**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, 2007





o
            **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 incorporation or organization)
            (I.R.S.
                Employer Identification No.)**9220
                Kirby Drive, Suite 500, 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
o





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: $11,956,016.





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 6, 2007: $15,631,353.





Number
      of
      shares outstanding of the issuer’s Common Stock as of September 6, 2007:
      12,109,583.




**DOCUMENTS
      INCORPORATED BY REFERENCE:**





Portions
      of the Registrant’s definitive Proxy Statement for the 2007 Annual Meeting of
      Stockholders to be held on


November
      15, 2007 **** are
      incorporated by reference in Part III hereof.





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





SHARPS
      COMPLIANCE CORP. AND SUBSIDIARIES


TABLE
      OF
      CONTENTS *


ANNUAL
      REPORT ON FORM 10-KSB








PagePART
                IItem 
                1
            
            Description
                of Business
            
            2Item
                2
            
            Description
                of Property
            
            8Item
                3
            
            Legal
                Proceedings
            
            8Item
                4
            
            Submission
                of Matters to a Vote of Security Holders
            
            9PART
                IIItem
                5
            
            Market
                for Common Equity and Related Stockholder Matters
            
            10Item
                6
            
            Management’s
                Discussion and Analysis or Plan of Operation
            
            11Item
                7
            
            Financial
                Statements
            
            15Item
                8
            
            Changes
                In and Disagreements with Accountants on Accounting and Financial
                Disclosure
            
            16Item
                8A
            
            Controls and Procedures
            
            16Item
                8B
            
            Other Information
            
            16PART
                IIIItem
                9
            
            Directors,
                Executive Officers, Promoters and Control Persons; Compliance with
                16(a)
                of the Exchange Act
            
            17Item
                10
            
            Executive
                Compensation
            
            17Item
                11
            
            Security
                Ownership of Certain Beneficial Owners and Management and Related
                Stockholder Matters
            
            17Item
                12
            
            Certain
                Relationships and Related Transactions
            
            18Item
                13
            
            Exhibits
            
            18Item
                14
            
            Principal
                Accountant Fees and Services
            
            19Signatures
            
            20







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





1




**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 9220 Kirby Drive, Suite 500, Houston, Texas
      77054.





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





**PRODUCTS
      AND SERVICES**





Sharps
      is
      a leading developer of cost effective solutions for improving safety and
      efficiency related to the proper disposal of medical waste by healthcare
      (outside of hospital), industry and consumers. These solutions include Sharps
      Disposal by Mail System® Pitch-ItTM IV Poles, Trip LesSystem®, Sharps Pump Return
      Box, Sharps Enteral Pump Return Box, Sharps Secure®, Sharps SureTemp Tote®,
      IsoWash® 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® 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® contains a securely sealed, leak and puncture resistant sharps
      container in several sizes; United States Postal Service (“USPS”) approved
      shipping carton with priority mail (pre-paid) postage; absorbent material inside
      the container that can safely hold up to 150 milliliters of fluids; a red bag
      for additional containment and complete documentation and tracking manifest.
      The
      Sharps Disposal by Mail System® is transported to the Company’s disposal
      facility for incineration (i.e. Sharps Environmental Services) in a pre-paid
      USPS approved shipping carton. Upon destruction, Sharps supplies verification
      of
      destruction to the customer.





The
      Pitch-ItTM 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-ItTM poles are available
      in three models: (i) tabletop, (ii) floor and (iii) full-size with
      wheels.


2


The
      Trip
      LesSystem® 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® has combined three complete
      programs for return and/or disposal. All systems contain the Sharps Disposal
      by
      Mail System® along with either (i) a prepaid pump return box or (ii) a Pitch-ItTM
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, such as infusion and enteral pumps, phototherapy and TENS
      units, between the healthcare provider and the patient.





The
      Sharps Secure® 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® needle collection container, housed in the newly
      designed (patent pending) Sharps Secure® 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® 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® 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®, 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® 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 SharpsTracerTM, AssetTracerTM.
      SharpsTracerTM 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. SharpsTracerTM 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. AssetTracerTM allows its
      registered subscribers to effectively manage all types of capital assets through
      a single, organized database. The program can be used in conjunction with other
      Company products or independently and includes management reporting for
      regulatory compliance, preventative maintenance and asset status and/or
      location. ComplianceTrak offers a broad range of employee centered compliance
      and education programs. The programs range from policy and procedure development
      to specialized training and certification for all employees required to meet
      certain Occupational Safety and Health Administration (“OSHA”)
      standards.





Sharps
      Environmental Services provide environmental solutions for customers with a
      wide
      variety of waste disposal needs. Primary services include the destruction and
      disposal of (i) medical sharps waste, (ii) legal/confidential documents, (iii)
      pharmaceutical products and (iv) non-hazardous industrial waste. This service
      allows the Company to directly oversee the proper disposal of its Sharps
      Disposal by Mail Systems®. 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




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





**MARKETS**





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


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





Healthcare :
      The
      Company markets its Sharps Disposal by Mail System®, Pitch-ItTM IV Poles, Trip
      LesSystem®, Sharps Pump Return Box, Sharps Enteral Pump Return Box and Sharps
      SureTemp Tote® products to the Healthcare segment. This market consists
      primarily of home healthcare companies and generated 60% of the Company’s
      billings for the year ended June 30, 2007.





Retail :
      The
      Company markets its Sharps Disposal by Mail System® products to the Retail
      segment. This market consists of, (i) companies that purchase the products
      to
      properly dispose of syringes utilized to administer flu shots, and (ii)
      non-emergency clinics located in the retail setting. The Retail market generated
      9% of the Company’s billings for the year ended June 30, 2007.





Hospitality : **** The
      Company markets its Sharps Disposal by Mail System®, IsoWash® Linen Recovery
      System, Biohazard Spill Clean-Up Kit and Disposal System products to the
      Hospitality segment. This market includes hotel, retirement and assisted living
      and contract food service provider companies. The Hospitality segment generated
      7% of the Company’s billings for the year ended June 30, 2007.





Professional :
      The
      Company markets its Sharps Disposal by Mail System® products to the Professional
      segment. This market includes physician, dental, veterinarian and other
      service-related firms. The Professional segment generated 5% of the Company’s
      billings for the year ended June 30, 2007.





Pharmaceutical :
      The
      Company markets its Sharps Disposal by Mail System® products to pharmaceutical
      manufacturers and clinical drug trial companies. Although, the Pharmaceutical
      segment generated only 4.5% of the Company’s billings for the year ended June
      30, 2007, it is believed to be a segment with significant growth
      potential.





Commercial
      / Industrial : **** The
      Company markets its Sharps Disposal by Mail System®, Sharps Secure®,and
      Biohazard Spill Clean-Up Kit products to the Commercial / Industrial market.
      This market includes a wide variety of customers including those with safety,
      industrial, retail and other facilities. The Commercial / Industrial segment
      generated 4% of the Company’s billings for the year ended June 30,
      2007.





Agriculture :
      The
      Company markets its Sharps Disposal by Mail System® products to the Agriculture
      segment. This market consists of companies that purchase the products to
      properly dispose of syringes used to inject farm animals (ex., dairy cattle)
      and
      generated 4% of the Company’s billings for the year ended June 30,
      2007.




**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® in many different industries and markets, since small quantity
      medical waste generators can be found throughout the country. Sharps is also
      considering the development of new products to assist companies in complying
      with OSHA regulations regarding medical waste handling. Development of new
      products is completed when utilizing the services of the prospective
      manufacturer, which kept development costs to a minimum. Currently, Sharps
      works
      with several manufacturers regarding the development of any
      products.





4




**MARKET
      RISKS**





Although
      Sharps has experienced growth in revenues over the past few years, there is
      an
      inherent concentration of credit risk associated with accounts receivable
      arising from sales to its major customers .
      For the year ended June 30, 2007, two customers represented approximately 28%
      of
      revenues. Those same two customers represented approximately 33%, or $441,607
      of
      the total accounts receivable balance at June 30, 2007. For the year ended
      June
      30, 2006, three customers represented approximately 48% of revenues. Those
      same
      three customers represented approximately 38%, or $378,939 of the total accounts
      receivable balance at June 30, 2006. The Company may be adversely affected
      by
      its dependence on a
      limited number of high volume customers. Management believes that the risks
      are
      mitigated by, (i) the contractual relationships with key customers, (ii) the
      high quality and reputation of the Company and its products and (iii) the
      continued diversification of the Company’s products and services into additional
      markets outside of its traditional Healthcare customer base.





Currently,
      the majority of Sharps transportation is sourced with the United States Post
      Office (“USPS”), which consists of delivering the Sharps Disposal by Mail
      System ® from the
      end user to the Company’s leased incineration facility. The Company entered into
      an arrangement with United Parcel Service Inc. (“UPS”) whereby UPS has agreed to
      transport the Company’s Sharps Disposal by Mail System® products from the end
      user to the Company’s leased incineration facility. The Company began selling a
      UPS product to select customers in fiscal year 2007. Management believes the
      risk of dependence on the USPS is mitigated by (i) the new arrangement with
      UPS
      and (ii) the long-standing business relationship with the USPS.





**INTELLECTUAL
      PROPERTY**





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





**RISK
      FACTORS**





**Operating
      History**





Sharps
      was profitable in fiscal years 2006 and 2007. Prior to fiscal year 2006, the
      Company had a history of operating losses. The future success of Sharps is
      dependent upon many factors, including environmental regulation, continued
      acceptability of its products and services, continuity of its customer
      agreements, successful completion of its product development activities and
      the
      identification and penetration of additional markets for its products and
      services. Management believes that the Company’s current financial resources,
      including cash on hand and its line of credit with JPMorgan Chase Bank, N.A.,
      will be sufficient to fund operations through fiscal year 2008.





