<PAGE>

                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION

                             WASHINGTON, D.C. 20549

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

                                   FORM 10-KSB


 [X]  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
      ACT OF 1934
      For the fiscal year ended June 30, 2001

 [ ]  TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
      ACT OF 1934
      for the transition period from ______________ to _______________.


                         Commission File Number: 0-22390

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

                             SHARPS COMPLIANCE CORP.
                 (Name of Small Business Issuer in its Charter)


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

       9050 KIRBY DRIVE, HOUSTON, TEXAS                   77054
   (Address of principal executive offices)            (Zip Code)


                                 (713) 432-0300
                          Registrant's telephone number

Check whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. Yes[X]  No[ ]

Check if there is no disclosure of delinquent filers in response to item 405 of
Regulation S-B 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: $4,651,303

Aggregate market value of the voting stock held by non-affiliates computed by
the closing stock price on October 10, 2001: $10,011,159

Number of shares outstanding of the issuer's Capital Stock as of October 10,
2001: 8,705,356


                      DOCUMENTS INCORPORATED BY REFERENCE:


Portions of the Registrant's definitive Proxy Statement for the 2001 Annual
Meeting of Stockholders to be held on November 5, 2001 are incorporated by
reference in Part III hereof.

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

<PAGE>

  ----------------------------------------------------------------------------
                             SHARPS COMPLIANCE CORP.

                               TABLE OF CONTENTS*
                          ANNUAL REPORT ON FORM 10-KSB
  ----------------------------------------------------------------------------


                                                                         Page
                                      PART I
     Item 1  Description of Business..................................    3
     Item 2  Description of Property..................................    9
     Item 3  Legal Proceedings........................................    9

                                      PART II

     Item 4  Market for Common Equity and Related Stockholder Matters.   11
     Item 5  Management's Discussion and Analysis of Financial
               Condition and Results of Operations....................   11

     Item 6  Financial Statements.....................................   13
     Item 7  Changes in and Disagreements with Accountants on
               Accounting and Financial Disclosure....................   13


                                      PART III

     Item 8  Directors, Executive Officers, Promoters and Control
               Persons of the Registrant; Compliance with
               Section 16(a) of the Exchange Act......................   14
     Item 9  Executive Compensation...................................   14
     Item 10 Security Ownership of Certain Beneficial Owners and
               Management.............................................   14
     Item 11 Certain Relationships and Related Transactions...........   14
     Item 12 Exhibits and Reports on Form 8-K.........................   15

             Signatures...............................................   15


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


                                       2
<PAGE>

INFORMATION REGARDING FORWARD-LOOKING STATEMENTS

THIS ANNUAL REPORT ON FORM 10-KSB CONTAINS CERTAIN FORWARD-LOOKING STATEMENTS
AND INFORMATION RELATING TO THE COMPANY AND ITS SUBSIDIARIES THAT ARE BASED ON
THE BELIEFS OF THE COMPANY'S MANAGEMENT AS WELL AS ASSUMPTIONS MADE BY AND
INFORMATION CURRENTLY AVAILABLE TO THE COMPANY'S MANAGEMENT. WHEN USED IN THIS
REPORT, THE WORDS "ANTICIPATE," "BELIEVE," "EXPECT," "ESTIMATE," "PROJECT," AND
"INTEND" AND WORDS OR PHRASES OF SIMILAR IMPORT, AS THEY RELATE TO THE COMPANY
OR ITS SUBSIDIARIES OR COMPANY MANAGEMENT, ARE INTENDED TO IDENTIFY
FORWARD-LOOKING STATEMENTS. SUCH STATEMENTS REFLECT THE CURRENT RISKS,
UNCERTAINTIES AND ASSUMPTIONS RELATED TO CERTAIN FACTORS, INCLUDING WITHOUT
LIMITATIONS, COMPETITIVE FACTORS, GENERAL ECONOMIC CONDITIONS, CUSTOMER
RELATIONS, RELATIONSHIPS WITH VENDORS, GOVERNMENTAL REGULATION AND SUPERVISION,
SEASONALITY, DISTRIBUTION NETWORKS, PRODUCT INTRODUCTIONS AND ACCEPTANCE,
TECHNOLOGICAL CHANGE, CHANGES IN INDUSTRY PRACTICES, ONETIME EVENTS AND OTHER
FACTORS DESCRIBED HEREIN. BASED UPON CHANGING CONDITIONS, SHOULD ANY ONE OR MORE
OF THESE RISKS OR UNCERTAINTIES MATERIALIZE, OR SHOULD ANY UNDERLYING
ASSUMPTIONS PROVE INCORRECT, ACTUAL RESULTS MAY VARY MATERIALLY FROM THOSE
DESCRIBED HEREIN AS ANTICIPATED, BELIEVED, ESTIMATED, EXPECTED OR INTENDED. THE
COMPANY DOES NOT INTEND TO UPDATE THESE FORWARD-LOOKING STATEMENTS.

                                     PART I


ITEM 1.  DESCRIPTION OF BUSINESS


The information presented herein is for Sharps Compliance Corp. ("Sharps")
(formerly U.S. Medical Systems, Inc.) and its wholly owned subsidiaries, Sharps
Compliance, Inc. of Texas, dba Sharps Compliance, Inc. ("SCI"), Sharps
e-Tools.com, Inc. ("Sharps e-Tools"), and Sharps Environmental Services, Inc.,
dba Sharps Environmental Services of Texas, Inc. ("Sharps Environmental
Services") (collectively, "Sharps" or the "Company"). Sharps has its principal
office located at 9050 Kirby Drive, Houston, Texas 77054.

On March 14, 2000, Sharps e-Tools.com, Inc., ("Sharps e-Tools"), a Delaware
corporation, was formed as a wholly owned subsidiary of Sharps Compliance Corp.
Sharps e-Tools was formed to provide a range of electronic solutions to improve
profitability for the healthcare and hospitality industries, including employee
centered training and education programs designed to facilitate compliance with
federal, state and local regulations.

On April 18, 2000, Sharps Environmental Services, Inc., ("Sharps Environmental
Services"), a Delaware corporation, was formed as a wholly owned subsidiary of
Sharps Compliance Corp. Sharps Environmental Services to manage and assure that
waste materials are properly handled through the disposal process.

PRODUCTS AND SERVICES

Sharps focuses on developing cost effective, logistical and educational
solutions for healthcare and non-healthcare institutional markets. These
solutions include Sharps Disposal by Mail(TM) System, Pitch It(TM) IV Poles,
Trip LesSystem(TM), Sharps e-Tools and Sharps Environmental Services. Sharps
products and services are provided primarily to create cost and logistical
efficiencies. These products and services facilitate compliance with state and
federal regulations by tracking, incinerating and documenting the disposal of
medical waste. Additionally, these services facilitate compliance with
educational and training requirements required by federal, state, local and
regulatory agencies.

The Sharps Disposal by Mail(TM) 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(TM) System contains a securely sealed, leak and puncture
resistant sharps container in several sizes; U.S. Postal Service approved
shipping carton with priority mail postage; absorbent material inside the
container that can hold up to 150 milliliters; a red bag for additional
containment; and complete documentation and tracking manifest. When the
container is full, the customer closes the sharps container, places it in the
red bag, places it back inside the approved prepaid shipping carton and deposits
the container with the mail carrier who sends the authorized shipping carton
through the U.S. Postal Service routing to a municipally owned incinerator for
destruction. Effective July 1, 2000, management and operation of the incinerator
was assumed by Sharps Environmental Services. After destruction of the Sharps
Disposal by Mail(TM) System, the Company sends verification of such destruction
to the customer.

The Pitch It(TM) IV Pole systems are designed as a cost effective, portable,
lightweight and disposable alternative to traditional IV poles


                                       3
<PAGE>

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

The Trip LesSystem(TM) is a solution for the home healthcare (commercial)
industry that will free them from making unnecessary and more costly trips to
the patient's home after treatment has been completed. The Trip LesSystem (TM)
has combined two complete programs for return and disposal. All systems contain
the Sharps Disposal by Mail(TM) System along with either (i) a prepaid pump
return box using Federal Express or (ii) a Pitch It(TM) IV Pole system which
Sharps manufactures, depending on the patient's therapy.

The Sharps e-Tools online services include SharpsTracer(TM), AssetTracer(TM) and
ComplianceTrak. SharpsTracer(TM) is a manifest imaging and tracking program for
registered customers with the purpose of tracking and certifying the
transportation and disposal of regulated medical waste. SharpsTracer(TM)
eliminates traditional paper-based methods of manifest tracking and is designed
to enhance customer efficiencies with an automatic Proof of Destruction, Market
Data Collection abilities and Return to Store Programs capabilities.
AssetTracer(TM) allows its registered subscribers to effectively manage all
types of capital assets through a single, organized database. The program can be
used in conjunction with other Sharps 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.

