CORP. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                             JUNE 30, 2005 AND 2004

NOTE 9 - STOCK OPTIONS (continued)

The following summary of activity for all stock options during the years ended
June 30, 2005 and 2004 is presented in the table below:
<TABLE>
<CAPTION>
                                                                                                                Weighted
                                                                                                                Average
                                                                                                      Options   Exercise
                                                                                                    Outstanding  Price
                                                                                                    ----------- --------

<S>           <C> <C>                                                                                  <C>        <C>
Balance, June 30, 2003 .............................................................................   2,408,390  $1.06
    Granted ........................................................................................   1,168,000  $0.78
    Exercised ......................................................................................           -     $-
    Forfeited or Canceled ..........................................................................     (55,000) $1.74
                                                                                                    -------------

Balance, June 30, 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
                                                                                                    =============

Exercisable at June 30, 2005 .......................................................................   2,153,143  $0.94
                                                                                                    -------------
</TABLE>

As of June 30, 2005 and 2004, there were 230,110 and 116,110 options,
respectively, available for grant under the Plan.

The following table summarizes information about stock options outstanding as of
June 30, 2005:

<TABLE>
<CAPTION>
                                    Options Outstanding                               Options Exercisable
                     --------------------------------------------------        ----------------------------------
                                         Weighted
                                         Average
                                        Remaining         Weighted                                  Weighted
    Range of          Outstanding      Contractual         Average              Exercisable          Average
    Exercise             as of             Life           Exercise                 as of            Exercise
     Price           June 30, 2005      (in Years)          Price              June 30, 2005          Price
-----------------    ---------------   -------------   ----------------        ---------------   ----------------

<S>      <C>              <C>              <C>         <C>                        <C>            <C>
 $0.50 - $1.00            2,359,890        5.48        $         0.74             1,165,643      $          0.67
 $1.01 - $1.50              772,500        3.44                  1.16               712,500                 1.17
 $1.51 - $2.00              275,000        3.88                  1.53               275,000                 1.53
                     ---------------                   ----------------        ---------------   ----------------
                          3,407,390                    $         0.90             2,153,143      $          0.94
                     ===============                   ================        ===============   ================
</TABLE>

                                      F-18
<PAGE>
                    SHARPS COMPLIANCE CORP. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                             JUNE 30, 2005 AND 2004

NOTE 10 - COMMITMENTS AND CONTINGENCIES

Operating Leases: The Company leases office space and various types of equipment
under certain operating lease agreements that expire at various dates through
January 2008. The Company also leases an incinerator facility located in
Carthage, Texas for medical waste disposal. The amended lease requires rental
payments of $2,000 per month for the first year (year ended June 30, 2003)
escalating by $500 per month each year thereafter until 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, 2005 and 2004 was $189,806 and $184,853, respectively. Future minimum lease
payments under non-cancelable operating leases as of June 30, 2005 are as
follows:
<TABLE>
<CAPTION>

         Year Ending June 30,
<S>               <C>                                                     <C>
                  2006 ............................................       $        172,827
                  2007 ............................................                178,827
                  2008 ............................................                134,517
                  2009 ............................................                 64,050
                  2010 ............................................                 68,843
                  Thereafter ......................................                152,343
                                                                          -----------------

                                                                          $        771,407
                                                                          =================
</TABLE>

For accounting purposes, and 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 that computes to $4,250 per month, or $51,000 per year. As
a result, a deferred portion is recorded, which, at June 30, 2005 was $62,500.

Former Employee Matter: 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 a
$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.

On or about February 25, 2003, Jason Jodway, a then employee of the Company
since April 1999, resigned in lieu of termination of employment by the Company.
Thereafter, Mr. Jodway formed Attentus Medical Sales, Inc., a competing entity
of the Company. In March 2005, the Company (through its wholly-own subsidiary
Sharps Compliance Inc.) filed a lawsuit in Harris County District Court, Texas
against Mr. Jodway and Attentus Medical Sales, Inc. The lawsuit claims, (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. The Company intends to vigorously pursue
its claim against Mr. Jodway and Attentus Medical Sales, Inc., though the
Company has not quantified its damages to date. In April 2005, Mr. Jodway and
Attentus Medical Sales, Inc. filed a general denial in the 152nd District Court
of Harris County. Additionally, the defendant filed a counter-claim against
Sharps Compliance, Inc. asserting his last day of employment was March 29, 2003
and that he is entitled to receive back wages. The Company denies any obligation
to Mr. Jodway for such back wages.

                                      F-19