**Dependence
      on Key Management Personnel**





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





**Competition**





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




5





**Customer
      Relationships**





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





**Incinerator
      Facilities**





The
      Company’s business utilizes an incinerator facility for medical waste disposal.
      The Company has a lease agreement for the facility with the City of Carthage,
      Texas (Panola County) to operate the PCRRF through June 30, 2012 (with options
      to extend the lease through June 30, 2022). The Company is responsible for
      operating and maintaining the facility in compliance with all federal, state
      and
      local laws and/or any other regulatory agency involving solid waste disposal.
      The cost of such compliance for the period ending June 30, 2007 was $2,162.
      The
      Company is also responsible for all operating and capital costs associated
      with
      day-to-day operations of the incinerator facility. Although, the Company entered
      into an agreement with a secondary burn facility to provide services in the
      event the PCRRF is unavailable, any disruption in the availability of a disposal
      facility or increased governmental regulation may have an adverse impact on
      the
      Company. The Company can make no assurances that no such disruption or
      burdensome regulation will occur in the future.





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





During
      fiscal 2008, the Company plans to begin the
      process of adding alternative technology, autoclaving, for medical waste
      disposal with plans to be fully operational in fiscal year 2009 at its current
      facility in Carthage, Texas. Autoclaving is a process that treats regulated
      waste with steam at high temperature and pressure to kill pathogens. Combining
      the Autoclaving with a shredding or grinder process allows the waste to be
      disposed in a landfill operation. The Company believes autoclaving is
      environmentally cleaner and a less costly method of treating medical waste
      than
      incineration. The autoclaving technology is planned to be used in addition
      to
      incineration and is estimated to cost approximately $300,000.





**Governmental
      Regulation**





*Operations
      and Incinerator*





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




6





In
      November 2005, the EPA amended the Clean Air Act which will affect the
      operations of the leased incineration facility located in Carthage, Texas.
      The
      regulation modifies the emission limits and monitoring procedures required
      to
      operate an incineration facility. The new rules will necessitate changes to
      the
      Company’s leased incinerator and pollution control equipment at the facility or
      require installation of an alternative treatment method to ensure compliance.
      Such change would require the Company to incur significant capital expenditures
      in order to meet the requirements of the regulations. The regulation allows
      a
      minimum period of three years and a maximum of five years to comply after the
      date the final rule was published. The Company has studied the amended EPA
      Clean
      Air Act and its options, and has decided in the interim to move forward with
      the
      process of adding alternative technology, autoclaving, for medical waste
      disposal with plans to be fully operational in fiscal year 2009 at its current
      facility in Carthage, Texas. Autoclaving is a process that treats regulated
      waste with steam at high temperature and pressure to kill pathogens. Combining
      the Autoclaving with a shredding or grinder process allows the waste to be
      disposed in a landfill operation. The Company believes autoclaving is
      environmentally cleaner and a less costly method of treating medical waste
      than
      incineration. The autoclaving technology is planned to be used in addition
      to
      incineration and is estimated to cost approximately $300,000.




*Proper
      Disposal of Medical Sharps*





The
      first
      significant regulatory development occurred in December 2004 with the improved
      guidance issued by the Environmental Protection Agency (“EPA”) regarding the
      safe disposal of medical sharps (needles, syringes and lancets). This new
      guidance is a result of disposal problems created by the estimated 2 billion
      syringes discarded annually by self-injectors of medicines in homes and
      non-healthcare commercial facilities. Until December 2004, the EPA guidance
      has
      instructed consumers to place used sharps in a household container and to place
      the container in the household garbage. New guidance posted on the EPA website
      reflects information about alternative disposal methods including mail-back
      programs. The improved guidance issued by the EPA is a significant step toward
      the removal of needles, syringes and other sharps from the solid waste stream,
      consistent with the current practice in healthcare facilities. The Company’s
      products and services, which are included in the EPA list of recommended
      solutions, are designed to improve safety, efficiency and patient concerns
      related to the proper disposal of medical sharps.





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





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





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





In
      addition to California and Massachusetts, other states are considering similar
      options.





In
      August
      2008, the U.S. House of Representative and U.S. Senate introduced bills 3251
      and
      1909, respectively, which would provide for Medicare reimbursement, under part
      D, for the safe and effective disposal of used needles and syringes through
      a
      sharps-by mail or similar program. This legislation proposes Medicare coverage
      for the safe needle disposal for approximately 1.3 million insulin-dependent
      diabetic beneficiaries and is intended to reduce the number of accidental
      injuries, infections and subsequent costs associated with the improper disposal
      of approximately 4 million needles generated daily by Medicare covered
      diabetics. The Company’s Sharps Disposal By Mail Systems® is an example of the
      cost-effective and easy-to-use solution recommended in the
      legislation.




7





**Postal
      Work Interruptions**





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




**Employees**





Sharps
      employees 33 individuals, of which 32 are full-time employees.





**ITEM
      2. DESCRIPTION OF PROPERTY**





On
      July
      13, 2007 Sharps executed a new lease agreement for 18,231 square feet of
      rentable (office and warehouse) space (“New Lease”) located near the previous
      leased facility in Houston, Texas (“New Premises”). The New Lease commenced and
      the prior lease was terminated effective March 1, 2007. The New Lease will
      expire on February 28, 2012.





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





**ITEM
      3. LEGAL PROCEEDINGS**





***Ameritech
      Environmental, Inc*** .




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 incineration services provided by the Company in 2002. In
      November 2003, Ameritech sold its assets representing collateral for the
      judgments to MedSolutions, Inc. of Dallas, Texas (“MedSolutions”). During
      January 2004, the Company secured a Garnishment Order against MedSolutions
      whereby MedSolutions was ordered to pay to the Company $170,765, plus interest
      at 5%, subject to the terms of the agreement by which MedSolutions purchased
      the
      Ameritech assets.   A balloon payment of $137,721 due November 7,
      2004, under the Garnishment Order, was not made by MedSolutions to the Company.
      This represented the then outstanding remaining amount due to the
      Company.





In
      August
      2006, the Company filed an amended suit against Ameritech, its officers and
      directors (Jasper S. Howard, Alton H. Howard and Jonathon S. Howard) alleging fraudulent
      conveyance, fraud on creditors, civil conspiracy, breach of court order and
      conversion. In October 2006, the Company sold certain assets secured by the
      above noted Garnishment Order for $50,000 cash, $17,500 of which was paid to
      an
      attorney under a contingency fee arrangement. The net proceeds of $32,500 were
      recorded as other income during the quarter ended December 31, 2006. In
      conjunction with this partial recovery, the Company and MedSolutions entered
      into a mutual release whereby the Company dismissed MedSolutions from the
      litigation.





Prior
      to
      the year ended June 30, 2003, the Company wrote-off all outstanding amounts
      due
      from Ameritech. Any recovery that may be received by the Company will be reduced
      by collection-related legal fees computed at thirty-five percent of any amounts
      collected plus expenses. Although the Company will continue to aggressively
      pursue collection of the remaining outstanding amount of approximately $90,000
      (plus interest and attorney fees), no assurances can be made regarding ultimate
      collection.




8





***Ronald
      E. Pierce 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 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.





***Patent
      Infringement Litigation***




In
      May
      2007, the Company filed patent infringement lawsuits in the United States
      District Court for the Southern District of Texas in Houston against MediSupply,
      Inc. (a/k/a or f/k/a Medi-Supply Alliance, LLC and Medi-Supply, Inc.
“MediSupply”) and Drive Medical Design & Manufacturing (“Drive Medical”) for
      infringement of three U.S. patents. The complaints allege that MediSupply and
      Drive Medical infringe the patents by making, selling, and offering for sale
      disposable IV poles which are identical to the Company’s Pitch-It TM IV Pole. In
      its cases against MediSupply and Drive Medical, the Company is seeking
      injunctions and damages or other monetary relief, including pre-judgment
      interest and awarding of attorney fees.





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





During
      the three months ended June 30, 2007, no matter was submitted by the Company
      to
      a vote of its stockholders through the solicitation of proxies or
      otherwise.


9


**PART
      II**





**ITEM
      5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER
      MATTERS**





**Market
      Information** :
      During
      the two years ended June 30, 2007, 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 trading volume, averaging approximately
      365,000 shares traded per month on the OTC Bulletin Board. The table below
      sets
      forth the high and low closing prices on the OTC Bulletin Board for each quarter
      within the last two fiscal years.





Common
                StockHigh
            
            Low**Fiscal
                Year Ended June 30, 2006**First
                Quarter
            
            $
            0.94
            
            $
            0.60Second
                Quarter
            
            $
            0.85
            
            $
            0.61Third
                Quarter
            
            $
            1.05
            
            $
            0.62Fourth
                Quarter
            
            $
            0.99
            
            $
            0.85**Fiscal
                Year Ended June 30, 2007**First
                Quarter
            
            $
            0.98
            
            $
            0.85Second
                Quarter
            
            $
            2.45
            
            $
            0.80Third
                Quarter
            
            $
            3.83
            
            $
            2.30Fourth
                Quarter
            
            $
            3.40
            
            $
            2.95**Fiscal
                Year Ending June 30, 2008**First
                Quarter (September 7, 2007)
            
            $
            3.65
            
            $
            2.50





**Stockholders** :
      At
      September 6, 2007 there were 12,109,583 shares of common stock held by
      approximately 200 holders of record with approximately 500 held in street name.
      The last reported sale of the common stock on September 6, 2007, was $2.60
      per
      share.





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





**Securities
      Authorized for Issuance under Equity Compensation Plans:**





**Equity
      Compensation Plan Information**




Plan
                category
            
            Number
                of securities to be issued upon exercise of outstanding options,
                warrants
                and rights
              (a)
            
            Weighted
                average exercise price of outstanding options, warrants and
                rights
              (b)
            
            Number
                of securities remaining available for future issuance under equity
                compensation plans (excluding securities reflected in column
                (a))
              (c)Equity
                compensation plans approved by security holder(1)
            
            
            1,913,330
            
            $
            1.08
            
            
            360,444Equity
                compensation plans not approved by security holders(2)
            
            
            295,000
            
            
            0.92
            
            
            N/ATotal
            
            
            2,208,330
            
            $
            1.06
            
            
            360,444





10





Notes:




(1)
            Represents
                stock options issued under the 1993 Sharps Compliance Corp. Stock
                Plan.