Effective July 1, 2000, the Company entered into an agreement with the City of
Carthage, Texas and Panola County to manage and operate the Panola County
Resources Recovery Facility, the municipally owned incinerator to which the
Sharps Disposal by Mail (TM) System is mailed for destruction. The length of the
agreement is three years, and Sharps is responsible for maintaining the facility
as required by federal, state, local and/or regulatory agencies. Sharps
Environmental Services will provide environmental solutions for customers with a
wide variety of waste disposal needs. Primary services will be 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(TM) Systems and allows the Company to provide its proprietary
SharpsTracer(TM) discussed above.

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 staff on the dangers of improper medical wastes and infection
control practices.

MARKETS

Sharps' target markets include the (Commercial Healthcare) Home Healthcare
Industry and Dental, Veterinarian and Physician markets; (Commercial
Non-Healthcare) Hospitality and Other industrial Markets; (Retail)- home
self-injectors and other markets where the products and services may be bundled
or cross sold to provide solutions to prospective customers. Sharps is involved
in the mission to help separate the potentially infectious medical waste from
the regular waste. The repeat order nature of our business and an
infrastructure, which is a nationwide, has helped drive our growth. Sharps has
remained flexible and responsive to its customer needs in industries that demand
effective cost and logistical solutions, quick response and technological
innovation.

HOME HEALTHCARE INDUSTRY. The home healthcare industry is a primary market for
the Sharps Trip LesSystem(TM) that centers on the Sharps Disposal by Mail(TM)
System, Pitch It(TM) IV Poles and Asset Return boxes. Sharps products are
distributed to the home healthcare industry through major national homecare
equipment and supply distributors, including Medline, Medical Specialties, Medic
ACS and Redline. The home healthcare industry is a somewhat fragmented market;
however, management of Sharps estimates that there are approximately 20
corporations that dominate the home healthcare market within the United States.
Sharps currently has a presence with the majority of those corporations. The
Trip LesSystem(TM) is predominate with many of the top home healthcare
corporations under contract and is under serious consideration with several of
the remaining companies. Sharps' current principal customers include nationally
recognized homecare customers such as Apria Healthcare Inc., Coram Healthcare
Inc. and Gentiva Health Services Inc.

Healthcare has intensified its focus on Homecare. Healthcare professionals are
dealing with an aging population that has a continued demand for healthcare and
they have to dispose of materials such as syringes, surgical supplies and other
materials that come in contact


                                       4
<PAGE>

with blood or other body fluids outside of medical care facilities. Sharps has
created a system for the home healthcare industry that will free them from
making unnecessary and more costly trips to the patient's home. In the home
healthcare industry, Sharps has become part of the formulary for dealing with
the disposal of the sharps encountered by the leading national homecare
companies primarily because of the Trip LesSystem(TM), which makes the system
cost effective.

Sharps has strategically placed its sales people around the U.S. to sell to the
homecare market. Sharps sells its products and services to home health companies
and their distributors. Sharps' goal is to obtain agreements with homecare
companies to use its products and arrange for the distributor of choice of that
homecare company to sell and deliver the product and services directly to the
end user.

DENTISTS, VETERINARIANS AND PHYSICIANS. Sharps has made a presence within this
healthcare market that has identified the usefulness of the Sharps Disposal by
Mail(TM) System. Sharps' product has been demonstrated to be a perfect fit for
these small volume waste generators. Sharps has grouped the dental, physician
and veterinarian market together due to their similar model and duration usage.

Sharps utilizes distributors to reach the dental, veterinarian and physician
marketplace. In all areas, Sharps' products and services are distributed through
major distributors within each of the respective markets. Henry Schein and
Patterson Dental distribute to dental customers. In the veterinary market, the
main distributors utilized are The Butler Company and MWI Veterinary Supply. In
the physician market, a variety of methods are used to reach the needs of all
physicians, including sales through Group Purchasing Organizations ("GPO").

HOSPITALITY AND OTHER INDUSTRIAL MARKETS. The third area of focus for Sharps
is the Hospitality and other industrial markets. Because of Occupational
Safety and Health Administration (OSHA) enhanced regulations, management
believes that this market could be one of the largest growing segments for
the company's products and services and will include hotels, restaurants and
manufacturing sites. Sharps works with Ecolab, Inc. as its distributor to the
industrial market. Ecolab has an extensive marketing program that includes
7,000 sales people. Ecolab markets to potential users of the Sharps Disposal
by Mail (TM) System such as hotels, motels, resorts, schools, colleges,
stadiums, daycare centers, planes, trains, cruise ships, casinos,
supermarkets, distribution centers, business offices, restaurants, bars and
clubs. Ecolab has a substantial impact in this market. Sharps has developed
specialized versions of its Sharps Disposal by Mail(TM), which permit an
institutional establishment to easily introduce the product. Sharps developed
custom-designed cones, one used to collect contaminated sharps when
discovered and a second used as a temporary receptacle by transient
individuals who need to dispose of syringes.

Sharps' goal is to obtain agreements with large hospitality companies to use its
products and services and arrange for its distributor to sell and deliver the
products and services to the end user. In some instances, products and services
may be directly sold to customers where exclusive agreements have not been
entered into with strategic partners.

Sharps believes that certain segments of the Hospitality and other industrial
markets provide additional opportunities for "bundling" and/or cross selling its
e-Tools products along with the Sharps Disposal by Mail(TM) System. The Company
believes that the segments within this market that experience high employee
turnover and require initial and annual OSHA training would benefit from
convenient, cost effective methods of education and training and tracking of
employee training.

HOME SELF-INJECTORS A growing market is the home self-injector market.
Approximately (three) 3 percent of the U.S. population, or individuals in one
out of every 12 households, use sharps (syringes, needles, lancets, sutures,
catheter needles, or any item that can puncture the skin) in the treatment of
diabetes, multiple sclerosis, infertility, migraines, allergies and hemophilia,
as well as infections diseases such as hepatitis and HIV. Certain states require
used needles from home self injectors to be disposed as medical waste and not as
regular garbage. A diabetic often requires numerous insulin injections. Sharps
is actively marketing to the vast number of insulin injected diabetics, and this
market is expected to grow over the next three to five years because modern
dietary habits are leading to an increased number of diabetics and more people
are being tested for the condition.

Sharps has entered into an agreement with Waste Management Inc. to have direct
and indirect opportunities to bring its products to the home self-injectors.

INDUSTRY ANALYSIS

The large, fragmented medical waste industry has experienced significant growth
since its inception. The regulated medical waste industry arose with the Medical
Waste Tracking Act of 1988 ("MWTA"), which Congress enacted in response to media
attention after medical waste washed ashore on beaches, particularly in New York
and New Jersey. Since the 1980s, the public and government


                                       5
<PAGE>

regulators have increasingly demanded the proper handling and disposal of
medical waste generated by the healthcare industry. Regulated medical waste is
generally described as any medical waste that can cause an infectious disease,
including single-use disposable items, such as needles, syringes, gloves and
other medical supplies, cultures and stocks of infectious agents and blood and
blood products. Today, almost all businesses have waste disposal concerns for
safety and liability reasons. Regulated waste such as syringes, razor blades,
bloodborne items, bio-hazard waste spills and other sharp waste can occur in the
following situations: treating cuts, abrasions and burns; cleaning rooms and
finding needles, syringes or blood-soaked items; laundering linens and finding
needles or razor blades in towels; maintenance people finding syringes, needles
and broken glass with blood stains; and bio-hazard clean-up.

MARKET SIZE

Management of the Company believes that many businesses that are not currently
using outsourced medical waste services are unaware of the need for proper
training of employees and OSHA requirements regarding the handling of medical
waste. These businesses include restaurants, casinos, hotels and generally all
businesses where employees may come into contact with bloodborne pathogens. In
addition, home healthcare generated medical waste in the home is currently
unregulated and may become subject to similar bloodborne pathogen regulations in
the future.

HOME HEALTHCARE INDUSTRY

The Homecare target markets for Sharps are predominantly the home infusion
provider and the home nursing agency with the first representing our primary
target. There are approximately 4,500 sites in the US that provide Home Infusion
Services including local, national and hospital based providers generating
approximately 4.5 billion dollars in annual revenue. A Large percentage of the
patients in this market are service by 20 large chains and affiliations, Sharps
currently has a presence in the majority of these accounts. The 1999 statistics
on home nursing agencies show 7,747 Medicare Certified Agencies employing
271,951 clinical FTE's. The home nursing market unlike the infusion market
downsized after the Balance budget amendment of 1997. Sharps focus in the home
nursing market is secondary to infusion do to the potential business per site
but Sharps Mailback system could service their total needs. The company's sales
force focuses mainly on these accounts. The sales force has been successful in
starting new companies and getting additional compliance in existing companies
contracts in these home care markets.

DENTIST, VETERINARIANS AND PHYSICIANS

1997 census figures supplied by the American Dental Association, the American
Medical Association and the American Veterinary Association indicate that there
are approximately 115,000 dentists, 600,000 physicians and 60,000 veterinarians
in active practice in the U.S. The Company estimates that the large majority of
these offices can be more than adequately serviced for its medical waste
disposal needs by the Sharps by Mail product.