(2)
            Represents
                options to purchase unregistered common stock of the
                Company.





**Recent
      Sales of Unregistered Securities:** None





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





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





**RESULTS
      OF OPERATIONS**





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




**Year
                Ended June 30,****2007**
            
            **2006**Total
                revenues
            
            
            100%
            
            
            100%Costs
                and expenses:Cost
                of revenues
            
            
            (58%)
            
            
            (57%)Selling,
                general and administrative
            
            
            (34%)
            
            
            (37%)Depreciation
                and amortization
            
            
            (2%)
            
            
            (1%)Total
                operating expenses
            
            
            (94%)
            
            
            (96%)Operating
                profit
            
            
            6%
            
            
            4%Interest
                income (expense), net
            
            
            1%
            
            
            0%Net
                income
            
            
            7%
            
            
            4%





**YEAR
      ENDED JUNE 30, 2007 COMPARED TO YEAR ENDED JUNE 30, 2006**





Total
      revenues for the year ended June 30, 2007 of $11,956,016 increased by
      $1,393,296, or 13.2%, over the total revenues for the year ended June 30, 2006,
      of $10,562,720. Billings by market are as follows:





**Twelve
                Months Ended June 30,****2007**
            
            **2006**
            
            **Variance**Billings
                by Market:Health
                Care
            
            $
            7,327,530
            
            $
            6,986,727
            
            $
            340,803Retail
            
            
            1,107,442
            
            
            559,078
            
            
            548,364Hospitality
            
            
            878,100
            
            
            552,356
            
            
            325,744Professional
            
            
            615,014
            
            
            464,952
            
            
            150,062Pharmaceutical
            
            
            553,885
            
            
            101,158
            
            
            452,727Commercial/Industrial
            
            
            528,915
            
            
            298,146
            
            
            230,769Agriculture
            
            
            515,281
            
            
            717,879
            
            
            (202,598
            )Protec
            
            
            416,307
            
            
            427,674
            
            
            (11,367
            )Government
            
            
            177,790
            
            
            80,811
            
            
            96,979Other
            
            
            128,810
            
            
            127,958
            
            
            852Subtotal
            
            
            12,249,074
            
            
            10,316,739
            
            
            1,932,335GAAP
                Adjustment*
            
            
            (293,058
            )
            
            245,981
            
            
            (539,039
            )Revenue
                Reported
            
            $
            11,956,016
            
            $
            10,562,720
            
            $
            1,393,296




11




*Represents
      the net impact of the revenue recognition adjustment required to arrive at
      reported GAAP revenue. Customer billings includes all invoiced amounts
      associated with products shipped during the period reported. GAAP revenue
      includes customer billings as well as numerous adjustments necessary to reflect,
      (i) the deferral of a portion of current period sales and (ii) recognition
      of
      certain revenue associated with product returned for treatment and destruction.
      The difference between customer billings and GAAP revenue is reflected in the
      Company’s balance sheet as deferred revenue. See Critical Accounting Policies
“Revenue Recognition” in Item 6: “Management’s Discussion and Analysis or Plan
      of Operation”.





The
      increase in revenues is primarily attributable to increased billings in the
      Retail ($548,364), Pharmaceutical ($452,727), Health Care ($340,803),
      Hospitality ($325,744), Commercial/Industrial ($230,769) Professional ($150,062)
      and Government ($96,979) markets. These increases were partially offset by
      decreased billings in the Agriculture ($202,598) and ProTec ($11,367) markets.
      The increase in the billings in the Retail market is a result of the increased
      use of our products in grocery stores and pharmacies to properly dispose of
      syringes utilized to administer flu and other inoculations. The increase in
      the
      billings in the Pharmaceutical market is a result of the initial portion of
      the
      Company’s first major pharmaceutical order of the Sharps Disposal by Mail
      System®. The increase in the Health Care market billings is a result of the
      growing number of patients in the health care industry and the increased
      utilization of the Sharps Disposal by Mail System® within existing branches. The
      increase in the Hospitality market is a result of a large order for the Sharps
      Disposal by Mail System® from a national hair care chain that will use the
      product to dispose of razor blades and increased sales to a food safety supplies
      distributor for Biohazard Disposable Mailback Kits and the Sharps Disposal
      by
      Mail System®. The increase in the Commercial/Industrial and Professional markets
      is being driven by higher demand for the Company’s products as industry and
      consumers become more aware of the proper disposal of medical sharps (syringes,
      lancets, etc.). The decrease in the Agriculture market is primarily attributable
      to decreased demand of the Sharps Disposal by Mail System by a customer who
      provides the product to facilitate the injection of dairy cattle due to growing
      public concern over the use of hormones.





Cost
      of
      revenues for the year ended June 30, 2007 of $6,942,567 was 58% of revenues.
      Cost of revenues for the year ended June 30, 2006 of $6,068,399 was 57% of
      revenues for the corresponding period.




Selling,
      general and administrative (“SG&A”) expenses for the year ended June 30,
      2007 of $3,945,642 are consistent with prior year. The cost of SG&A compared
      to revenue decreased to 33% from 37% for the year ended June 30,
      2006.




During
      the year ended June 30, 2007, the Company recorded a special charge of $138,000,
      $0.01 per diluted share, related to the re-alignment of the leadership in the
      Company’s sales and marketing department. The charge includes a severance
      accrual of $102,000 and an executive recruiter fee of $36,000.





The
      Company generated operating income of $727,305 for the year ended June 30,
      2007
      an increase of $345,112 compared to $382,193 for the year ended June 30, 2006.
      The improvement in operating income is due to higher revenue and gross profit,
      partially offset by the special charge noted above.





The
      Company generated income before tax of $805,880 for the year ended June 30,
      2007
      versus a pre-tax income of $381,629 for the year ended June 30, 2006. The
      improvement of the income before tax is a result of the higher operating income
      (discussed above) coupled with the higher interest income (result of higher
      cash
      balances) and capital leases being paid off.





The
      Company reported diluted earnings per share of $0.06 for the year ended June
      30,
      2007 versus diluted earnings per share of $0.03 for the year ended June 30,
      2006. The improvement of the earnings per share is a result of the higher net
      income (discussed above).





Excluding
      the special charge, the Company generated operating income, net income and
      earnings per diluted share for the year ended June 30, 2007 of $865,305,
      $919,940 and $0.07, respectively.





**PROSPECTS
      FOR THE FUTURE**





The
      Company continues to take advantage of the many opportunities in the markets
      served as communities, consumers and industries become
      more aware of the proper disposal of medical sharps (syringes, lancets, etc.).
      This education process was enhanced in March 2004 when the U. S. Environmental
      Protection Agency (“EPA”) issued its new guidelines for the proper disposal of
      medical sharps (see www.epa.gov/epaoswer/other/medical/sharps.htm ).
      Additionally, in July 2006 both the states of California and Massachusetts
      passed legislation designed to mandate appropriate disposal of sharps waste
      necessary to protect the general public and workers from potential exposure
      to
      contagious diseases and health and safety risks. In August 2008, the U.S. House
      of Representative and U.S. Senate introduced bills 3251 and 1909, respectively,
      which would provide for Medicare reimbursement, under part D, for the safe
      and
      effective disposal of used needles and syringes. Among the methods of disposal
      recommended as part of the above noted regulatory actions are mail-back programs
      such as those marketed by the Company. The Company estimates that there are
      an
      estimated 2 billion used syringes disposed of in the United States outside
      of
      the hospital setting. Additionally, the Company estimates that it would require
      30 - 40 million Sharps Disposal by Mail System® products to properly disposal of
      all such disposed syringes, which would equate to a $1 billion small quantity
      generator market opportunity. Based upon the current level of sales, the Company
      estimates that this $1 billion market has only been penetrated by approximately
      1% or less.




12





The
      Company continues to develop new products for its Sharps Disposal by Mail
      System® and Sharps SureTemp Tote® product lines. The Company believes its future
      growth will be driven by, among other items, (i) the positive impact and
      awareness created by the above noted regulatory actions as well as additional
      potential future legislation and (ii) the effects of the Company’s extensive
      direct marketing efforts. The result of these direct marketing efforts was
      recognized with the receipt of the first major pharmaceutical manufacturer
      order, valued at $1.4 million, from a recognized and leading pharmaceutical
      manufacturer. The initial $0.45 million order was billed during March 2007
      with
      fulfillment services to patients having started in May 2007. The remaining
      portion of the order is expected to be completed in calendar year
      2007.




Looking
      forward, the Company is targeting customer billings of $15 million to $16
      million for fiscal year 2008 led by expected growth in the pharmaceutical,
      retail, hospitality and professional markets. The Company anticipates gross
      margin of approximately 42% in fiscal year 2008 and an increase in SG&A of
      approximately 10%, exclusive of any non-cash stock-based compensation expense
      (SFAS 123R). The expected investment in SG&A expense is primarily related to
      increased sales and marketing related activities.




Demand
      for the Company’s primary product, the Sharps Disposal by Mail System®, which
      facilitates the proper and cost-effective disposal of medical waste including
      hypodermic needles, lancets and other devices or objects used to puncture or
      lacerate the skin (referred to as “sharps”), has been growing rapidly in the
      small quantity generator sector because of its mail-back convenience and unique
      data tracking feature. In addition, targeted opportunities continue to expand
      as
      a result of the growing awareness of the need to properly handle sharps medical
      waste for safety and environmental concerns, the expanding need for
      self-injectable medications and the changing paradigm in the health
      industry.





**LIQUIDITY
      AND CAPITAL RESOURCES**





Cash
      and
      cash equivalents increased by $1,837,193 to $2,134,152 at June 30, 2007 from
      $296,959 at June 30, 2006. **** The
      increase in cash and cash equivalents is primarily a result of cash generated
      from operations of $1,096,678 and stock options exercised of $1,115,032,
      partially offset by, (i) additions to property and equipment of $316,160 (ii)
      additions to intangible assets of $18,097 and (iii) payments on capital lease
      obligations of $40,260.