HOSPITALITY AND OTHER INDUSTRIAL MARKETS

The Lodging Industry Profile ("LIP") for the year 1998 estimates there are
approximately 51,000 properties consisting of 3.9 million rooms supporting more
than 7 million jobs. In 32 states, the tourism industry also ranks as the first,
second or third largest employer. According to the National Restaurant
Association, the restaurant industry employs approximately 11 million people,
with 7 out of 10 eating-and-drinking establishments having fewer than 20
employees in 1997.

HOME SELF-INJECTORS

The American Diabetes Association ("ADA") estimates there are approximately 15.7
million people or 5.9% of the population in the United States who have diabetes.
Of the diagnosed cases, the ADA estimates 3.7 million need daily insulin
injections to stay alive.

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

      1.  The healthcare industry is under pressure to reduce costs and improve
          efficiency. To accomplish this reduction, it is continually searching
          for solutions that provide cost effective and logistical efficiencies.
          Sharps believes that its solutions help


                                       6

<PAGE>

          healthcare providers reduce costs by reducing their medical waste
          tracking, handling and compliance costs and providing online education
          and training to help reduce their potential liability related to
          employee exposure to bloodborne pathogens and other infectious
          material.

      2.  The continued move toward stronger federal, state and local
          regulations for transporting and/or disposing of medical waste.

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

      4.  The continued growth in the non-healthcare related industries such as
          hospitality. This industry has needs for a low cost, effective method
          of training employees to satisfy the requirements discussed above, in
          addition to many other safety programs to reduce potential liabilities
          in the workplace.


RESEARCH & DEVELOPMENT

The Company is seeking new applications for the Sharps Disposal by Mail (TM)
System in many different areas since small quantity medical waste generators can
be found in many industries. The Company is constantly looking into the
development of new products to assist companies in complying with OSHA
regulations for disposal of potentially infectious waste and attempting to
reduce potential liability. The Company has dedicated a minimum amount of time
and money toward research and development of alternative disposal and healthcare
treatments, focusing on the acquisition of compatible product lines such as the
"Pitch It" and "Pitch It Jr." disposable IV poles. The "Pitch It Sr." disposable
IV pole, which is capable of holding a pump, was introduced in June 1999.
Development of this new product was completed utilizing the services of the
prospective manufacturer, which kept development costs to a minimum. The
Company's research and development costs have not been material.

MARKET RISKS

Although Sharps has experienced growth in revenues over the past few years,
there is an inherent concentration of credit risk associated with accounts
receivable arising from sales to its major customers, which are primarily
distributors. For the years ended June 30, 2001 and 2000, four customers
represented approximately 61% and 68% of revenues respectively. Four customers
comprised approximately 58% (or $420,000) of the total accounts receivable
balance at June 30, 2001 and 72% (or $568,000) at June 30, 2000. Sharps may be
affected by its dependence on a limited number of high volume customers.
Management believes that the risk is mitigated by (i) the contractual
relationships with the end user of the products and reputation of Sharps' major
customers, (ii) a loss of any distributor does not necessarily mean the loss of
the underlying customer base of that distributor for the Company's products and
(iii) the continued diversification of the Company's products and services.

Sharps continues to sole-source each of its transportation and software
development functions. Sharps may be affected by its dependence on the suppliers
of these functions. The risk is mitigated by the long-standing business
relationships with and reputation of Sharps' suppliers. Although there are no
assurances with regard to the continued future business associations, after
expirations of certain agreements between Sharps and its suppliers, management
believes that alternative sources would be available at similar costs due to the
generic nature of products and services offered.

MANUFACTURING

Manufacturing capabilities are key in the total solution offered by Sharps.
Sharps can control quality, remain flexible and be responsive to its customer
requirements. The technology required to participate in the various markets is
key to being on the forefront of project design. Sharps manufactures certain
products in Houston, Texas and can currently produce approximately 4,000 systems
per day, per shift. Sharps currently operates one shift, and its manufacturing
facility is approximately 15,000 square feet. The Company entered into a
contract with Futura Medical Corporation making Sharps the exclusive purchaser
of the high density polyethylene for the manufacture of certain one, two and
three-gallon containers for sale to the Company's industrial and healthcare
facilities, and diabetic patients.


                                       7
<PAGE>

INTELLECTUAL PROPERTY

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

RISK FACTORS

DEPENDENCE ON CERTAIN MANAGEMENT PERSONNEL

Sharps' growth and development to date has been largely dependent upon active
participation of its current chief executive officer, Dr. Burt Kunik. Although
Sharps expects to hire and retain other qualified and experienced management
personnel from time to time, the loss of services of any of its current
executives, especially Dr. Kunik, could have a material adverse affect on the
development of the Company's business. Sharps has key man life insurance on Dr.
Kunik and not on any other officer, director or employee of the Company, but may
elect to do so in the future.

COMPETITION

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

CUSTOMER RELATIONSHIPS

Sharps has no firm long-term volume commitments from its customers and generally
enters into individual purchase orders with its customers. Although Sharps has
contractual relationships with its largest customers, Sharps has experienced
fluctuations in order levels from period to period and expects it will continue
to experience fluctuations in the near future. In addition, customer purchase
orders may be canceled and order volume levels can be changed, canceled or
delayed with limited or no penalties. The replacement of canceled, delayed or
reduced purchase orders with new business cannot be assured. Moreover, the
businesses, financial condition and results of operations of Sharps will depend
in significant part upon its ability to obtain orders from new customers, as
well as the financial condition and success of its customers, its customers'
products 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.

BURN FACILITIES

Effective July 1, 2000, the Company entered into a multi-year agreement with
the City of Carthage, Texas and Panola County to operate the Panola County
Resource Recovery Facility ("PCRRF"). The Company is responsible for
operating and maintaining the facility under compliance of all federal, state
and local laws and/or any other regulatory agency involving solid waste
disposal. Sharps has received notification from the City of Carthage of
various notices of violations which it has received from the Texas Natural
Resource Conservation Commission (TNRCC). Management believes that the
ultimate resolution of these matters will not have any material adverse
effect on Sharps' consoliated financial position, results of operations or
liquidity. The Company believes the operation of the facility is in
compliance of all applicable federal, state, local and/or regulatory agency
requirements as of October 10, 2001. The Company entered into an agreement
with a secondary burn facility to provide services in the event the PCRRF is
unavailable. The price negotiated with the secondary burn facility in some
instances may be higher than primary pricing.

OPERATING HISTORY; HISTORY OF LOSSES

Sharps has incurred significant losses from operations since its inception.
The future success of Sharps is dependent upon many factors, including
environmental regulation, continuity of its distributorship agreements,
successful completion of its product development activities and the
identification and penetration of additional markets for its products and
services. There can be no assurance that the Company will be able to obtain
financing on acceptable terms to fund operations beyond that time frame;
however, management believes that it will be successful in raising such
financing, if necessary.

                                       8
<PAGE>

Management believes that the Company's current resources will be sufficient to
fund operations through calendar year 2002

GOVERNMENTAL REGULATION

Sharps is required to operate within the guidelines established by federal,
state, local and/or 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 mail 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.

POSTAL WORK INTERRUPTIONS

Since the basis by which Sharps transports its medical sharps products is by use
of the U.S. Postal Service, any interruption in the day-to-day postal services
would have a material adverse effect on Sharps' revenues and financial
condition. Postal delivery interruptions are rare and cannot be predicted with
any certainty. However, since U.S. Postal 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.

ITEM 2. DESCRIPTION OF PROPERTY

Sharps currently leases 7,274 square feet of commercial office space in Houston,
Texas. The lease period commenced August 1, 1998 and runs through July 31, 2002
at an annual rental rate of $8.59 per square foot. The lease agreement provides
for annual escalations based on increases in common area maintenance, property
taxes, insurance costs and management. Sharps believes that the facility is
adequate and anticipates remaining in the facility for the period of the lease.

ITEM 3. LEGAL PROCEEDINGS

Sharps operates in a regulated industry and subject to routine and /or
unannounced regulatory inspections. Sharps is a party to various legal actions
and claims and regulatory actions arising in the normal course of business.
While the outcome of these matters cannot be predicted with certainty,
management believes these matters will not have a material adverse effect on
Sharps' consolidated financial position, results of operations or liquidity.



                                       9
<PAGE>

                                     PART II

ITEM 4. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS


MARKET INFORMATION. During the two (2) years ended June 30, 2001, the Common
Stock of the Company has been quoted on the NASD OTC Bulletin Board under the
symbol "SCOM". The Company's Common Stock has had limited trading volume,
averaging approximately 58,700 shares traded per month on the OTC Bulletin
Board. The table below sets forth the high and low closing prices on the OTC
Bulletin Board for each quarter within the last two fiscal years.