Accounts
      receivable increased by $395,448 to $1,330,731 at June 30, 2007 from $935,283
      at
      June 30, 2006. The increase is a direct result of the increase in billings
      generated by the Company for the quarter ended June 30, 2007 versus the quarter
      ended June 30, 2006.





Property
      and equipment increased by $117,180 to $590,567 at June 30, 2007 from $473,387
      at June 30, 2006 due to capital expenditures of $316,160 partially offset by
      depreciation expense of $198,980. The capital expenditures consisted of, (i)
      custom software programming of $45,194, (ii) computer equipment of $40,745,
      (iii) incinerator facility improvements of $34,619, (iv) molds and printing
      plates of $85,675 and (v) office equipment of $66,437 and manufacturing and
      assembly / warehouse-related equipment of $43,490. The custom software program
      was incurred to accommodate the change from FedEx to UPS and an upgrade to
      the
      Company’s financial and operations system, including the Sharps Tracer TM system.
      The computer equipment was purchased to facilitate the upgrade of outdated
      equipment. The molds and printing plates were procured to facilitate duplicates
      in the event of dual production facilities. Office and other equipment purchased
      were related to equipment necessary to accommodate the in-house assembly of
      the
      Company’s products and the move to the new facility including office furniture
      and equipment ($38,090), a new phone system ($28,347) and manufacturing and
      warehouse equipment and racks ($43,490).





Accrued
      liabilities increased by $351,632 to $613,851 at June 30, 2007 from $262,219
      at
      June 30, 2006. The increase from year to year is a result of, (i) Inventory
      received in warehouse but invoice has not been received in Accounts Payable
      ($144,483), (ii) payroll accrual ($111,387), (iii) Senior VP of Sales severance
      ($40,655), (iv) additional rebates ($29,865), and (v) other accrued liabilities
      ($25,242).




13





Stockholder’s
      equity increased by $1,917,225 from $251,900 to $2,169,125. This increase is
      attributable to net income for fiscal year 2007 of $784,700, the effect of
      stock
      options to purchase 1,443,060 common stock exercised with proceeds of $1,115,032
      (average exercise price of $0.77 per share), 123(R) expense and other of
      $17,493.





The
      Company’s obligations under capital leases (including current portion) decreased
      by $40,260 as of June 30, 2007 as compared to the June 30, 2006 balances. This
      decrease is attributable to the corresponding payments on such capital lease
      obligations.




Based
      upon all options outstanding at June 30, 2007 and restricted stock awards
      totaling 49,500 issued on July 2, 2007, the Company is expecting to incur
      non-cash stock based compensation charges of approximately $120,000 in fiscal
      year 2008.





The
      Company expects to incur capital expenditures of $300,000 during the later
      part
      of fiscal year 2008 and early fiscal year 2009 for the implementation of an
      autoclaving system at its current facility in Carthage, Texas.





Management
      believes that the Company’s current cash resources (cash on hand and cash
      generated from operations) along with its $2.5 million line of credit will
      be
      sufficient to fund operations for the twelve months ending June 30,
      2008.




**QUARTERLY
      RESULTS OF OPERATIONS (UNAUDITED)**





The
      following tables set forth selected quarterly information for 2007 and 2006.
      We
      believe that all necessary adjustments have been included in the amounts below
      to present fairly the results of such periods.





**Quarter
                Ended****September
                30, 2005**
            
            **December
                31, 2005**
            
            **March
                31, 2006**
            
            **June
                30, 2006**Total
                revenues
            
            $
            2,660,112
            
            $
            2,663,376
            
            $
            2,531,210
            
            $
            2,708,022Cost
                of revenues
            
            $
            1,560,919
            
            $
            1,496,692
            
            $
            1,466,906
            
            $
            1,543,882Operating
                income (loss)
            
            $
            171,806
            
            $
            171,119
            
            $
            (2,830
            )
            $
            37,110Net
                income (loss)
            
            $
            164,532
            
            $
            166,972
            
            $
            (2,513
            )
            $
            52,638Net
                income (loss) per share
            
            $
            0.02
            
            $
            0.02
            
            $
            0.00
            
            $
            0.00Weighted
                average shares - diluted
            
            
            10,732,740
            
            
            10,720,512
            
            
            10,547,328
            
            
            10,950,196





**Quarter
                Ended****September
                30, 2006**
            
            **December
                31, 2006**
            
            **March
                31, 2007**
            
            **June
                30, 2007**Total
                revenues
            
            $
            2,990,884
            
            $
            3,181,777
            
            $
            2,896,651
            
            $
            2,899,704Cost
                of revenues
            
            $
            1,693,588
            
            $
            1,819,800
            
            $
            1,681,437
            
            $
            1,747,742Operating
                income (loss)
            
            $
            298,662
            
            $
            392,378
            
            $
            69,293
            
            $
            (33,027
            )Net
                income (loss)
            
            $
            291,588
            
            $
            421,196
            
            $
            81,970
            
            $
            (10,054
            )Net
                income (loss) per share
            
            $
            0.03
            
            $
            0.04
            
            $
            0.01
            
            $
            0.00Weighted
                average shares - diluted
            
            
            10,991,339
            
            
            11,576,162
            
            
            13,395,644
            
            
            11,894,855





**CRITICAL
      ACCOUNTING POLICIES**





Revenue
      Recognition :
      The
      Company complies
      with 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





**RECENTLY
      ISSUED ACCOUNTING STANDARDS**





In
      July
      2006, the FASB issued FIN No. 48, “Accounting for Uncertainty in Income Taxes -
      an interpretation of FASB Statement No. 109. This interpretation clarifies
      the
      accounting for uncertainty in income taxes recognized in an entity’s financial
      statements in accordance with SFAS No. 109, “Accounting for Income Taxes.” It
      prescribes a recognition threshold and measurement attribute for financial
      statement disclosure of tax positions taken or expected to be taken on a tax
      return. This interpretation is effective for fiscal years beginning after
      December 15, 2006. The Company will be required to adopt this interpretation
      in
      the first quarter of fiscal year 2008. Management is currently evaluating the
      requirements and potential impact of FIN No. 48.





In
      September 2006, the SEC released Staff Accounting Bulletin No. 108, “Considering
      the Effects of Prior Year Misstatements when Quantifying Misstatements in
      Current Year Financial Statements,” which provides interpretive guidance on the
      SEC’s views regarding the process of quantifying materiality of financial
      statement misstatements. SAB 108 is effective for fiscal years ending after
      November 15, 2006, with early application for the first interim period ending
      after November 15, 2006. The Company adopted SAB 108 for the year ending June
      30, 2007 and it has not had a material impact on the Company’s consolidated
      financial statements.





In
      September 2006, the FASB issued Statement No. 157, “Fair Value Measurements.”
SFAS 157 defines fair value, establishes a framework and gives guidance
      regarding the methods used for measuring fair value, and expands disclosures
      about fair value measurements. SFAS 157 is effective for financial statements
      issued for fiscal years beginning after November 15, 2007, and interim periods
      within those fiscal years. The Company does not expect the new standard to
      have
      a material impact on its financial position and results of
      operations.





In
      February 2007, the FASB issued SFAS No. 159, “The Fair Value Option
      for Financial Assets and Financial Liabilities — Including an Amendment of FASB
      Statement No. 115.” This statement permits entities to choose to measure
      many financial instruments and certain other items at fair value that are not
      currently required to be measured at fair value and establishes presentation
      and
      disclosure requirements designed to facilitate comparisons between entities
      that
      choose different measurement attributes for similar types of assets and
      liabilities. SFAS 159 is effective as of the beginning of an entity’s first
      fiscal year that begins after November 15, 2007. Early adoption is
      permitted as of the beginning of a fiscal year that begins on or before
      November 15, 2007, provided the entity also elects to apply the provisions
      of SFAS No. 157. The Company expects to adopt SFAS 159 beginning
      July 1, 2008. The Company is currently evaluating the impact that this
      pronouncement may have on our consolidated financial statements.





**ITEM
      7. FINANCIAL STATEMENTS**





The
      financial statements of the Company and the related report of the Company’s
      independent registered public accounting firm thereon are included in this
      report and are referenced as pages F-1 to F-16.




15




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





None.





**ITEM
      8A. CONTROLS AND PROCEDURES**





As
      of
      June 30, 2007, under the supervision and with the participation of the Company’s
      management, including the Company’s Chief Executive Officer and Chief Financial
      Officer, we evaluated the design and operation of the Company’s disclosure
      controls and procedures pursuant to Exchange Act Rule 13(a)-15(e) and 15(d)
      -
      15(e).  Based upon that evaluation, the Chief Executive Officer and Chief
      Financial Officer concluded that the Company’s disclosure controls and
      procedures are designed, and 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 control over financial
      reporting during the year ended June 30, 2007 that materially affected, or
      are
      reasonably likely to materially affect, the Company’s internal control over
      financial reporting.





**ITEM
      8B. OTHER INFORMATION**





The
      information required by this item is not applicable.





16




**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 15, 2007.





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, 2007, all
      Section 16(a) filing requirements applicable to its officers, directors and
      greater than 10% beneficial owners were complied with.





The
      Audit
      Committee is comprised of certain Directors who are not employees of the Company
      or any of its subsidiaries.  Messrs. Zerrillo (Chairman) and Parker 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-B under the Securities Act
      of
      1933, as amended.  The Company’s Code of Ethics was previously an exhibit
      to the Annual Report on Form 10-KSB.  Individuals may also request a free
      copy of the Company’s Code of Ethics from the Company’s investor relations
      department. Additionally, the Company posted its Code of Ethics on its
      website ( www.sharpsinc.com ).
      The
      Company intends to disclose any amendments to, or waivers from, the provisions
      of its Code of Ethics within four business days of the amendment or waiver
      within 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, within 120 days, relating to its Annual Meeting of Stockholders
      to
      be held on November 15, 2007.




**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, within 120 days, relating to its Annual
      Meeting of Stockholders to be held on November 15, 2007.





17




**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, within 120 days, relating to its Annual Meeting
      of
      Stockholders to be held on November 15, 2007.





**ITEM
      13. EXHIBITS**


ExhibitNumber
              
              Description
                  of Exhibit2.1
              
              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 19,2005.10.11
                
                Credit
                    Agreement dated March 27,2006, by and between Sharps compliance
                    Corp. and
                    JPMorgan Chase Bank, N.A.10.12
                
                Line
                    of Credit Note dated March 27, 2006, by and between Sharps Compliance
                    Corp. and JPMorgan Chase Bank, N.A.10.13
                
                Security
                    Agreement dated March 27, 2006, by and between Sharps Compliance
                    Corp. and
                    JPMorgan Chase Bank, N.A.10.14
                
                Lease
                    Agreement dated as of July 13, 2006, between Sharps Compliance,
                    Inc. and
                    Warehouse Associates Corporate Centre Kirby II, Ltd.10.15
                
                Lease
                    Termination Agreement dated as of July 13, 2006, between Sharps
                    Compliance, Inc. and Warehouse Associates Corporate Centre Kirby
                    I &
                    II, Ltd.10.16
                
                Amendment
                    to Credit Agreement dated February 5, 2007, by and between Sharps
                    compliance Corp. and, JPMorgan Chase Bank , N.A.10.17
                
                Line
                    of Credit Note dated February 5, 2007, by and between Sharps
                    Compliance
                    Corp. and JPMorgan Chase Bank, N.A.10.18
                
                Offer
                    Letter between Sharps Compliance Corp., and David C. Mayfield
                    dated March
                    15, 2007.10.19
                
                Form
                    of restricted stock award agreement dated July 2, 2007.10.20
                
                Letter
                    Agreement by and between Sharps Compliance Corp. and David C.
                    Mayfield
                    dated April 10, 2007 (filed herewith).
  18
  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).


**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, within 120 days, relating to its Annual Meeting of Stockholders
      to
      be held on November 15, 2007.





19




**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 12, 2007
              By:
              /s/ BURTON
                J.
                KUNIKDr.
                  Burton J. Kunik
                Chairman
                  of the Board,
                Chief
                  Executive Officer and President By:
              /s/ DAVID
                P.
                TUSADavid
                  P. Tusa
                Executive
                  Vice President
                Chief
                  Financial Officer, Business
                Development
                  and Corporate Secretary By:
              /s/ RAMSAY
                GILLMANRamsay
                GillmanDirector By:
              /s/ JOHN
                R.
                GROWJohn
                R. GrowDirector By:
              /s/ PARRIS
                H.
                HOLMES, JR.Parris
                H. Holmes, Jr.Director By:
              /s/ F.
                GARDNER PARKERF.
                Gardner ParkerDirector By:
              /s/ PHILIP
                C.
                ZERRILLOPhilip
                C. ZerrilloDirector
 20





**SHARPS
      COMPLIANCE CORP. AND SUBSIDIARIES**


**INDEX
      TO CONSOLIDATED FINANCIAL STATEMENTS**




**PAGE****CONSOLIDATED
                FINANCIAL STATEMENTS**Report
                of Independent Registered Public Accounting Firm
            
            F-2Consolidated
                Balance Sheets as of June 30, 2007 and 2006
            
            F-3Consolidated
                Statements of Operations for the Years Ended June 30, 2007 and 2006
            
            F-4Consolidated
                Statements of Stockholders’ Equity (Deficit) for the Years Ended June 30,
                2007 and 2006
            
            F-5Consolidated
                Statements of Cash Flows for the Years Ended June 30, 2007 and 2006
            
            F-6Notes
                to Consolidated Financial Statements
            
            F-7





F-1





REPORT
      OF
      INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM




To
      the
      Board of Directors and Stockholders of


Sharps
      Compliance Corp. and Subsidiaries


Houston,
      Texas





We
      have
      audited the accompanying consolidated balance sheets of Sharps Compliance Corp.
      (a Delaware corporation) and subsidiaries (the “Company”) as of June 30, 2007
      and 2006, and the related consolidated statements of operations, stockholders’
equity 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 audits 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, 2007 and 2006, and the
      consolidated 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.




As
      discussed in Note 2 to the consolidated financial statements, the Company
      changed its method of accounting for stock-based compensation effective July
      1,
      2006.




/s/
                UHY LLPHouston,
                Texas
              September
                12, 2007





F-2




**SHARPS
      COMPLIANCE CORP. AND SUBSIDIARIES**


**CONSOLIDATED
      BALANCE SHEETS**





**June
                30,****2007**
            
            **2006**ASSETSCURRENT
                ASSETSCash
                and cash equivalents
            
            $
            2,134,152
            
            $
            296,959Restricted
                cash
            
            
            10,010
            
            
            10,010Accounts
                receivable, net of allowance for doubtful accounts of $15,793 and
                20,024,
                respectively
            
            
            1,330,731
            
            
            935,283Inventory
            
            
            364,005
            
            
            325,688Prepaid
                and other current assets
            
            
            186,101
            
            
            88,348TOTAL
                CURRENT ASSETS
            
            
            4,024,999
            
            
            1,656,288PROPERTY
                AND EQUIPMENT, net of accumulated depreciation of $878,248 and $790,397,
                respectively
            
            
            590,567
            
            
            473,387INTANGIBLE
                ASSETS, net of accumulated amortization of $120,327 and $116,805,
                respectively
            
            
            75,002
            
            
            60,427TOTAL
                ASSETS
            
            $
            4,690,568
            
            $
            2,190,102LIABILITIES
                AND STOCKHOLDERS’ EQUITYCURRENT
                LIABILITIESAccounts
                payable
            
            $
            557,302
            
            $
            526,582Accrued
                liabilities
            
            
            613,851
            
            
            262,219Deferred
                revenue
            
            
            883,678
            
            
            826,764Current
                maturities of capital lease obligations
            
            
            1,809
            
            
            40,260TOTAL
                CURRENT LIABILITIES
            
            
            2,056,640
            
            
            1,655,825LONG-TERM
                DEFERRED REVENUE
            
            
            392,803
            
            
            211,568OBLIGATIONS
                UNDER CAPITAL LEASES, net of current maturities
            
            
            -
            
            
            1,809RENT
                ABATEMENT
            
            
            72,000
            
            
            69,000TOTAL
                LIABILITIES
            
            
            2,521,443
            
            
            1,938,202COMMITMENTS
                AND CONTINGENCIES
            
            
            -
            
            
            -STOCKHOLDERS’
                EQUITYCommon
                stock, $0.01 par value per share; 20,000,000 shares authorized; 11,998,453
                and 10,551,310 shares issued and outstanding, respectively
            
            
            119,985
            
            
            105,513Additional
                paid-in capital
            
            
            8,596,321
            
            
            7,478,268Accumulated
                deficit
            
            
            (6,547,181
            )
            
            (7,331,881
            )TOTAL
                STOCKHOLDERS’ EQUITY
            
            
            2,169,125
            
            
            251,900TOTAL
                LIABILITIES AND STOCKHOLDERS’ EQUITY
            
            $
            4,690,568
            
            $
            2,190,102




See
      accompanying notes to consolidated financial statements




F-3


**SHARPS
      COMPLIANCE CORP. AND SUBSIDIARIES**


**CONSOLIDATED
      STATEMENTS OF OPERATIONS**





**Year
                Ended June 30,****2007**
            
            **2006**REVENUESProduct
            
            $
            11,603,434
            
            $
            10,143,651Environmental
                services
            
            
            346,810
            
            
            394,318Consulting
                services
            
            
            5,772
            
            
            24,751TOTAL
                REVENUES
            
            
            11,956,016
            
            
            10,562,720COSTS
                AND EXPENSESCost
                of revenues
            
            
            6,942,567
            
            
            6,068,399Selling,
                general and administrative
            
            
            3,945,642
            
            
            3,957,653Special
                charge
            
            
            138,000
            
            
            -Depreciation
                and amortization
            
            
            202,502
            
            
            154,475TOTAL
                COSTS AND EXPENSES
            
            
            11,228,711
            
            
            10,180,527OPERATING
                INCOME
            
            
            727,305
            
            
            382,193OTHER
                INCOME (EXPENSE)Interest
                income
            
            
            50,680
            
            
            12,314Interest
                expense
            
            
            (4,605
            )
            
            (12,878
            )Other
                income
            
            
            32,500
            
            
            -TOTAL
                OTHER INCOME (EXPENSE)
            
            
            78,575
            
            
            (564
            )INCOME
                BEFORE INCOME TAXESNET
                INCOME)
            
            
            805,880
            
            
            381,629INCOME
                TAXES
            
            
            (21,180
            )
            
            -NET
                INCOME
            
            $
            784,700
            
            $
            381,629NET
                INCOME PER COMMON SHAREBasic
            
            $
            .07
            
            $
            .04Diluted
            
            $
            .06
            
            $
            .03WEIGHTED
                AVERAGE SHARES USED IN COMPUTING NET INCOME PER COMMON SHAREBasic
            
            
            11,161,367
            
            
            10,547,846Diluted
            
            
            12,338,047
            
            
            10,953,831




See
      accompanying notes to consolidated financial statements




F-4


**SHARPS
      COMPLIANCE CORP. AND SUBSIDIARIES**


**CONSOLIDATED
      STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)**





**Total****Additional**
            
            
            
            **Stockholders’****Common
                Stock**
            
            **Paid-in**
            
            **Accumulated**
            
            **Equity****Shares**
            
            **Amount**
            
            **Capital**
            
            **Deficit**
            
            **(Deficit)**Balances,
                July 1, 2005
            
            
            10,547,311
            
            $
            105,473
            
            $
            7,464,381
            
            $
            (7,713,510
            )
            $
            (143,656
            )Exercise
                of stock options
            
            
            3,999
            
            
            40
            
            
            2,852
            
            
            -
            
            
            2,892Stock-based
                compensation
            
            
            
            
            
            
            
            
            11,035
            
            
            
            
            
            11,035Net
                income
            
            
            -
            
            
            -
            
            
            -
            
            
            381,629
            
            
            381,629Balances,
                June 30, 2006
            
            
            10,551,310
            
            
            105,513
            
            
            7,478,268
            
            
            (7,331,881
            )
            