                                                         COMMON STOCK

          FISCAL YEAR ENDED JUNE 30, 2000               HIGH        LOW
          -------------------------------              ------     -------
          First Quarter                                $ 3.00     $  .875
          Second Quarter                               $ 2.00     $ 1.03
          Third Quarter                                $ 2.88     $ 1.06
          Fourth Quarter                               $ 2.12     $  .75

          FISCAL YEAR ENDED JUNE 30, 2001
          -------------------------------
          First Quarter                                $ 1.437    $  .75
          Second Quarter                               $ 1.062    $  .50
          Third Quarter                                $  .968    $  .625
          Fourth Quarter                               $ 1.01     $  .45


          FISCAL YEAR ENDING JUNE 30, 2002
          --------------------------------
          First Quarter (through September 21, 2001)   $ 1.80     $  .62


STOCKHOLDERS: At September 21, 2001, there were 8,705,356 shares of Common Stock
held by 258 holders of record. The last reported sale of the Common Stock on
October 10, 2001, was $1.15 per share. The Company closed a Private Placement
of 1.1 million shares of common stock on October 11, 2001, at price of $1.10
per share.

DIVIDEND POLICY: The Company has never declared or 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.

ITEM 5. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS

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

RESULTS OF OPERATIONS

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

<TABLE>
<CAPTION>
                                                       YEARS ENDED JUNE 30,
                                                   --------------------------
                                                          2001       2000
                                                   --------------------------
<S>                                                       <C>        <C>
      Total revenues                                      100%       100%
      Costs and expenses:

         Cost of revenues                                 (50%)      (54%)
         Selling, general and administrative              (69%)      (75%)
         Depreciation and amortization                     (2%)       (3%)
                                                         ----       ----

      Total operating expenses                           (121%)     (132%)
                                                         ----       ----
      Operating loss                                      (21%)      (32%)
      Interest income, net                                  1%         1%
                                                         ----       ----
      Net loss                                            (20%)      (31%)
                                                         ====       ====
</TABLE>

YEAR ENDED JUNE 30, 2001 COMPARED TO YEAR ENDED JUNE 30, 2000



                                       10
<PAGE>

Revenues for fiscal 2001 increased 11% as compared to the prior year due to
continued penetration of target markets and revenue growth in Sharps Disposal by
Mail (TM) and Pitch It(TM) IV Pole systems. Year over year revenues increased by
approximately $450,000 while cost of revenues narrowed to 50% of total revenues
in 2001 compared to 54% in 2000. The Company expects that its results of
operations will continue to fluctuate between periods based upon the timing and
level of sales to distributors.

The change in costs of revenues was substantially due to a revaluation
adjustment to our accrued disposal liability. During the year ended June 30,
2001, we completed an analysis of the accrued disposal liability based on a
review of historical Sharps Disposal by Mail (TM)System return experience and
recorded a reduction of the liability of $540,996.

Selling, general and administrative expenses declined as a percent of revenue
to 69% in 2001 from 75% in 2000. The decline is due to increased sales and
our ability to leverage the existing cost structure supporting the new
growth. The decline in percentage was partially offset by increased stock
based compensation charges in 2001 compared to 2000.

Our net loss from operations narrowed in 2001 from 2000 by approximately 25%, or
approximately $320,000. This improvement is substantially due to the revaluation
adjustment to our accrued disposal liability discussed above.

LIQUIDITY AND CAPITAL RESOURCES

As of June 30, 2001, the Company had approximately $345,000 in cash and
short-term investments. Current liabilities exceeded current assets by
approximately $144,000 at June 30, 2001. On October 11, 2001, the Company
completed a private placement of 1,100,000 shares of its common stock for gross
proceeds of $1,210,000, which improved the Company's working capital position.

Capital expenditures during the year ended June 30, 2001 were approximately
$133,000 and consisted of computers, computer software development, computer
networking related equipment and tooling for manufactured products. The
Company expects capital expenditures to generally continue at this level
through fiscal year 2002.

At June 30, 2001, total long-term debt outstanding was $2,745. Additionally, the
Company analyzed the historical return results for its Sharps Disposal by Mail
(TM) System and the portion of the accrued disposal obligation and deferred
revenue not expected to be incurred within one year have been classified as long
term liabilities of $253,518 and $40,396, respectively.

The Company expects to continue to incur substantial costs related to sales,
marketing and administrative activities. The amount and timing of anticipated
expenditures will depend upon numerous factors both within and outside the
Company's control, including the nature and timing of marketing and sale
activities. Management believes that the Company's current resources will be
sufficient to fund operations through December 2002. There can be no
assurance that the Company will be able to obtain financing on acceptable
terms to fund operations beyond that time frame; however, management believes
that it will be successful in raising such financing, if necessary.

QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following table sets forth selected quarterly information for 2001 and 2000.
We believe that all necessary adjustments have been included in the amounts
below to present fairly the results of such periods.

<TABLE>
<CAPTION>
                                                        -----------------------------------------------------------------------
                                                                            QUARTER          ENDED  2001
                                                        -----------------------------------------------------------------------
                                                         SEPTEMBER 30        DECEMBER 31         MARCH 31            JUNE 30
                                                        --------------     --------------      ------------      --------------
<S>                                                      <C>                <C>                <C>                <C>
Total Revenues                                           $   989,673        $ 1,146,823        $ 1,182,787        $ 1,332,020
Costs of Revenues                                        $   536,229        $   724,610        $   209,599        $   862,579
Operating income (loss)                                  $  (289,094)       $  (416,204)       $   183,175        $  (478,052)
Net Income (loss)                                        $  (278,827)       $  (407,815)       $   184,714        $  (459,622)
Net Income (loss) per share                              $      (.04)       $     .(05)        $       .02        $      (.05)
Weighted average shares- basic and diluted                 7,952,531          8,626,444          8,626,444          8,647,123


                                                        -----------------------------------------------------------------------
                                                                            QUARTER          ENDED  2000
                                                        -----------------------------------------------------------------------
                                                         SEPTEMBER 30        DECEMBER 31         MARCH 31            JUNE 30
                                                        --------------     --------------      ------------      --------------

Total Revenues                                           $ 1,006,000        $ 1,029,000        $   958,372        $ 1,208.350
Costs of Revenues                                        $   595,000        $   576,000        $   551,824        $   546,205
Operating loss                                           $  (336,000)       $  (392,000)       $  (377,359)       $  (222,239)
Net loss                                                 $  (322,000)       $  (379,000)       $  (368,312)       $  (212,225)
Net loss per share                                       $      (.04)       $      (.05)       $      (.05)       $      (.03)
Weighted average shares- basic and diluted                 7,626,444          7,626,444          7,626,444          7,626,444

</TABLE>




                                       11
<PAGE>

ITEM 6. FINANCIAL STATEMENTS

The financial statements of the Company and the related report of the Company's
independent accountants thereon are included in this report and are referenced
as pages F-1 to F-15.



                                       12
<PAGE>

                                    PART III

ITEM 8. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS OF THE
        REGISTRANT; 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 19, 2001.

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, 2001, all
Section 16(a) filing requirements applicable to its officers, directors and
greater than 10% beneficial owners were complied with.

ITEM 9. EXECUTIVE COMPENSATION

The information required by this item is incorporated herein by reference to the
information under the captions "Management" and "Executive Compensation" of the
Registrant's definitive Proxy Statement to be filed pursuant to Regulation 14A
with the SEC relating to its Annual Meeting of Stockholders to be held on
November 19, 2001.

ITEM 10. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The information required by this item is incorporated herein by reference to the
information under the captions "Security Ownership of Management" and "Certain
Beneficial Owners," of the Registrant's definitive Proxy Statement to be filed
pursuant to Regulation 14A with the SEC relating to its Annual Meeting of
Stockholders to be held on November 19, 2001.

ITEM 11. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The information required by this item is incorporated herein by reference to the
information under the caption "Certain Relationships and Related Transactions,"
of the Registrant's definitive Proxy Statement to be filed pursuant to
Regulation 14A with the SEC relating to its Annual Meeting of Stockholders to be
held on November 19, 2001.


                                       13
<PAGE>

ITEM 12. EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibit Number      Description of Exhibit

    2.2     Agreement and Plan of Reorganization dated as of February 27, 1998,
            between and among U.S. Medical Systems, Inc., Sharps Compliance,
            Inc. and its Stockholders (incorporated by reference from Exhibit
            2.2 to 2/27/98 Form 8-K)

    3.4     Bylaws of Company (incorporated by reference from Exhibit 3.4 to
            6/30/94 Form 10-KSB)

    3.6     Certificate of Elimination of the Series "A" Voting Convertible
            Preferred Stock (incorporated by reference from Exhibit 3.6 to
            6/30/98 Form 10-KSB)

    4.4     Specimen Stock Certificate (incorporated by reference from Exhibit
            4.4 to 6/30/98 Form 10-KSB)

    10.29   Employment Agreement effective January 1, 1998 by and between Sharps
            Compliance, Inc. and Dr. Burt Kunik, and First Amendment to
            Employment Agreement (incorporated by reference from Exhibit 10.29
            to 6/30/98 Form 10-KSB)

    10.30   Second Amendment to Employment Agreement dated May 15, 1998
            (incorporated by reference from Exhibit 10.30 to 6/30/98 Form
            10-KSB)

    10.31   Exclusive Distributorship Agreement dated April 1, 1998 between
            Pro-Tec Containers, Inc. and Sharps Compliance, Inc. (incorporated
            by reference from Exhibit 10.31 to 6/30/98 Form 10-KSB)

    10.32   Purchase Agreement between IVY Green Corporation and Sharps
            Compliance, Inc., dated June 19, 1998 (incorporated by reference
            from Exhibit 10.32 to 6/30/98 Form 10-KSB)

    10.33   Lease Agreement between Lakes Technology Center, Ltd. and Sharps
            Compliance, Inc. dated August 1, 1998 (incorporated by reference
            from Exhibit 10.33 to 6/30/98 Form 10-KSB)

    10.34   Severance Agreement dated September 2, 1998, between C. Lee Cooke,
            Jr. and Sharps Compliance Corp. (formerly known as - U.S. Medical
            Systems, Inc.) (incorporated by reference from Exhibit 10.34 to
            6/30/98 Form 10-KSB)

    16.4    Letter regarding changes in Certifying Accountant to Arthur Andersen
            LLP (incorporated by reference from Exhibit 16.4 to 6/30/98 Form
            10-KSB)

    21.1    Subsidiaries (filed herewith)

(b)   Reports on Form 8-K


None

                                   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: October 11, 2001                  By: /s/ BURTON J. KUNIK
                                             -----------------------------
                                             Dr. Burton J. Kunik, Chairman of
                                             the Board, President and Chief
                                             Executive Officer

                                         By: /s/ GARY L. SHELL
                                             ----------------------------
                                             Gary L. Shell, Vice President and
                                             Chief Financial Officer



                                       14

<PAGE>

                     SHARPS COMPLIANCE CORP. AND SUBSIDARIES

                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

                                                                   PAGE

            CONSOLIDATED FINANCIAL STATEMENTS
               Report of Independent Public Accountants...........      F-2
               Consolidated Balance Sheets as of June 30, 2001
                 and 2000.........................................      F-3
               Consolidated Statements of Operations for the
                 Years Ended June 30, 2001 and 2000...............      F-4
               Consolidated Statements of Stockholders' Equity
                 (Deficit) for the Years Ended June 30, 2001 and
                 2000.............................................      F-5
               Consolidated Statements of Cash Flows for the
                 Years Ended June 30, 2001 and 2000...............      F-6
               Notes to Consolidated Financial Statements.........      F-7



                                      F-1
<PAGE>

                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS


To the Stockholders of Sharps Compliance Corp.:

We have audited the accompanying consolidated balance sheets of Sharps
Compliance Corp. (a Delaware corporation) and subsidiaries as of June 30, 2001
and 2000, and the related consolidated statements of operations, stockholders'
equity (deficit) and cash flows for the years ended June 30, 2001 and 2000.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.

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

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Sharps Compliance
Corp. and subsidiaries as of June 30, 2001 and 2000, and the results of their
operations and their cash flows for the years ended June 30, 2001 and 2000, in
conformity with accounting principles generally accepted in the United States.


/s/ ARTHUR ANDERSEN LLP


Houston, Texas
September  18, 2001 (except with respect
   to the matter discussed in Note 9, as to
   which the date is October 11, 2001)


                                      F-2
<PAGE>
                    SHARPS COMPLIANCE CORP. AND SUBSIDIARIES

                           CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
                                      ASSETS                                                        JUNE 30,
                                                                                         -------------------------------
                                                                                            2001                 2000
                                                                                         -----------         -----------
<S>                                                                                      <C>                 <C>
CURRENT ASSETS:
   Cash and cash equivalents                                                             $   107,275         $   153,346
   Short-term investments                                                                    237,941              40,984
   Accounts receivable, net of allowance for doubtful accounts of
     $26,500 and $30,381, respectively                                                       709,274             778,643
   Inventory                                                                                 223,207             221,105
   Prepaids and other assets                                                                 149,740              96,831
                                                                                         -----------         -----------

             Total current assets                                                          1,427,437           1,290,909

PROPERTY AND EQUIPMENT, net of accumulated depreciation of
     $226,907 and $134,793, respectively                                                     221,427             180,736

INTANGIBLE ASSETS, net of accumulated amortization
     of $60,735 and $40,489, respectively                                                     40,490              60,736

NOTE RECEIVABLE FROM STOCKHOLDER                                                             320,000             320,000

OTHER ASSETS                                                                                  11,695                 --
                                                                                         -----------         -----------

             Total assets                                                                $ 2,021,049         $ 1,852,381
                                                                                         ===========         ===========

                         LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)

CURRENT LIABILITIES:

   Accounts payable                                                                      $   560,954         $   354,538
   Accrued liabilities                                                                       131,948             129,087
   Accrued disposal costs                                                                    662,632           1,371,193
   Deferred revenue                                                                           85,843                --
   Current maturities of notes payable                                                       129,299              64,718
                                                                                         -----------         -----------

             Total current liabilities                                                     1,570,676           1,919,536

LONG TERM ACCRUED DISPOSAL COSTS, net of current portion                                     253,518                --

LONG TERM DEFERRED REVENUE, net of current portion                                            40,396                --
NOTES PAYABLE, net of current maturities                                                       2,745               8,780
                                                                                         -----------         -----------

             Total liabilities                                                             1,867,335           1,928,316


COMMITMENTS AND CONTINGENCIES

STOCKHOLDERS' EQUITY (DEFICIT):

   Preferred stock, $.01 par value per share; 1,000,000 shares authorized;
        -0- shares issued and outstanding                                                         --                  --
   Common stock, $.01 par value per share; 20,000,000 shares authorized;
        8,705,356 and 7,626,444 shares issued and outstanding, respectively                   87,053              76,264
   Additional paid-in capital                                                              5,572,598           4,392,188
   Accumulated deficit                                                                    (5,505,937)         (4,544,387)
                                                                                         -----------         -----------

             Total stockholders' equity (deficit)                                            153,714             (75,935)
                                                                                         -----------         -----------

             Total liabilities and stockholders' equity (deficit)                        $ 2,021,049         $ 1,852,381
                                                                                         ===========         ===========
</TABLE>

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


                                      F-3
<PAGE>

                    SHARPS COMPLIANCE CORP. AND SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
                                                       YEARS ENDED JUNE 30,
                                                   ----------------------------
                                                       2001             2000
                                                   -----------      -----------
<S>                                                <C>              <C>
REVENUES:
   Sales, net                                      $ 4,466,079      $ 4,051,598
    Consulting services and other                      185,224          150,124
                                                   -----------      -----------

        Total revenues                               4,651,303        4,201,722

COSTS AND EXPENSES:
   Cost of revenues                                  2,332,475        2,269,029
   Selling, general and administrative               3,206,643        3,168,543
   Depreciation and amortization                       112,360           91,748
                                                   -----------      -----------

        Operating loss                              (1,000,175)      (1,327,598)

INTEREST INCOME                                         44,910           47,536

INTEREST EXPENSE                                        (6,285)          (1,475)
                                                   -----------      -----------

        Net loss                                   $  (961,550)     $(1,281,537)
                                                   ===========      ===========

BASIC AND DILUTED NET LOSS

PER SHARE                                          $      (.11)     $      (.17)
                                                   ===========      ===========

SHARES USED IN COMPUTING BASIC AND
   DILUTED NET LOSS PER SHARE                        8,461,986        7,626,444
                                                   ===========      ===========
</TABLE>


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


                                      F-4
<PAGE>

                    SHARPS COMPLIANCE CORP. AND SUBSIDIARIES

            CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)

<TABLE>
<CAPTION>

                                                                             COMMON STOCK                    ADDITIONAL
                                                                   --------------------------------           PAID- IN
                                                                      SHARES               AMOUNT              CAPITAL
                                                                   -----------------------------------------------------
<S>                                                                  <C>                <C>                  <C>
BALANCE, June 30, 1999                                               7,626,444          $    76,264          $ 4,370,886
   Stock based compensation and
     amortization of deferred compensation                                --                   --                 21,302
   Net loss                                                               --                   --                   --
                                                                   -----------          -----------          -----------

BALANCE, June 30, 2000                                               7,626,444               76,264            4,392,188
   Issuance of common stock for services provided                       78,912                  789               52,704
   Issuance of common stock for cash                                 1,000,000               10,000              990,000
   Issuance of options for services provided                              --                   --                137,706
   Net loss                                                               --                   --                   --
                                                                   -----------          -----------          -----------

BALANCE, June 30, 2001                                               8,705,356          $    87,053          $ 5,572,598
                                                                   ===========          ===========          ===========


                                                                                                               TOTAL
                                                                     DEFERRED           ACCUMULATED         STOCKHOLDERS'
                                                                   COMPENSATION           DEFICIT          EQUITY (DEFICIT)
                                                                  ---------------------------------------------------------
BALANCE, June 30, 1999                                             $   (11,000)         $(3,262,850)         $ 1,173,300
   Stock based compensation and
     amortization of deferred compensation                              11,000                 --                 32,302
   Net loss                                                               --             (1,281,537)          (1,281,537)
                                                                   -----------          -----------          -----------

BALANCE, June 30, 2000                                                    --             (4,544,387)             (75,935)
   Issuance of common stock for services provided                         --                   --                 53,493
   Issuance of common stock for cash                                      --                   --              1,000,000
   Issuance of options for services provided                              --                   --                137,706
   Net loss                                                               --               (961,550)            (961,550)
                                                                   -----------          -----------          -----------

BALANCE, June 30, 2001                                             $      --            $(5,505,937)         $   153,714
                                                                   ===========          ===========          ===========

</TABLE>
                   The accompanying notes are an integral part
                   of these consolidated financial statements.