            251,900Exercise
                of stock options
            
            
            1,443,060
            
            
            14,431
            
            
            1,100,601
            
            
            
            
            
            1,115,032Stock-based
                compensation and other
            
            
            4,083
            
            
            41
            
            
            17,452
            
            
            
            
            
            17,493Net
                income
            
            
            -
            
            
            -
            
            
            -
            
            
            784,700
            
            
            784,700Balances,
                June 30, 2007
            
            
            11,998,453
            
            $
            119,985
            
            $
            8,596,321
            
            $
            (6,547,181
            )
            $
            2,169,125




See
      accompanying notes to consolidated financial statements





F-5




**SHARPS
      COMPLIANCE CORP. AND SUBSIDIARIES**


**CONSOLIDATED
      STATEMENTS OF CASH FLOWS**





**Year
                Ended June 30,****2007**
            
            **2006**CASH
                FLOWS FROM OPERATING ACTIVITIESNet
                income
            
            $
            784,700
            
            $
            381,629Adjustments
                to reconcile net income to net cash provided by operating
                activities:Depreciation
                and amortization
            
            
            202,502
            
            
            154,475Stock
                based compensation expense and other
            
            
            17,493
            
            
            11,035Changes
                in operating assets and liabilities:(Increase)
                decrease in accounts receivable
            
            
            (395,448
            )
            
            28,865(Increase)
                decrease in inventory
            
            
            (38,317
            )
            
            42,807Decrease
                in prepaid and other assets
            
            
            (97,753
            )
            
            (9,028
            )(Increase)
                decrease in accounts payable and accrued liabilities
            
            
            385,352
            
            
            (56,050
            )Increase
                (decrease) in deferred revenue
            
            
            238,149
            
            
            (231,046
            )NET
                CASH PROVIDED BY OPERATING ACTIVITIES
            
            
            1,096,678
            
            
            322,687CASH
                FLOWS FROM INVESTING ACTIVITIESPurchases
                of property and equipment
            
            
            (316,160
            )
            
            (175,188
            )Intangible
                Assets
            
            
            (18,097
            )
            
            (63,258
            )NET
                CASH USED IN INVESTING ACTIVITIES
            
            
            (334,257
            )
            
            (238,446
            )CASH
                FLOWS FROM FINANCING ACTIVITIESPayments
                on capital lease obligations
            
            
            (40,260
            )
            
            (48,601
            )Proceeds
                from exercise of stock options
            
            
            1,115,032
            
            
            2,892NET
                CASH PROVIDED BY (USED) IN FINANCING ACTIVITIES
            
            
            1,074,772
            
            
            (45,709
            )NET
                INCREASE IN CASH AND CASH EQUIVALENTS
            
            
            1,837,193
            
            
            38,532CASH
                AND CASH EQUIVALENTS, beginning of year
            
            
            296,959
            
            
            258,427CASH
                AND CASH EQUIVALENTS, end of year
            
            $
            2,134,152
            
            $
            296,959SUPPLEMENTAL
                DISCLOSURE OF CASH FLOW INFORMATIONCash
                paid for interest
            
            $
            4,602
            
            $
            12,879




See
      accompanying notes to consolidated financial statements




F-6


**SHARPS
      COMPLIANCE CORP. AND SUBSIDIARIES**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**JUNE
      30, 2007 AND 2006**




**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 :
      Sharps
      is a leading developer of cost effective solutions for improving safety and
      efficiency related to the proper disposal of medical waste by healthcare
      (outside of hospital), industry and consumers. These solutions include Sharps
      Disposal by Mail System® Pitch-ItTM IV Poles, Trip LesSystem®, Sharps Pump Return
      Box, Sharps Enteral Pump Return Box, Sharps Secure®, Sharps SureTemp Tote®,
      IsoWash® Linen Recovery System, Biohazard Spill Clean-Up Kit and Disposal
      System, Sharps e-Tools, Sharps Environmental Services and Sharps
      Consulting.





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 .
      For the year ended June 30, 2007, two customers represented approximately 28%
      of
      revenues. Those same two customers represented approximately 33%, or $441,607
      of
      the total accounts receivable balance at June 30, 2007. For the year ended
      June
      30, 2006, three customers represented approximately 48% of revenues. Those
      same
      three customers represented approximately 38%, or $378,939 of the total accounts
      receivable balance at June 30, 2006. The Company may be adversely affected
      by
      its dependence on a
      limited number of high volume customers. Management believes that the risks
      are
      mitigated by, (i) the contractual relationships with key customers, (ii) the
      high quality and reputation of the Company and its products and (iii) the
      continued diversification of the


Company’s
      products and services into additional markets outside of its traditional
      Healthcare customer base.





Currently,
      the majority of Sharps transportation is sourced with the United States Post
      Office (“USPS”), which consists of delivering the Sharps Disposal by Mail
      System ® from the
      end user to the Company’s leased incineration facility. The Company entered into
      an arrangement with United Parcel Service Inc. (“UPS”) whereby UPS has agreed to
      transport the Company’s Sharps Disposal by Mail System® products from the end
      user to the Company’s leased incineration facility. The Company began selling a
      UPS product to select customers in fiscal year 2007. Management believes the
      risk of dependence on the USPS is mitigated by (i) the new arrangement with
      UPS
      and (ii) the long-standing business relationship with the USPS.





Liquidity :
      Sharps
      was profitable in fiscal years 2006 and 2007. Prior to fiscal year 2006, the
      Company had a history of operating losses. The future success of Sharps is
      dependent upon many factors, including environmental regulation, continued
      acceptability of its products and services, continuity of its customer
      agreements, successful completion of its product development activities and
      the
      identification and penetration of additional markets for its products and
      services. Management believes that the Company’s current financial resources,
      including cash on hand and its line of credit with JPMorgan Chase Bank, N.A.,
      along with cash flow from operations, will be sufficient to fund operations
      through fiscal year 2008.





**NOTE
      2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES**





Cash
      Equivalents :
      The
      Company considers all highly liquid investments with a maturity of three months
      or less at the time of purchase to be cash equivalents.





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





F-7




**SHARPS
      COMPLIANCE CORP. AND SUBSIDIARIES**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**JUNE
      30, 2007 AND 2006**





**NOTE
      2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)**





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





Inventory :
      Inventory consists primarily of finished goods and supplies held for sale and
      are stated at the lower of cost or market using the average cost method. At
      June
      30, 2007 total inventory was $364,005 of which $179,193 was finished goods
      and
      $184,812 was raw materials. At June 30, 2006 total inventory was $325,688 of
      which $162,634 was finished goods and $163,054 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, 2007
      and 2006, the Company recorded depreciation expense of $198,980 and $139,865,
      respectively.





Intangible
      Assets :
      Intangible assets consist of, (i) permit costs related to the Company’s leased
      incineration facility in Carthage, Texas, (ii) three patents, two acquired
      in
      June 1998 and one in November 2003 and (iii) defense costs related to certain
      existing patents. The permit costs are being amortized over the remaining
      initial term of the corresponding incinerator lease. The one patent acquired
      in
      November 2003 is being amortized over its estimated useful life of seventeen
      years. During the years ended June 30, 2007 and 2006, the Company recorded
      amortization expense of $3,522 and $14,610, respectively. Accumulated
      amortization at June 30, 2007 and 2006 was $120,327 and $116,805, respectively.
      Future amortization for intangible assets is as follows: $12,775, $12,775,
      $12,775, $12,775, $12,775 and $11,127 for the years ending June 30, 2008, 2009,
      2010, 2011, 2012 and thereafter, respectively, for a total amortization of
      $75,002.




Stock-Based
      Compensation : In
      December 2004, the Financial Accounting Standards Board issued Statement of
      Financial Accounting Standards (“SFAS”) No. 123 (revised 2004), *Share-Based
      Payment* (“SFAS
      123R”) that addresses the accounting for share-based payment transactions in
      which an enterprise receives employee services in exchange for equity
      instruments of the enterprise or liabilities that are based on the fair value
      of
      the enterprise’s equity instruments or that may be settled by the issuance of
      such equity instruments. SFAS 123R eliminates the ability to account for
      share-based compensation transactions using the intrinsic value method under
      Accounting Principles Board Opinion No. 25, *Accounting
      for Stock Issued to Employees* (“APB
      25”), and generally requires instead that such transactions be accounted for
      using a fair-value-based method. We adopted SFAS 123R beginning July 1,
      2006. There is no compensation expense related to the unvested portion of stock
      options granted prior to July 1, 2006 since the Company’s Board of Directors
      approved, in June 2006, the acceleration of the vesting of all unvested stock
      options previously awarded.




SFAS
      123R
      requires the use of a valuation model to calculate the fair value of stock-based
      awards. We have elected to use the Black-Scholes-Merton (“BSM”) pricing model to
      determine the fair value of stock- options on the dates of grant, consistent
      with that used for pro forma disclosures under SFAS No. 123, *Accounting
      for Stock-Based Compensation* .
      Restricted Stock Units (“RSUs”) are measured based on the fair market values of
      the underlying stock on the dates of grant. We began issuing RSUs on July 2,
      2007.




F-8




**SHARPS
      COMPLIANCE CORP. AND SUBSIDIARIES**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**JUNE
      30, 2007 AND 2006**





**NOTE
      2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)**




We
      have
      elected the modified prospective transition method as permitted by SFAS 123R,
      and accordingly, prior periods have not been restated to reflect the impact
      of
      SFAS 123R. Under this method, we are required to recognize stock-based
      compensation for all new and unvested stock-based awards that are ultimately
      expected to vest as the requisite service is rendered beginning July 1,
      2006. Stock-based compensation is measured based on the fair values of all
      stock-based awards on the dates of grant.