                                      F-5
<PAGE>

                    SHARPS COMPLIANCE CORP. AND SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
                                                                                  YEARS ENDED JUNE 30,
                                                                             -------------------------------
                                                                                 2001                2000
                                                                             -----------         -----------
<S>                                                                          <C>                 <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
  Net loss                                                                   $  (961,550)        $(1,281,537)
  Adjustments to reconcile net loss to net cash
     used in operating activities-
     Depreciation and amortization                                               112,360              91,748
     Stock based compensation and amortization
       of deferred compensation                                                  191,199              32,302
     Changes in operating assets and liabilities-
        Decrease (increase) in accounts receivable                                69,369            (304,941)
        Increase in inventory                                                     (2,102)            (88,939)
        Increase in prepaids and other assets                                    (64,604)            (13,688)
        Increase  in accounts payable and
          accrued liabilities                                                    209,277             173,106
        Increase (decrease) in accrued disposal costs                           (455,043)            298,411
        Increase in deferred revenue                                             126,239                --
                                                                             -----------         -----------

    Net cash used in operating activities                                       (774,855)         (1,093,538)
                                                                             -----------         -----------

CASH FLOWS FROM INVESTING ACTIVITIES:
  Purchases of property and equipment                                           (132,805)            (63,176)
  Sales of short-term investments                                                317,001           5,535,332
  Purchases of short-term investments                                           (513,958)         (4,276,316)
                                                                             -----------         -----------

      Net cash provided by (used in) investing activities                       (329,762)          1,195,840
                                                                             -----------         -----------


CASH FLOWS FROM FINANCING ACTIVITIES:
  Issuance of common stock                                                     1,000,000                --
  Payments on notes payable                                                     (111,141)            (28,661)
  Borrowings on notes payable                                                    169,687              64,253
                                                                             -----------         -----------

      Net cash provided by (used in) financing activities                      1,058,546              35,592
                                                                             -----------         -----------



NET INCREASE (DECREASE) IN CASH AND CASH
   EQUIVALENTS:                                                                  (46,071)            137,894


CASH AND CASH EQUIVALENTS,
    beginning of year                                                            153,346              15,452
                                                                             -----------         -----------

CASH AND CASH EQUIVALENTS, end of year                                       $   107,275         $   153,346
                                                                             ===========         ===========

SUPPLEMENTAL DISCLOSURE OF CASH FLOW
   INFORMATION:
    Cash paid for interest                                                   $     6,285         $     1,388
                                                                             ===========         ===========

</TABLE>

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


                                      F-6
<PAGE>

                    SHARPS COMPLIANCE CORP. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


                                  JUNE 30, 2001


1. ORGANIZATION AND BACKGROUND:

ORGANIZATION

The accompanying consolidated financial statements include the accounts of
Sharps Compliance Corp. (formerly U.S. Medical Systems, Inc.) and its wholly
owned subsidiaries, Sharps Compliance, Inc. of Texas, dba Sharps Compliance,
Inc., Sharps e-Tools.com, Inc. ("Sharps e-Tools"), and Sharps Environmental
Services, Inc., dba Sharps Environmental Services of Texas, Inc. (collectively,
"Sharps" or the "Company"). All significant intercompany accounts and
transactions have been eliminated in consolidation.

BUSINESS

Sharps focuses on developing cost effective, logistical and educational
solutions for healthcare and non-healthcare institutional markets. These
solutions include Sharps Disposal by Mail(TM) System, Pitch It(TM) IV Poles,
Trip LesSystem(TM), Sharps e-Tools and Sharps Environmental Services. Sharps
products and services are provided primarily to create cost and logistical
efficiencies. These products and services facilitate compliance with state and
federal regulations by tracking, incinerating and documenting the disposal of
medical waste. Additionally, these services facilitate compliance with
educational and training requirements required by federal, state, local and
regulatory agencies.

The Sharps Disposal by Mail(TM) System is a comprehensive solution for the
containment, transportation, destruction and tracking of medical waste for the
commercial, industrial and home healthcare industries. The Sharps Disposal by
Mail(TM) System contains a securely sealed, leak and puncture resistant sharps
container in several sizes; U.S. Postal Service approved shipping carton with
priority mail postage; absorbent material inside the container that can hold up
to 150 milliliters of waste; a red bag for additional containment; and complete
documentation and tracking manifest. Waste generators who use the Sharps
Disposal by Mail (TM) System are responsible for mailing the systems to the
Sharps Environmental Services Resource Recovery Facility (the "Disposal
Facility") for incineration. Effective July 1, 2000, the Company entered into an
agreement with the City of Carthage, Texas and Panola County (collectively, the
"City") to manage and operate the Disposal Facility. The length of the agreement
is three years, and Sharps is responsible for maintaining the Disposal Facility
as required by federal, state, local and/or regulatory agencies. Prior to July
1, 2000, Sharps paid the City to perform the incineration function. Sharps is
also responsible for paying the postage costs associated with the Sharps
Disposal by Mail (TM) System being mailed to the Disposal Facility by the waste
generators.

Prior to July 1, 2000, Sharps recorded accrued disposal costs for both
postage and incineration based on the number of Sharps Disposal by Mail(TM)
Systems sold that management estimated would eventually be returned for
incineration. However, for sales subsequent to June 30, 2000, Sharps accrues
only for estimated postage costs as the Company assumed operation of the
Disposal Facility effective July 1, 2000. For sales subsequent to June 30,
2000, deferred revenue is recorded for non-refundable payments received for
which the incineration services have not been performed and incineration
costs are expensed as incurred. Sharps estimates returns of the Sharps
Disposal by Mail(TM) Systems based on historical experience. The amount and
timing of accrued disposal costs are adjusted prospectively for revisions in
the estimated disposal costs and return rate, if any. Depending upon the
experience of Sharps, such revisions could be significant. During the year
ended June 30, 2001, the Company completed an analysis of its accrued
disposal liability on a historical basis and recorded a reduction of the
liability of $540,996, which has been reflected as a reduction to cost of
revenues in the accompanying consolidated Statement of Operations. Further,
as of June 30, 2001, the Company has reclassified a portion of its disposal
liability as long-term, based on historical experience and management's
estimate of when returns of the Sharps Disposal by Mail System will occur.
During the years ended June 30, 2001 and 2000, the Company accrued $745,420
and $788,075, respectively, for estimated disposal costs and


                                      F-7
<PAGE>

funded $659,467 and $489,664, respectively, of actual disposal costs. Disposal
costs are included in cost of revenue in the accompanying consolidated financial
statements.

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

The Trip LesSystem(TM) is a solution for the home healthcare (commercial)
industry that will free them from making unnecessary and more costly trips to
the patient's home after treatment has been completed. The Trip LesSystem (TM)
has combined two complete programs for return and disposal. All systems contain
the Sharps Disposal by Mail(TM) System along with either (i) a prepaid pump
return box using Federal Express or (ii) a Pitch It(TM) IV Pole system which
Sharps manufactures, depending on the patient's therapy.

The Sharps e-Tools online services include SharpsTracer(TM), AssetTracer(TM) and
ComplianceTrak. SharpsTracer(TM) is a manifest imaging and tracking program for
registered customers with the purpose of tracking and certifying the
transportation and disposal of regulated medical waste. SharpsTracer(TM)
eliminates traditional paper-based methods of manifest tracking and is designed
to enhance customer efficiencies with an automatic Proof of Destruction, Market
Data Collection abilities and Return to Store Programs capabilities.
AssetTracer(TM) allows its registered subscribers to effectively manage all
types of capital assets through a single, organized database. The program can be
used in conjunction with other Sharps 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.

Effective July 1, 2000, the Company entered into an agreement with the City of
Carthage, Texas and Panola County to manage and operate the Panola County
Resources Recovery Facility, the municipally owned incinerator to which the
Sharps Disposal by Mail (TM) System is mailed for destruction. The length of the
agreement is three years, and Sharps is responsible for maintaining the facility
as required by federal, state, local and/or regulatory agencies. Sharps
Environmental Services will provide environmental solutions for customers with a
wide variety of waste disposal needs. Primary services will be 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(TM) Systems and allows the Company to provide its proprietary
SharpsTracer(TM) discussed above.

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 staff on the dangers of improper medical wastes and infection
control practices.

Although Sharps has experienced growth in revenues over the past few years,
there is an inherent concentration of credit risk associated with accounts
receivable arising from sales to its major customers, which are primarily
distributors. For the years ended June 30, 2001 and 2000, four customers
represented approximately 61% and 68% of revenues, respectively. Four customers
comprised approximately 58% (or $420,000) of the total accounts receivable
balance at June 30, 2001 and 72% (or $568,000) at June 30, 2000. Sharps may be
affected by its dependence on a limited number of high volume customers.
Management believes that the risk is mitigated by (i) the contractual
relationships with the end user of the products and reputation of Sharps' major
customers, (ii) a loss of any distributor does not necessarily mean the loss of
the underlying customer base of that distributor for the Company's products and
services and (iii) the Company's continued diversification of its products and
services.

Sharps continues to sole-source each of its transportation and software
development functions. Sharps may be affected by its dependence on the suppliers
of these functions. Management believes the risk is mitigated by the


                                      F-8

<PAGE>

long-standing business relationships with and reputations of Sharps' suppliers.
Although there are no assurances with regard to the continued future business
associations after expirations of certain agreements between Sharps and its
suppliers, management believes that alternative sources would be available at
similar costs due to the generic nature of the products and services offered

Sharps has incurred cumulative losses since its inception and has a working
capital deficit at June 30, 2001. Sharps expects to continue to incur
substantial costs related to sales, marketing and administrative activities.
There can be no assurance that Sharps will ever attain profitable operations or
will be able to generate sufficient revenue levels to support operations. The
future success of Sharps is dependent upon many factors, including continuity of
current management, environmental and governmental regulation, continuity of its
license agreements, maintaining an agreement with an incineration facility,
successful completion of its product development activities, the identification
and penetration of markets for its products and services and obtaining funds
necessary to complete these activities. If Sharps is unable to achieve its
fiscal year 2002 projected results of operations, or if the actual return of
mail disposal systems exceeds those estimated by management, additional
financing may be required to fund Sharps' operations. Management believes
Sharps' current resources will be sufficient to fund operations through
December 2002. There can be no assurance that the Company will be able to obtain
financing on acceptable terms to fund operations beyond that time frame;
however, management believes that it will be successful in raising such
financing, if necessary

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS

The Company considers all highly liquid investments with a maturity of three
months or less at the time of purchase to be cash equivalents. Short-term
investments consist of certificates of deposit with original maturities greater
than three months but less than one year. Short-term investments are classified
as held-to-maturity and are classified at amortized cost, which approximates
fair value.

INVENTORY

Inventory primarily represents finished goods and supplies and is stated at cost
using the first-in, first-out method. Cost is not in excess of market.

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.

INTANGIBLE ASSETS

Intangible assets consist of costs related to two patents acquired in June 1998.
The patents are being amortized over their estimated useful lives of five years.
During each of the years ended June 30, 2001 and 2000, the Company recorded
amortization expense of $20,246. Accumulated amortization at June 30, 2001
and 2000 was $60,735 and $40,489, respectively.

REALIZATION OF LONG-LIVED ASSETS

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


                                       F-9
<PAGE>

REVENUE RECOGNITION

Sharps has adopted Staff Accounting Bulletin No. 101, "Revenue Recognition"
("SAB No. 101"), which provides guidance related to revenue recognition based on
interpretations and practices followed by the Securities and Exchange
Commission. Adoption of SAB No. 101 did not have a material effect on the
Company's financial position or results of operations, although its revenue
recognition has been modified for a change in business that occurred in July
2000 (See Note 1).

Prior to July 1, 2000, product sales were recognized as revenue when the Sharps
Disposal by Mail(TM) System was delivered and accepted by the customer.
Effective July 1, 2000, the Company assumed responsibility for operation of the
Disposal Facility and, accordingly, began deferring a portion of the product
sales revenue associated with providing the incineration service. Deferred
revenue is recognized when the Sharps Disposal by Mail(TM) Systems sold are
returned to the Disposal Facility and incinerated. The deferral amount is based
on objective evidence of fair value for the incineration function, based on
sales of this service to other third parties. Further, the deferral amount is
based on the number of Sharps Disposal by Mail(TM) Systems that management
estimates will eventually be incinerated at the Disposal Facility. Deferred
revenue will be adjusted prospectively for revisions in the estimated return
rate, if any. Depending upon the experience of the Company, such revisions could
be significant.

Revenue associated with the incineration of third party materials and consulting
services are recognized as services are provided.

SHIPPING AND HANDLING FEES AND COSTS

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

INCOME TAXES

The Company's deferred tax liabilities and assets are determined based on the
differences between the financial statement carrying amounts and tax bases of
assets and liabilities using currently enacted tax rates in effect for the years
in which the differences are expected to reverse. Deferred tax assets are
evaluated for realization based on a more-likely-than-not criteria in
determining whether a valuation allowance should be provided.

NET LOSS PER SHARE

Earnings per share 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 earnings per share ("basic EPS")
and diluted earnings per share ("diluted EPS"). 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. Diluted
EPS reflects the potential dilution that could occur if securities and other
contracts to issue common stock were exercised or converted into common stock.
Options outstanding during each year have not been included in the calculation
of diluted EPS, as they would have an anti-dilutive effect on EPS. There are no
differences in basic EPS and diluted EPS for either year presented.

FINANCIAL INSTRUMENTS

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

SEGMENT REPORTING

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


                                      F-10
<PAGE>

USE OF ESTIMATES

The preparation of 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 financial statements and
the reported amounts of revenue and expense during the reporting period. Actual
results could differ from these estimates.

Specifically, Sharps has estimated the cost and related liability for postage
and incineration costs associated with the mail-back of full sharps containers
for disposal. These estimates are based on Sharps' experience to date and are
reflected in accrued disposal costs and deferred revenue on the accompanying
consolidated balance sheets. Future results may differ from these estimates.

RECLASSIFICATION

Certain reclassifications have been made to the 2000 consolidated financial
statements to conform to the presentation for 2001.

RECENT ACCOUNTING PRONOUNCEMENTS

In July 2001, the Financial Accounting Standards Board issued SFAS No. 141,
"Business Combinations" and No. 142, "Goodwill and Other Intangible Assets."
SFAS 141 requires all business combinations initiated after June 30, 2001, to be
accounted for using the purchase method. Under SFAS 142, goodwill and intangible
assets with indefinite lives are no longer amortized but are reviewed annually
(or more frequently if impairment indicators arise) for impairment. Separable
intangible assets that are not deemed to have indefinite lives will continue to
be amortized over their useful lives (but with no maximum life). The
amortization provisions of SFAS 142 apply to goodwill and intangible assets
acquired after June 30, 2001. With respect to goodwill and intangible assets
acquired prior to July 1, 2001, Sharps is required to adopt SFAS 142 effective
July 1, 2002. Management is currently evaluating the effect that adoption of the
provisions of SFAS 142 will have on its results of operations and financial
condition.

3. NOTE RECEIVABLE FROM STOCKHOLDER:

Sharps has a $320,000 personal, full recourse note receivable with a
stockholder and officer of Sharps. The note, as amended, bears interest at
8.0 percent with principal and accrued but unpaid interest due in November
2002. At June 30, 2001 and 2000, approximately $-0- and $16,000,
respectively, of accrued interest was recorded under the note. Because
interest payments have not been made in accordance with the agreement,
outstanding accrued interest for 2001 and 2000 has been recorded as
compensation expense.

4. PROPERTY AND EQUIPMENT:

At June 30, 2001 and 2000, property and equipment consisted of the following:

<TABLE>
<CAPTION>
                                                                    JUNE 30,
                                                            --------------------------
                                            USEFUL LIFE         2000           2000
                                            ------------    -----------    -----------
<S>                                         <C>             <C>            <C>
     Furniture and fixtures                 3 to 5 years    $    32,819    $    32,819
     Equipment                              5 years             114,350        114,350
     Computers and software                 3 to 5 years        223,183        137,602
     Automobiles                            5 years              30,758         30,758
                                                            -----------    -----------
                                                                448,334        315,529
     Less - Accumulated depreciation                           (226,907)      (134,793)
                                                            -----------    -----------

           Net property and equipment                       $   221,427    $   180,736
                                                            ===========    ===========
</TABLE>


                                      F-11
<PAGE>

5. NOTES PAYABLE:

The Company has a promissory note to finance the purchase of an automobile which
bears interest at 7.75 percent. The note matures in October 2002, is due in
monthly installments and is secured by the automobile. The balance outstanding
on the note at June 30, 2001 and 2000, was $8,782 and $14,808, respectively.

The Company finances certain of its insurance premiums through a note payable
with a finance company. The note payable bears interest at approximately 7.74
percent, and interest and principal are due monthly through May 2002. The
balance outstanding on the note payable at June 30, 2001 and 2000, was $123,262
and $58,690, respectively.