Prior
      to
      the adoption of SFAS 123R, we accounted for our employee stock-based
      compensation using the intrinsic value method prescribed by APB 25. We
      applied below the disclosure provisions of SFAS 123, as amended by SFAS
      No. 148, *Accounting
      for Stock-Based Compensation—Transition and Disclosure* ,
      as if
      the fair value method had been applied. If this method had been used, our net
      income and net income per share for the year ended June 30, 2006 would have
      been
      adjusted to the pro forma amounts below:





The
      following table reflects the pro forma effect on net income (loss) and income
      (loss) per share for the year ended June 30, 2006 as if we had applied the
      fair
      value recognition provision of SFAS 123(R):





**Year
                Ended**
              **June
                30, 2006**Net
                income, as reported
            
            $
            381,629Less:
                Total stock-based employee compensation expense determined under
                fair
                value based method for all awards, net of related tax effects
            
            $
            (724,361
            )Net
                loss, pro forma
            
            $
            (342,732
            )Diluted
                net income per share, as reported
            
            $
            0.03Basic
                and diluted loss per share, pro forma
            
            $
            (0.03
            )




For
      the
      year ended June 30, 2007, we recognized stock-based compensation of $5,162
      which is included in the line item “selling, general and administrative
      expenses” of the Consolidated Statement of Operations.


****


For
      purposes of the stock-based computations during the years ended June 30, 2007
      and 2006 the following assumptions were used:




**Year
                Ended June 30,****2007**
            
            **2006**Risk-free
                interest rate
            
            
            4.9
            %
            
            4.7
            %Expected
                volatility
            
            
            100
            %
            
            114
            %Expected
                life (in years)
            
            
            3.3
            
            
            3.4Dividend
                yield
            
            
            -
            
            
            -




For
      stock-based awards granted on or after July 1, 2006, the Company considers
      an
      estimated forfeiture rate for stock option and RSUs based on historical
      experience and the anticipated forfeiture rates during the future contract
      life.





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




F-9




**SHARPS
      COMPLIANCE CORP. AND SUBSIDIARIES**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**JUNE
      30, 2007 AND 2006**





**NOTE
      2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)**




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 revenues.





Advertising
      Costs :
      Advertising costs are charged to expenses when incurred and totaled $16,572
      and
      $22,187 for the years ended June 30, 2007 and 2006, respectively.





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





Employee
      Benefit Plans :
      In
      addition to group health related benefits, the Company maintains a 401(k)
      employee savings plan available to all full-time employees. The Company matches
      a portion of employee contributions with cash (25% of employee contribution
      up
      to 6%). Company contributions to the 401(k) plan were $21,575 and $20,954 for
      the years ended June 30, 2007 and 2006, respectively, and are included in
      selling and administrative expenses. For purposes of the group health benefit
      plan, the Company self-insures an amount equal to the excess of the employees’
deductible ($1,000 for individual and $3,000 for family coverage) up to the
      amount by which the third party insurance coverage begins ($5,000 for individual
      and $10,000 for family). The amount of liability at June 30, 2007 and 2006
      was
      $3,603 and $899, and is included in “Accrued Liabilities”.





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
      Income 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.





Financial
      Instruments :
      The
      Company considers the fair value of all financial instruments, including cash
      and cash equivalents, accounts receivable, accounts payable and accrued
      liabilities, 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.




F-10




**SHARPS
      COMPLIANCE CORP. AND SUBSIDIARIES**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**JUNE
      30, 2007 AND 2006**





**NOTE
      2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
      (continued)**





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.





Recent
      Accounting Pronouncements :
      In July
      2006, the FASB issued FIN No. 48, “Accounting for Uncertainty in Income Taxes -
      an interpretation of FASB Statement No. 109.” This interpretation clarifies the
      accounting for uncertainty in income taxes recognized in an entity’s financial
      statements in accordance with SFAS No. 109, “Accounting for Income Taxes.” It
      prescribes a recognition threshold and measurement attribute for financial
      statement disclosure of tax positions taken or expected to be taken on a tax
      return. This interpretation is effective for fiscal years beginning after
      December 15, 2006. The Company will be required to adopt this interpretation
      in
      the first quarter of fiscal year 2008. Management is currently evaluating the
      requirements and potential impact of FIN No. 48.





In
      September 2006, the SEC released Staff Accounting Bulletin No. 108, “Considering
      the Effects of Prior Year Misstatements when Quantifying Misstatements in
      Current Year Financial Statements,” which provides interpretive guidance on the
      SEC’s views regarding the process of quantifying materiality of financial
      statement misstatements. SAB 108 is effective for fiscal years ending after
      November 15, 2006, with early application for the first interim period ending
      after November 15, 2006. The Company adopted SAB 108 for the year ending June
      30, 2007 and it has not had a material impact on the Company’s consolidated
      financial statements.





In
      September 2006, the FASB issued Statement No. 157, “Fair Value Measurements.”
SFAS 157 defines fair value, establishes a framework and gives guidance
      regarding the methods used for measuring fair value, and expands disclosures
      about fair value measurements. SFAS 157 is effective for financial statements
      issued for fiscal years beginning after November 15, 2007, and interim periods
      within those fiscal years. The Company does not expect the new standard to
      have
      a material impact on its financial position and results of
      operations.





In
      February 2007, the FASB issued SFAS No. 159, “The Fair Value Option
      for Financial Assets and Financial Liabilities — including an Amendment of FASB
      Statement No. 115.” This statement permits entities to choose to measure
      many financial instruments and certain other items at fair value that are not
      currently required to be measured at fair value and establishes presentation
      and
      disclosure requirements designed to facilitate comparisons between entities
      that
      choose different measurement attributes for similar types of assets and
      liabilities. SFAS 159 is effective as of the beginning of an entity’s first
      fiscal year that begins after November 15, 2007. Early adoption is
      permitted as of the beginning of a fiscal year that begins on or before
      November 15, 2007, provided the entity also elects to apply the provisions
      of SFAS No. 157. The Company expects to adopt SFAS 159 beginning
      July 1, 2008. The Company is currently evaluating the impact that this
      pronouncement may have on our consolidated financial statements.





**NOTE
      3 - ACCOUNT RECEIVABLE**





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 incineration services provided by the Company in 2002. In
      November 2003, Ameritech sold its assets representing collateral for the
      judgments to MedSolutions,
      Inc. of Dallas, Texas (“MedSolutions”). During January 2004, the Company secured
      a Garnishment Order against MedSolutions whereby MedSolutions was ordered to
      pay
      to the Company $170,765, plus interest at 5%, subject to the terms of the
      agreement by which MedSolutions purchased the Ameritech assets. A balloon payment
      of $137,721 due November 7, 2004, under the Garnishment Order, was not made
      by
      MedSolutions to the Company. This represented the then outstanding remaining
      amount due to the Company.  F-11





**SHARPS
      COMPLIANCE CORP. AND SUBSIDIARIES**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**JUNE
      30, 2007 AND 2006**





**NOTE
      3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued** )




In
      August
      2006, the Company filed an amended suit against Ameritech, its officers and
      directors (Jasper S. Howard, Alton H. Howard and Jonathon S. Howard) alleging fraudulent
      conveyance, fraud on creditors, civil conspiracy, breach of court order and
      conversion. In October 2006, the Company sold certain assets secured by the
      above noted Garnishment Order for $50,000 cash, $17,500 of which was paid to
      an
      attorney under a contingency fee arrangement. The net proceeds of $32,500 were
      recorded as other income during the quarter ended December 31, 2006. In
      conjunction with this partial recovery, the Company and MedSolutions entered
      into a mutual release whereby the Company dismissed MedSolutions from the
      litigation.





Prior
      to
      the year ended June 30, 2003, the Company wrote-off all outstanding amounts
      due
      from Ameritech. Any recovery that may be received by the Company will be reduced
      by collection-related legal fees computed at thirty-five percent of any amounts
      collected plus expenses. Although the Company will continue to aggressively
      pursue collection of the remaining outstanding amount of approximately $90,000
      (plus interest and attorney fees), no assurances can be made regarding ultimate
      collection.




**NOTE
      4 - PROPERTY AND EQUIPMENT**





At
      June
      30, 2007 and 2006, property and equipment consisted of the
      following:





**June
                30,****Useful
                Life**
            
            **2007**
            
            **2006**Furniture
                and fixtures
            
            
            3
                to 5 years
            
            $
            57,485
            
            $
            25,026Equipment
            
            
            5
                years
            
            
            317,706
            
            
            250,058Manufacturing
            
            
            15
                years
            
            
            221,636
            
            
            221,636Computers
                and software
            
            
            3
                to 5 years
            
            
            614,267
            
            
            543,963Leasehold
                improvements
            
            
            3
                years
            
            
            257,721
            
            
            223,1011,468,815
            
            
            1,263,784Less:
                accumulated depreciation
            
            
            
            
            
            878,248
            
            
            790,397Net
                property and equipment
            
            
            
            
            $
            590,567
            
            $
            473,387





**NOTE
      5 - NOTES PAYABLE AND LONG-TERM DEBT**





Effective
      February 5, 2007, the Company entered into an Amended Credit Agreement with
      JPMorgan Chase Bank, N.A. (“Credit Agreement”) which provides for a $2.5
      million Line of Credit Facility the proceeds of which may be utilized for,
      (i) working capital, (ii) letters of credit (up to $200,000), (iii)
      acquisitions (up to $500,000) and (iv) general corporate purposes. Indebtedness
      under the Credit Agreement is secured by substantially all of the Company’s
      assets. Borrowings bear interest at a fluctuating rate per annum equal to
      either, (i) prime rate or (ii) LIBOR plus a margin of 2.75%. Any outstanding
      revolving loans, and accrued and unpaid interest, will be due and payable on
      March 27, 2009, the maturity date of the facility. The aggregate principal
      amount of advances outstanding at any time under the Facility shall not exceed
      the Borrowing Base which is equal to, (i) 80% of Eligible Accounts Receivable
      (as defined) plus (ii) 50% of Eligible Inventory (as defined). The Credit
      Agreement contains affirmative and negative covenants that, among other items,
      require the Company to maintain a specified tangible net worth and fixed charge
      coverage ratio. The Credit Agreement also contains customary events of default.
      Upon the occurrence of an event of default that remains uncured after any
      applicable cure period, the lenders’ commitment to make
      further loans may terminate and the Borrower may be required to make immediate
      repayment of all indebtedness to the lenders. The lender would also be entitled
      to pursue other remedies against the Company and the collateral. As of June
      30,
      2007, there were no borrowings under this Line Of Credit Facility and the
      Company was incompliance
      with all loan covenants. Under the Credit Agreement, and based upon the
      Company’s June 30, 2007 level of accounts receivable and inventory, the amount
      available to borrow at year end was $1.2 million.