Future maturities on notes payable as of June 30, 2001, are as follows:


                   YEAR ENDING JUNE 30-

                            2002           $129,299
                            2003              2,745
                                           --------

                                           $132,044
                                           ========

6. INCOME TAXES:

The reconciliation of the statutory federal income tax rate to the Company's
effective income tax rate for the years ended June 30, 2001 and June 30, 2000,
is as follows:


                                                     YEARS ENDED JUNE 30,
                                                  --------------------------
                                                    2001              2000
                                                  --------         ---------

           Statutory rate                           (34.0)%          (34.0)%
           State income taxes, net                   (2.8)            (2.8)
           Meals and entertainment                    1.8              3.0
           Increase in valuation allowance           35.0             33.8
                                                  -------          -------

                                                      --%              --%
                                                  =======          =======


                                      F-12

<PAGE>

Significant components of Sharps' net deferred tax asset at June 30, 2001 and
2000 are as follows:

<TABLE>
<CAPTION>
                                                      YEARS ENDED JUNE 30,
                                                   ----------------------------
                                                       2001             2000
                                                   -----------      -----------
<S>                                                <C>              <C>
Deferred tax assets relating to-
   Net operating loss carryforwards                $ 3,461,630      $ 3,247,843
   Accrued disposal costs and deferred revenue         385,684          319,625
   Deferred compensation                                80,421           29,702
   Accounts receivable reserve                           9,805           11,241
                                                   -----------      -----------
                Total deferred tax assets            3,937,540        3,608,411

Deferred tax liability relating to-
   Cash to accrual adjustment                             --             (4,814)

Deferred tax valuation allowance                    (3,937,540)      (3,603,597)
                                                   -----------      -----------

                Net deferred tax asset             $      --        $      --
                                                   ===========      ===========

</TABLE>

At June 30, 2001, Sharps had net operating loss carryforwards for federal income
tax purposes of approximately $9.4 million, of which approximately $5.6 million
was acquired in an acquisition which occurred in February 1998. Sharps' ability
to utilize these net operating losses to reduce future taxable income may be
limited upon a change of ownership and amounts of separate Company taxable
income, as defined by the Internal Revenue Code. The carryforwards will begin to
expire in 2008 if not otherwise used. A valuation allowance has been established
to fully offset the Company's deferred tax assets due to the Company's history
of losses since inception. The valuation allowance relates primarily to Sharps'
net losses. Sharps has not made any income tax payments since inception.

7. STOCKHOLDERS' EQUITY:

COMMON STOCK

On August 31, 2000, the Company completed a private placement of 1,000,000
unregistered shares of its common stock for proceeds of $1,000,000.

1993 STOCK PLAN

Sharps sponsors the 1993 Stock Plan ("the Plan") covering employees, consultants
and non-employee directors. The Plan, as amended, provides for the granting of
options, either incentive or nonstatutory, to purchase up to 2,000,000 shares of
Sharps' common stock. Options granted vest over a period of up to four years.
Options expire five to seven years after the date of grant.

SFAS No. 123 "Accounting for Stock-Based Compensation," allows companies to
adopt one of two methods for accounting for stock options. Sharps has elected
the method that requires disclosure of stock based compensation only. Because of
this election, Sharps continues to account for its employee stock-based
compensation plan under Accounting Principles Board Opinion No. 25 "Accounting
for Stock Issued to Employees" and the related interpretations. Accordingly,
deferred compensation is recorded for stock based compensation grants based on
the market value of the common stock on the measurement date over the exercise
price. The deferred compensation is amortized over the vesting period of each
unit of stock based compensation grant, generally three to four years. If the
exercise price of the stock based compensation grants is equal to the estimated
fair value of Sharps' stock on the date of the grant, no compensation expense is
recorded. During the years ended June 30, 2001 and 2000, no options were issued
to employees at below fair value, and accordingly, no compensation cost was
recognized.

Sharps records the fair value of options issued to non-employee consultants at
the fair value of the options issued. Any expense is recognized over the service
period or at the date of issuance if the options are fully vested and no
performance obligation exists. During the year ended June 30, 2001, expense of
$137,706 was recorded for option grants to non-employees that were fully vested
at the date of the grant and for which no further performance obligation exists.
The expense has been recorded in selling, general and administrative expense in
the accompanying consolidated financial statements.


                                      F-13

<PAGE>
A summary of the activity of the Plan during the years ended June 30, 2001 and
2000, is presented in the table below:

<TABLE>
<CAPTION>
                                                                     WEIGHTED
                                                 OPTIONS             AVERAGE
                                               OUTSTANDING        EXERCISE PRICE
                                              -------------      ---------------
<S>                                               <C>             <C>
          Balance, June 30, 1999                  114,307         $     2.74
             Granted                              367,500               1.23
             Forfeited or Canceled                (61,667)              1.45
                                               ----------
          Balance, June 30, 2000                  420,140               1.61
             Granted                              725,000                .51
             Forfeited or Canceled                (70,000)              1.03
                                               ----------
          Balance, June 30, 2001                1,075,140                .91
                                               ==========

          Exercisable at June 30, 2001            549,314               1.10
                                               ==========
</TABLE>

The weighted average fair values of options granted during the years ended June
30, 2001 and 2000 were $.43 and $.66, respectively. As of June 30, 2001 and
2000, there were 924,860 options and 579,860 options, respectively, available
for grant under the Plan.

The following table summarizes information about stock options outstanding as of
June 30, 2001:

<TABLE>
<CAPTION>
                         OPTIONS OUTSTANDING                                                    OPTIONS EXERCISABLE
  ----------------------------------------------------------------------------        ------------------------------------
                                               WEIGHTED
                                               AVERAGE             WEIGHTED                                    WEIGHTED
   RANGE OF            OUTSTANDING            REMAINING            AVERAGE               EXERCISABLE           AVERAGE
   EXERCISE               AS OF              CONTRACTUAL           EXERCISE                 AS OF              EXERCISE
    PRICE             JUNE 30, 2001        LIFE (IN YEARS)          PRICE               JUNE 30, 2001           PRICE
  ----------         ---------------      -----------------      -------------        ----------------      -------------
<S>                    <C>                       <C>                <C>                    <C>                  <C>
$.51- $1.00               817,500                6.60               $0.58                  368,337              $0.56
      $1.38               152,500                5.00                1.38                   75,837               1.38
$2.25-$3.02               105,140                2.78                2.80                  105,140               2.80
                        ---------                                                          -------
                        1,075,140                                    0.91                  549,314               1.10
                        =========                                                          =======
</TABLE>

Pursuant to the provisions of SFAS No. 123, the fair value of each option grant
was estimated on the date of grant using the Black-Scholes option-pricing model.
The following weighted average assumptions were used for the fiscal year 2001
and 2000 grants: risk-free rates of return ranging from 5.86 percent to 6.00
percent; expected annual dividend rate of -0-; expected life of five to seven
years; and volatility ranging from 53.5 percent to 96.9 percent. Had
compensation expense for stock based compensation been determined consistent
with the provisions of SFAS No. 123, Sharps' net loss would have been increased
to the following pro forma amounts:

                                                  YEARS ENDED JUNE 30,
                                             -------------------------------
                                                 2001               2000
                                             ------------       ------------
              Net Loss
                 As reported                 $  (961,550)       $ (1,281,537)
                                             ===========        ============
                 Proforma                    $(1,049,016)       $ (1,319,281)
                                             ===========        ============

              Basic and diluted EPS
                 As reported                 $      (.11)       $      (.17)
                                             ===========        ===========
                 Proforma                    $      (.12)       $      (.17)
                                             ===========        ===========

8. COMMITMENTS AND CONTINGENCIES:

LITIGATION

Sharps operates in a regulated industry and subject to routine and /or
unannounced regulatory inspections. Sharps has received notification from the
City of Carthage of various notices of violations which it has received from
the Texas Natural Resource Conservation Commission (TNRCC). Management
believes that the ultimate resolution of these matters will not have any
material adverse effect on Sharps' consolidated financial position, results
of operations or liquidity.

                                      F-14

<PAGE>

Sharps is also a party to various legal actions and claims arising in the normal
course of business. While the outcome of these matters cannot be predicted with
certainty, management believes these matters will not have a material adverse
effect on Sharps' consolidated financial position, results of operations or
liquidity.

DISTRIBUTOR AGREEMENTS

Sharps has an agreement with a supplier for Sharps to be the exclusive domestic
distributor of certain of the supplier's medical waste containers. The agreement
provides for automatic renewals for two-year periods, unless either party
provides notice of termination to the other within 90 days prior to the
expiration of the then current term. Exclusivity rights will lapse unless annual
non-guaranteed purchase volumes are met.

SALES REPRESENTATION AGREEMENT

Sharps has a sales representation agreement with a sales agency for promotion of
the Sharps Disposal by Mail(TM) System exclusively in the veterinary market. The
agreement is for a two-year period with automatic two-year renewal periods,
unless either party notifies the other 90 days prior to expiration of the
current period of its intent to terminate. The agreement further specifies a
15.0 percent commission on net sales as defined in the agreement. Commission
expense related to this agreement was $5,847 and $5,383 for the years ended June
30, 2001 and 2000, respectively.

OPERATING LEASES

Sharps leases office space and equipment under certain operating lease
agreements, which expire at various dates through March 2004. Rent expense for
the years ended June 30, 2001 and 2000 were $68,671 and $70,534, respectively.
Future minimum lease payments under non-cancelable operating leases as of June
30, 2001, are as follows:


                  YEAR ENDING JUNE 30-
                           2002            $ 68,671
                           2003              10,570
                           2004               3,966
                                           --------

                                           $ 83,207
                                           ========


9. EVENTS SUBSEQUENT TO DATE OF AUDITORS' REPORT:

On October 11, 2001, the Company completed a private placement of 1,100,000
unregistered shares of its common stock for net proceeds of approximately
$1.2 million.



                                      F-15