F-12




**SHARPS
      COMPLIANCE CORP. AND SUBSIDIARIES**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**JUNE
      30, 2007 AND 2006**





**NOTE
      6 - INCOME TAXES**





The
      reconciliation of the statutory income tax rate to the Company’s effective
      income tax rate for the years ended June 30, 2007 and 2006 are as
      follows:




**Year
                Ended June 30,****2007**
            
            **2006**Statutory
                rate
            
            
            34.0
            %
            
            34.0
            %State
                income taxes, net
            
            
            0.0
            
            
            99.3Meals
                and entertainment
            
            
            2.8
            
            
            5.1Expiration
                of net operating losses
            
            
            0.0
            
            
            60.3Adjustment
                of net operating losses due to InternalRevenue
                Code §382 Limitation
            
            
            0.0
            
            
            415.4Change
                in valuation allowance
            
            
            (34.6
            )
            
            (618.8
            )Other
            
            
            .4
            
            
            4.72.6
            %
            
            -
            %





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





At
      June
      30, 2007 and 2006, significant components of deferred tax assets and liabilities
      are approximated as follows:





**June
                30,****2007**
            
            **2006**Deferred
                tax assets relating to:Accounts
                receivable allowance
            
            $
            5,369
            
            $
            6,808Deferred
                revenue
            
            
            434,004
            
            
            353,033Net
                operating loss carryforwards and other credits
            
            
            2,240,228
            
            
            1,921,863Total
                deferred tax assets
            
            
            2,679,601
            
            
            2,281,704Deferred
                tax liabilities related to:Depreciation
                differences
            
            
            (21,685
            )
            
            (23,378
            )Stock
                Compensation
            
            
            (1,755
            )
            
            -2,656,161
            
            
            2,258,326Valuation
                allowance
            
            
            (2,656,161
            )
            
            (2,258,326
            )Net
                deferred tax asset (liabilities)
            
            $
            -
            
            $
            -





At
      June
      30, 2007, the Company had net operating loss carryforwards for income tax
      purposes of approximately $10.8 million. The carryforwards will begin to expire
      in 2008 if not otherwise used.  There is a limitation under Internal
      Revenue Code Section 382 on the Company’s net operating losses generated prior
      to 1998. This limitation will cause $4.3M of losses to expire unused. Therefore,
      only $6.5M of the Company’s net operating loss carryforwards are available for
      use in future years.





F-13




**SHARPS
      COMPLIANCE CORP. AND SUBSIDIARIES**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**JUNE
      30, 2007 AND 2006**





**NOTE
      6 - INCOME TAXES (continued)**





It
      should
      be noted that $679,595 of the deferred tax asset (and valuation allowance)
      related to net operating losses is a result of the exercise of non-qualified
      stock options. If and when these net operating losses are utilized the benefit
      will be recorded to additional paid in capital.





A
      valuation allowance has been established to fully offset the Company’s deferred
      tax assets due to the Company’s history of losses.





**NOTE
      7 - STOCK TRANSACTIONS**





The
      following represents the significant stock transactions for the years ended
      June
      30, 2007 and 2006. During the year ended June 30, 2007, stock options to
      purchase 1,443,060 of common shares were exercised. Total proceeds to the
      Company were $1,115,032 (average price of $0.77 per share). In March and June
      2006, stock options to purchase 1,499 and 2,500, respectively, of common shares
      were exercised. Total proceeds to the Company were $2,892. In June 2006, the
      Company accelerated the vesting of unvested stock options resulting in
      compensation expense of $11,035.





**NOTE
      8 - STOCK OPTIONS**





The
      Company sponsors a Stock Plan (the “Plan”) covering employees, consultants and
      non-employee directors. The Plan, as amended, provides for the granting of
      options to purchase up to 3,500,000 shares of the Company’s common stock of
      which 1,913,330 are outstanding as of June 30, 2007. The Company also has issued
      637,500 non-Plan options to purchase common stock of which 295,000 are
      outstanding as of June 30,2007. Options granted generally vest over a period
      of
      three years and expire seven years after the date of grant.





The
      following summary of activity for all stock options during the years ended
      June
      30, 2007 and 2006 is presented in the table below:




**Options**
              **Outstanding**
            
            **Weighted**
                    **Average
                      Exercise Price**Balance,
                July 1, 2005
            
            
            3,407,390
            
            $
            0.94Granted
            
            
            393,500
            
            $
            0.79Exercised
            
            
            (3,999
            )
            $
            0.72Forfeited
                or Canceled
            
            
            (93,001
            )
            $
            1.27Balance,
                June 30, 2006
            
            
            3,703,890
            
            $
            0.88Granted
            
            
            125,000
            
            $
            3.21Exercised
            
            
            (1,443,060
            )
            $
            0.77Forfeited
                or Canceled
            
            
            (177,500
            )
            $
            1.24Balance,
                June 30, 2007
            
            
            2,208,330
            
            $
            1.06Exercisable
                at June 30, 2007
            
            
            2,083,330
            
            $
            0.93





As
      of
      June 30, 2007 and 2006, there were 360,444 and 315,444 options, respectively,
      available for grant under the Plan.





F-14




**SHARPS
      COMPLIANCE CORP. AND SUBSIDIARIES**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**JUNE
      30, 2007 AND 2006**





The
      following table summarizes information about stock options outstanding as of
      June 30, 2007:





**Options
                Outstanding****Weighted****Average**
            
            **Weighted****Range
                of**
            
            **Outstanding**
            
            **Remaining**
            
            **Average****Exercise**
            
            **as
                of**
            
            **Life**
            
            **Exercise****Price**
            
            **June
                30, 2007**
            
            **(in
                Years)**
            
            **Price**$0.50
                - $1.00
            
            
            1,435,830
            
            
            3.94
            
            $
            0.80$1.01
                - $1.50
            
            
            480,000
            
            
            1.85
            
            
            1.12$1.51
                - $2.00
            
            
            167,500
            
            
            1.82
            
            
            1.53$2.01
                - $3.50
            
            
            125,000
            
            
            6.74
            
            
            3.212,208,330
            
            
            3.48
            
            $
            1.06





The
      following table summarizes information about stock options outstanding and
      exercisable as of June 30, 2007:





**Options
                Outstanding And Exercisable****Weighted****Average**
            
            **Weighted****Range
                of**
            
            **Outstanding**
            
            **Remaining**
            
            **Average****Exercise**
            
            **as
                of**
            
            **Life**
            
            **Exercise****Price**
            
            **June
                30, 2007**
            
            **(in
                Years)**
            
            **Price**$0.50
                - $1.00
            
            
            1,435,830
            
            
            3.94
            
            $
            0.80$1.01
                - $1.50
            
            
            480,000
            
            
            1.85
            
            
            1.12$1.51
                - $2.00
            
            
            167,500
            
            
            1.82
            
            
            1.532,083,330
            
            
            3.28
            
            $
            0.93




**NOTE
      9 - COMMITMENTS AND CONTINGENCIES**





Operating
      Leases :
      On July
      13, 2006 Sharps executed a new lease agreement for 18,231 square feet of
      rentable (office and warehouse) space (“New Lease”) located near the previous
      leased facility in Houston, Texas (“New Premises”). The New Lease commenced and
      the prior lease was terminated effective on March 1, 2007. The New Lease will
      expire on February 28, 2012. The Company also leases an incinerator facility
      located in Carthage, Texas for medical waste disposal. The lease agreement
      requires rental payments of $2,000 per month for the first year (year ended
      June
      30, 2003) escalating by $6,000 per year (or $500 per month) each year thereafter
      until initial termination of the lease on June 30, 2012. The Company is required
      to pay additional rent equal to $0.02 per pound for all materials burned,
      treated, received or transferred at the incinerator facility exceeding 100,000
      pounds per month. The incineration fee has not been included in the table below.
      Rent expense for the years ended June 30, 2007 and 2006 was $229,293 and
      $184,313, respectively. Future minimum lease payments under non-cancelable
      operating leases as of June 30, 2007 are as follows:





F-15




**SHARPS
      COMPLIANCE CORP. AND SUBSIDIARIES**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**JUNE
      30, 2007 AND 2006**





**NOTE
      9 - COMMITMENTS AND CONTINGENCIES (continued)**





Year
                Ending June 30,2008
            
            $
            303,6842009
            
            
            309,6842010
            
            
            315,6842011
            
            
            312,6602012
            
            
            238,432$
            1,480,144





For
      accounting purposes, the Company records lease expense for the incinerator
      facility on a straight-line basis over the life of the lease that computes
      to
      $4,250 per month, or $51,000 per year. As a result, a deferred portion (rent
      abatement) is recorded, which, at June 30, 2007 was $72,000 and is reflected
      in
      the Company’s Consolidated Balance Sheet.





Former
      Employee Matters :





***Ronald
      E. Pierce 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 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.





Other :





***Patent
      Infringement Litigation***




In
      May
      2007, the Company filed patent infringement lawsuits in the United States
      District Court for the Southern District of Texas in Houston against MediSupply,
      Inc. (a/k/a or f/k/a Medi-Supply Alliance, LLC and Medi-Supply, Inc.
“MediSupply”) and Drive Medical Design & Manufacturing (“Drive Medical”) for
      infringement of three U.S. patents. The complaints allege that MediSupply and
      Drive Medical infringe the patents by making, selling, and offering for sale
      disposable IV poles which are identical to the Company’s Pitch-It TM IV Pole. In
      its cases against MediSupply and Drive Medical, the Company is seeking
      injunctions and damages or other monetary relief, including pre-judgment
      interest and awarding of attorney fees.





F-16